The Justice Department has entered into a $5.06 billion settlement with Goldman Sachs related to Goldman’s conduct in the packaging, securitization, marketing, sale and issuance of residential mortgage-backed securities (RMBS) between 2005 and 2007.
The resolution requires Goldman to pay $2.385 billion in a civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and also requires the bank to provide $1.8 billion in other relief, including relief to underwater homeowners, distressed borrowers and affected communities, in the form of loan forgiveness and financing for affordable housing.
Goldman Sachs was represented by Richard Klapper of Sullivan & Cromwell in New York.
Goldman will also pay $875 million to resolve claims by other federal entities and state claims. Investors, including federally-insured financial institutions, suffered billions of dollars in losses from investing in RMBS issued and underwritten by Goldman between 2005 and 2007.
The $2.385 billion civil monetary penalty resolves claims under FIRREA, which authorizes the federal government to impose civil penalties against financial institutions that violate various predicate offenses, including wire and mail fraud.
The settlement expressly preserves the government’s ability to bring criminal charges against Goldman, and does not release any individuals from potential criminal or civil liability.
In addition, as part of the settlement, Goldman agreed to fully cooperate with any ongoing investigations related to the conduct covered by the agreement.
Goldman told investors in offering documents that “[l]oans in the securitized pools were originated generally in accordance with the loan originator’s underwriting guidelines,” other than possible situations where “when the originator identified ‘compensating factors’ at the time of origination.”
But Goldman has acknowledged that, “Goldman received information indicating that, for certain loan pools, significant percentages of the loans reviewed did not conform to the representations made to investors about the pools of loans to be securitized.
Specifically, Goldman has now acknowledged that, even when the results of its due diligence on samples of loans from those pools “indicated that the unsampled portions of the pools likely contained additional loans with credit exceptions, Goldman typically did not . . . identify and eliminate any additional loans with credit exceptions.” Goldman has acknowledged that it “failed to do this even when the samples included significant numbers of loans with credit exceptions.”
Dennis Kelleher of Better Markets was not pleased with the settlement.
“The Department of Justice’s latest big bank settlement, this time with Goldman Sachs, is just more of the same non-punishment, non-accountability ritual that will do nothing to stop the Wall Street crime spree,” Kelleher said.
“In fact, such settlements, many years after the crimes have been committed, are so weak that they will actually incentivize more law breaking on Wall Street. That will not change until DOJ requires admissions, punishes individual officers and managers, discloses the amount of ill-gotten gains and investor losses caused by the fraud, and charges banks and individuals with actual crimes like fraud rather than mere disclosure violations.”
“This settlement is a victory for Goldman. First, it got to keep all the ill-gotten gains for the last eight-plus years. Second, a $5 billion settlement is meaningless unless it is publicly disclosed how much money was made from the illegal conduct and the total amount of investor losses. Third, DOJ helped it cover up its illegal actions by letting Goldman merely acknowledge a Swiss cheese ‘statement of facts’ carefully crafted more to conceal than reveal what Goldman really did here. Fourth, Goldman’s net revenue was $37.7 billion and its net earnings were $9.5 billion in 2006 alone, just one year in the midst of this multi-year scheme. Fifth, every single individual at Goldman who received a bonus from this illegal conduct not only keeps the entire bonus, but suffers no penalty at all. Sixth, more than half of the $5 billion appears likely to be tax deductible, meaning U.S. taxpayers will be required to subsidize this settlement.”
“That is not justice. That is a fraud on the American people who deserve to know who did what when they were breaking the law and when they will actually be punished.”