goldman-sachs-officially-reaches-5b-settlement-over-toxic-mortgage-bonds

(Update: This article is updated with a statement from Goldman Sachs)

The previously announced $5 billion settlement between Goldman Sachs and the federal government over claims related to toxic mortgage bonds sold to investors in the run up to the financial crisis is now official, the Department of Justice announced Monday morning.

Goldman Sachs itself first announced the terms of the settlement in January, but noted at the time that the agreement with the government was merely an “agreement in principle” and could change, but the DOJ announced the finalized settlement agreement on Monday, with the terms remaining the same as what Goldman Sachs disclosed earlier this year.

The $5 billion settlement agreement resolves actual and potential civil claims by the Department of Justice; the New York and Illinois Attorneys General; the National Credit Union Administration, acting as conservator for several failed credit unions; and the Federal Home Loan Banks of Chicago and Seattle, relating to the Goldman Sachs’ securitization, underwriting and sale of residential mortgage-backed securities from 2005 to 2007.

Under the terms of the settlement, Goldman Sachs will pay $2.385 billion civil monetary penalty to the federal government under the Financial Institutions Reform, Recovery and Enforcement Act.

Goldman Sachs will also be required to make $875 million in cash payments to resolve claims by other federal entities and state claims.

As part of that $875 million, Goldman 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.

Goldman Sachs will also provide $1.8 billion in consumer relief.

According to the DOJ, $1.52 billion of that relief will be paid out pursuant to an agreement with the United States requiring Goldman to provide loan modifications, including loan forgiveness and forbearance, to distressed and underwater homeowners throughout the country, as well as financing for affordable rental and for-sale housing throughout the country.

The DOJ said that this agreement represents the largest commitment in any RMBS agreement to provide financing for affordable housing, which it calls as a “crucial need following the turmoil of the financial crisis.”

The DOJ also said that $280 million will be paid out by Goldman pursuant to an agreement separately negotiated with the state of New York.

“This resolution holds Goldman Sachs accountable for its serious misconduct in falsely assuring investors that securities it sold were backed by sound mortgages, when it knew that they were full of mortgages that were likely to fail,” said Acting Associate Attorney General Stuart Delery.

“This $5 billion settlement includes a $1.8 billion commitment to help repair the damage to homeowners and communities that Goldman acknowledges resulted from its conduct, and it makes clear that no institution may inflict this type of harm on investors and the American public without serious consequences,” Delery added.

According to the DOJ, 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 DOJ said that 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, the DOJ said.

“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,” said Principal Deputy Assistant Attorney General Benjamin Mizer, head of the Justice Department’s Civil Division.

“Viewed in conjunction with the previous multibillion-dollar recoveries that the department has obtained for similar conduct, this settlement demonstrates the pervasiveness of the banking industry’s fraudulent practices in selling RMBS, and the power of the Financial Institutions Reform, Recovery and Enforcement Act as a tool for combatting this type of wrongdoing,” Mizer added.

According to the DOJ, Goldman Sachs agreed to a statement of facts, which describes how Goldman made “false and misleading” representations to prospective investors about the characteristics of the loans it securitized and the ways in which Goldman would protect investors in its RMBS from harm.

Below are segments of the agreed upon statement of facts, provided by the DOJ, that provide more details on the nature of Goldman Sachs malfeasance:

• 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 today 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.”

• Goldman’s Mortgage Capital Committee, which included senior mortgage department personnel and employees from Goldman’s credit and legal departments, was required to approve every RMBS issued by Goldman. Goldman has now acknowledged that “[t]he Mortgage Capital Committee typically received . . . summaries of Goldman’s due diligence results for certain of the loan pools backing the securitization,” but that “[d]espite the high numbers of loans that Goldman had dropped from the loan pools, the Mortgage Capital Committee approved every RMBS that was presented to it between December 2005 and 2007.” As one example, in early 2007, Goldman approved and issued a subprime RMBS backed by loans originated by New Century Mortgage Corporation, after Goldman’s due diligence process found that one of the loan pools to be securitized included loans originated with “[e]xtremely aggressive underwriting,” and where Goldman dropped 25 percent of the loans from the due diligence sample on that pool without reviewing the unsampled 70 percent of the pool to determine whether those loans had similar problems.

• Goldman has acknowledged that, for one August 2006 RMBS, the due diligence results for some of the loan pools resulted in an “unusually high” percentage of loans with credit and compliance defects. The Mortgage Capital Committee was presented with a summary of these results and asked “How do we know that we caught everything?” One transaction manager responded “we don’t.” Another transaction manager responded, “Depends on what you mean by everything? Because of the limited sampling . . . we don’t catch everything . . .” Goldman has now acknowledged that the Mortgage Capital Committee approved this RMBS for securitization without requiring any further due diligence.

• Goldman made detailed representations to investors about its “counterparty qualification process” for vetting loan originators, and told investors and one rating agency that Goldman would engage in ongoing monitoring of loan sellers. Goldman has now acknowledged, however, that it “received certain negative information regarding the originators’ business practices” and that much of this information was not disclosed to investors.

• For example, Goldman has now acknowledged that in late 2006 it conducted an internal analysis of the underwriting guidelines of Fremont Investment & Loan (an originator), which found many of Fremont’s guidelines to be “off market” or “at the aggressive end of market standards.” Instead of disclosing its view of Fremont’s underwriting, Goldman has acknowledged that it “[u]ndertook a significant marketing effort” to tell investors about what Goldman called Fremont’s “commitment to loan quality over volume” and “significant enhancements to Fremont underwriting guidelines.” Fremont was shut down by federal regulators within several months of these statements.

• In another example, Goldman was aware in early-mid 2006 of certain issues with Countrywide Financial Corporation’s origination process, including a pattern of non-responsiveness and inability to provide sufficient staff to handle the numerous loan pools Countrywide was selling. In April 2006, while Goldman was preparing an RMBS backed by Countrywide loans for securitization, a Goldman mortgage department manager circulated a “very bullish” equity research report that recommended the purchase of Countrywide stock. Goldman’s head of due diligence, who had just overseen the due diligence on six Countrywide pools, responded “If they only knew . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .”

• Meanwhile, as Goldman has acknowledged in this statement of facts, “[Around the end of 2006], Goldman employees observed signs of uncertainty in the residential mortgage market [and] by March 2007, Goldman had largely halted new purchases of subprime loan pools.”

“Goldman took $10 billion in TARP bailout funds knowing that it had fraudulently misrepresented to investors the quality of residential mortgages bundled into mortgage backed securities,” said Special Inspector General Christy Goldsmith Romero for TARP. “Many of these toxic securities were traded in a taxpayer funded bailout program that was designed to unlock frozen credit markets during the crisis. While crisis investigations take time, SIGTARP is committed to working with our law enforcement partners to protect taxpayers and bring accountability and justice.”

A spokesperson for Goldman Sachs said that the company is “pleased” to be able to move past “legacy” issues like these.

“We are pleased to put these legacy matters behind us,” Michael DuVally, a Goldman Sachs spokesperson said. “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.”

goldman-sachs-officially-reaches-5b-settlement-over-toxic-mortgage-bonds