Goldman Sachs Will Pay $5 Billion To Settle Financial Crisis Allegations

Nobody will face criminal charges over misconduct in the lead-up to the crisis. But the bank will pay out billions.

Another bank, another multi-billion dollar settlement over actions that fueled the financial crisis.

Goldman Sachs has agreed to pay just over $5 billion, including a $2.4 billion civil penalty, $1.8 billion in various forms of consumer relief, and $875 million to other regulators and states, to settle claims related to its sale of mortgage-backed securities in the years leading up to the financial crisis.

The deal fits the template used by the Justice Department for several massive settlements with big banks over their conduct related to the crisis: No criminal charges or penalties for the individuals involved, alongside a grab-bag of multi-billion dollar payments to regulators, states and consumers.

Other agreements that fit the template: the more than $13 billion settlement the DOJ reached with JPMorgan Chase in November, 2013; Citi's $7 billion settlement in July, 2014; the almost-$17 billion settlement reached with Bank of America in August, 2014; and the $3.2 billion settlement with Morgan Stanley earlier this year.

"We are pleased to put these legacy matters behind us," Goldman Sachs 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."

In January, Goldman Sachs disclosed that it had agreed in principle with the DOJ and other regulators to a settlement of up to $5 billion. The bank at the time said it would reduce its fourth quarter earnings by $1.5 billion after taxes. The settlement covers Goldman's marketing and sale of residential mortgage-backed securities from 2005 to 2007.

The Justice Department set up the RMBS Working Group in early 2012, a collection of prosecutors, Justice Department officials, financial regulators, and New York Attorney General Eric Schneiderman. Since the group's establishment, several of the senior Justice Department officials involved have departed.

“Today’s settlement is another example of the department’s resolve to hold accountable those whose illegal conduct resulted in the financial crisis of 2008,” Benjamin Mizer, the head of the Civil Division at the Department of Justice said in a statement. “This settlement demonstrates the pervasiveness of the banking industry’s fraudulent practices in selling RMBS."

The settlement largely aligns with the popular depiction of Goldman Sachs' pre-crisis posture: It was running a large and profitable business selling mortgage-backed securities to investors, while also becoming increasingly aware of the weakness of some of those securities.

Goldman both purchased the rights to mortgages and packaged them into the securities it was selling. In the course of doing so, the Justice Department said in a statement of facts attached to the settlement, it assured investors that the companies originating mortgages had, for the most part, determined the borrower's ability repay the debt, that the loans were within guidelines set by the originator beforehand, and the that exceptions were disclosed.

But Goldman also did its own due diligence using an outside vendor, and what it learned sometimes didn't make it through to the people buying the securities. “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,” the DOJ said in a statement.

In one striking 2006 example highlighted by the Justice Department, Goldman was packaging loans by Countrywide, the mortgage giant whose loans were at the core of the housing boom. A Goldman analyst wrote an optimistic report on Countrywide's stock, specifically mentioning how many loans it had originated in March.

One Goldman due diligence official's emailed response to the analyst report: “If they only knew..................................”

Goldman had done its own due diligence on six pools of loans from Countrywide, and had trouble getting payment and disclosure information, which one Goldman official said internally was “absolutely unacceptable." But Goldman still bundled some of those Countrywide loans into securities and sold them to investors.

"I am gratified that this office has developed investigations, first against JPMorgan Chase and now against Goldman Sachs, that have led to significant civil settlements that hold bad actors in this market accountable," U.S. Attorney Benjamin Wagner said in a statement. His office in the Eastern District of California did some of the fundamental groundwork that led to the JPMorgan settlement.

"The results obtained by this office and other members of the RMBS Working Group continue to send a message to Wall Street that we remain committed to pursuing those responsible for the financial crisis."

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