Goldman Sachs to settle US probe
GOLDMAN Sachs will pay $5.1bn to settle a US probe into its handling of mortgage-backed securities involving allegations that loans were not vetted properly before being sold.
GOLDMAN Sachs will pay $5.1bn to settle a US probe into its handling of mortgage-backed securities involving allegations that loans were not properly vetted before being sold to investors as high-quality bonds.
Goldman Sachs, which announced details of the accord in January, will pay a $2.39bn civil penalty, make $875m in cash payments and provide $1.8bn in consumer relief, according to a US justice department statement.
“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 they were full of mortgages likely to fail,” said acting associate attorney-general Stuart Delery.
Yesterday’s resolution is the fifth multibillion-dollar settlement reached with US banks resulting from the government’s push to hold Wall Street firms to account for creating and selling subprime mortgage bonds that helped spur the 2008 financial crisis. Other banks, including Royal Bank of Scotland and Deutsche Bank remain under investigation, people familiar with the matter have said.
The bank has already made provisions for most of the charges. Goldman set aside $1.95bn for legal expenses in the fourth quarter, and $4.01bn for all of last year, more than double the totals for the two previous years combined.
In addition to the justice department, the deal resolves claims from several authorities, including New York, California and Illinois attorneys-general, for the bank’s securitisation, underwriting and sale of bonds from 2005-07.
The accord would also resolve claims by the National Credit Union Administration and the Federal Home Loan Banks of Chicago and Seattle, according to the statement.
The government’s mortgagebacked security resolutions stem from a working group of prosecutors and other officials that President Barack Obama ordered in 2012 to probe Wall Street for fuelling the financial crisis with bonds linked to souring mortgages. Until then, the justice department had been pilloried for years for not having brought significant cases against banks and their executives.
Goldman “agreed” to a statement of facts put together as part of the resolution, which gives examples of what the government said were false and misleading representations to investors.
In one August 2006 residential mortgage-backed security, the bank’s due diligence reported an “unusually high” percentage of loans with credit and compliance defects, according to the statement.
When presented with the results, the Goldman employees responsible for overseeing the securities asked, “How do we know we caught everything?” One transaction manager responded, “We don’t”. Another responded, “Depends on what you mean by everything? Because of the limited sampling we don’t catch everything.”
Goldman approved this residential mortgage-backed security for securitisation without requiring any further due diligence.