Goldman Sachs settles debt obligation from 2008 recession
State and federal officials have announced that Goldman Sachs will pay $5.1 billion to settle accusations of “wrongdoings” in handling residential mortgage-backed securities before the financial crisis of 2008.
The multinational investment banking firm struck the deal to settle “actual and potential” civil claims over Goldman’s mortgage securitization activities from 2005 to 2007 with the Department of Justice, the attorneys general in New York and Illinois, the National Credit Union Administration, a federal regulator and the Federal Home Loan Banks of Chicago and Seattle.
The Federal Securities & Exchange Commission alleged that prior to the national debt crisis of 2008, “Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS).”
Additionally, “Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.”
Although the allegations date to nearly 10 years ago, the public has only recently become aware of the settlement. The allegations have greatly impacted the company, its economic status and other firms of similar stature.
The reason for the return of controversy is the alleged hidden tax incentives in the deal that could actually reduce the firm’s investment by as much as $1 billion.According to the report, Goldman’s settlement has now generated public controversy because the claim is far smaller than the sums paid by other firms, like JP Morgan Chase and Bank of America, who were also investigated for selling flawed mortgage securities.
Kenneth Lench, chief of the SEC’s Structured and New Products Unit, explained that in the current market, “The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress.”
Bank of America in 2014 paid about $16.6 billion in a similar settlement with federal and state agencies, and JPMorgan Chase paid about $13 billion in 2013. In all, the banks have paid more than $40 billion in settlements to resolve claims investigated by the task force. Goldman is also the last firm to reach a civil settlement with a task force of federal prosecutors.
In its agreement, Goldman Sachs is set to pay $2.4 billion in civil penalties, another $1.8 billion in funds to homeowners whose mortgages are underwater and $875 million to settle claims with state governments, the National Credit Union Administration and other entities. “We are pleased to put these legacy matters behind us,” a Goldman spokesperson said in a statement. “Since the financial crisis, we have taken significant steps to strengthen our culture, reinforce our commitment to our clients, and ensure our governance processes are robust,” the spokesperson said. However, it may not be as simple as promised by the statement released by Goldman officials.
Like other banks that have been fined, Goldman Sachs has “negotiated sweeteners” in the agreement that allow it to save money through tax credits and government incentives. Because of this, some consumer advocates have raised concerns about how that money is allocated and how much comes directly from the bank’s revenue.
For example, the firm voiced it would pay $240 million toward affordable housing, but the deal shows Goldman will only have to pay about 30 percent of that in practice because of large per-dollar tax credits on the payment.
According to analysts, the company appears to have inflated the settlement amount for public relations purposes to possibly mislead the public; there may be a discrepancy in the actual documentation of what the firm will pay. However, Goldman Sachs is upholding its ethical promise to consumers. In a statement released by Lloyd C. Blankfein, Goldman’s chairman and chief executive, the firm’s executive board is “pleased to have reached an agreement in principle to resolve these matters.”
By announcing the settlement now and including the cost in the fourth quarter, Goldman is trying to enter 2016 with a clean slate and in turn, put many of its outstanding regulatory issues in the past. Analysts are awaiting official confirmation from the SEC of the $5 billion payment to ensure that the company has paid for its dated claims.