Goldman Sachs To Pay $5B To Settle Charges Of Selling Troubled Mortgages Ahead Of The Financial Crisis

Federal and state prosecutors are closing yet another chapter in its investigation related to banks’ roles in the financial crisis. To that end, Goldman Sachs has agreed to pay $5.06 billion to settle claims it misled mortgage bond investors during the period leading up to the crisis.

The Department of Justice, along with the Residential Mortgage-Backed Securities Working Group, announced the settlement on Monday, putting an end to a years-long investigation into Goldman Sachs’ behavior and business practices related to packaging, securitization, marketing, and sale of residential mortgage-backed securities between 2007 and 2009.

“Today’s settlement is yet another acknowledgment by one of our leading financial institutions that it did not live up to the representations it made to investors about the products it was selling,” U.S. Attorney Benjamin B. Wagner of the Eastern District of California, said in a statement.

The Dept. of Justice estimates that investors suffered billion of dollars in losses because Goldman Sachs sold shoddy mortgages. Specifically, the Dept. and other federal and state investigators allege that from 2005 to 2007, Goldman Sachs repeatedly discovered problems with the mortgages it was selling to investors but didn’t tell investors.

Instead, the company made statements to investors in offering documents and other marketing materials regarding its process for reviewing and approving originators, yet it failed to disclose to investors negative information it obtained about mortgage loan originators and its practice of securitizing loans from suspended originators.

For example, in 2006, an employee allegedly recommended investors buy shares in mortgage company Countrywide, noting that it was issuing more loans than expected. However, another Goldman employee replied to the research report by saying: “If they only knew……”

Under the settlement [PDF], Goldman Sachs agreed to a statement of facts [PDF] that describes how Goldman Sachs made false and misleading representations to investors about the quality of the mortgage loans it securitized and sold to investors, its process for screening out questionable loans, and its process for qualifying loan originators.

Additionally, the company has agreed to pay a $2.385 billion civil penalty and $1.8 billion in other relief, including funds for homeowners whose mortgages exceed the value of their property, as well as distressed borrowers.

The settlement will also see Goldman paying $875 million to resolve other state claims: the company will pay $575 million to settle claims by the National Credit Union Administration; $37.5 million to settle claims by the Federal Home Loan Bank of Des Moines as successor to the Federal Home Loan Bank of Seattle; $37.5 million to settle claims by the Federal Home Loan Bank of Chicago; $190 million to settle claims by the state of New York; $25 million to settle claims by the state of Illinois; and $10 million to settle claims by the state of California.

However, like other settlements reached with large banks, no individual Goldman Sachs employees are being held responsible for the allegedly misleading and deceptive behavior.

The deal was negotiated through the Residential Mortgage-Backed Securities Working Group, a joint state and federal working group formed in 2012 to share resources and continue investigating wrongdoing in the mortgage-backed securities market prior to the financial crisis.

New York Attorney General Eric Schneiderman, who serves on the working group, says the funds obtained by the settlement will go toward helping residents keep their homes and rebuild their communities.

“This settlement, like those before it, ensures that these critical programs—such as mortgage assistance, principal forgiveness, and code enforcement—will continue to get funded well into the future, and will be paid for by the institutions responsible for the financial crisis,” Schneiderman says in a statement.

Monday’s settlement is the fifth to be brokered by the Residential Mortgage-Backed Securities Working Group since 2012. Most recently Morgan Stanley agreed to pay $3.2 billion, while Citibank settled for $7 billion. JPMorgan Chase agreed to pay $13 billion and Bank of America settled for $16.6 billion.