Goldman Agrees to $5 Billion Deal Over Faulty Mortgages

January 15, 2016
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by Jason M. Breslow Digital Editor

A trader works in the Goldman Sachs booth on the floor of the New York Stock Exchange. (AP Photo/Richard Drew)

The Wall Street powerhouse Goldman Sachs on Thursday agreed in principle to pay up to $5 billion to settle a government investigation into its role in the financial crisis.

The proposed agreement, which was announced after markets closed on Thursday, is the largest regulatory penalty in Goldman’s history, and allows the bank to turn the page on an era that has seen banks, mortgage firms and other financial institutions pay at least $181.1 billion in crisis-related settlements.

The deal is the third major penalty to be paid by Goldman in the eight years since the height of the crisis. In 2014, the bank agreed to pay the Federal Housing Finance Agency $1.2 billion to resolve claims that it never disclosed the risks in certain mortgage bonds that it sold. In 2010, it paid $550 million to the Securities and Exchange Commission for its role in creating a collateralized debt obligation named Abacus that resulted in giant losses for investors.

But Goldman’s legal tab for crisis-related activity has largely paled in comparison to that of its largest competitors — primarily because its role in doling out faulty mortgages and mortgage-backed securities was smaller than others on Wall Street. In 2014, for example, Bank of America paid nearly $17 billion in a similar settlement. The year before that, JPMorgan Chase paid about $13 billion.

As part of the settlement, Goldman will pay the Department of Justice a $2.385 billion civil penalty, $875 million to a mix of federal and state entities and also provide $1.8 billion in consumer relief. The deal resolves claims stemming from its underwriting and sale of residential mortgage-backed securities from 2005 to 2007.

“We are pleased to have reached an agreement in principle to resolve these matters,” Lloyd Blankfein, Goldman’s chairman and chief executive, said in a statement.

If the deal is finalized by the Justice Department, it would mark the first such agreement since Loretta Lynch took over as attorney general from Eric Holder last April. Under Holder, the department became the target of fierce criticism for failing to prosecute any high-level executives for alleged fraud in the lead-up to the crisis. Instead, the department resolved investigations through large monetary settlements and so-called deferred-prosecution agreements in which banks often did not have to admit or deny responsibility.

As a result, critics say, legal settlements have simply become a cost of doing business for many Wall Street banks. In one recent study, the United States Public Interest Group, a nonprofit advocacy group, looked at $80 billion in legal settlements agreed to by several major corporations, and found that because of the way the deals were structured, at least $48 billion of that amount was eligible for tax deductions. Out of JPMorgan’s $13 billion mortgage settlement, for example, $11 billion was eligible for a deduction, according to the study.

Final approval of the Goldman agreement is not expected for several weeks, so it remains unclear whether the deal would be eligible for such tax breaks.

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