Goldman Sachs Group Inc. has agreed to pay $5.06 billion to settle claims it engaged in deceptive practices with mortgage bond investors in the years leading up to the financial crisis, the U.S. Department of Justice announced on Monday.
From 2005-2007, according to the Justice Department, Goldman made “false and misleading representations to prospective investors” about the quality of the loans it securitized and how it would protect investors in its residential mortgage-backed securities.
As a result, investors suffered billions of dollars in losses from investing in residential mortgage-backed securities during that time, according to the Justice Department.
The settlement requires Goldman to pay $2.385 billion in civil penalties under the Financial Institutions Reform, Recovery and Enforcement Act. Goldman will pay $1.8 billion in other relief, including to underwater homeowners, distressed borrowers and affected communities. Those payments will come in the form of loan forgiveness and financing for affordable housing, according to the Justice Department.
The settlement also includes $670 million for New Yorkers, according to an announcement from Attorney General Eric T. Schneiderman. That money will be split: $190 million will be in cash to the state and $480 million will go to consumer relief, such as mortgage assistance, principal forgiveness and affordable housing. Â
“These dollars will immediately go to work funding proven programs and services to help New Yorkers keep their homes and rebuild their communities,” Schneiderman said. “We”™ve witnessed the incredible impact these programs and services can have in helping communities recover from the financial crisis.”
Schneiderman is co-chair of the Residential Mortgage-Backed Securities Working Group, a joint state and federal working group formed in 2012 to investigate wrongdoing in the mortgage-backed securities market prior to the financial crisis. The working group led the negotiations on this settlement and has now reached settlements with five different banks totaling close to $45 billion. Â Â Â Â
In a statement of facts provided in the settlement, which Goldman agreed to, the group acknowledge it secured thousands of Alt-A and subprime mortgage loans and sold the resulting residential mortgage-backed securities to investors for billions. That statement of fact showed how the group misled investors even when it knew of possible faults in the securities.
In 2006, Goldman”™s own due diligence for one of its residential mortgage-backed securities found an “unusually high” number of mortgages with credit and compliance defects, the Justice Department said.
“How do we know that we caught everything?” a committee tasked with vetting the securities asked. “We don”™t,” a transaction manager responded. Another transaction manager told the committee it “depends on what you mean by everything? Because of the limited sampling… we don”™t catch everything.”
Goldman acknowledged in the statement of facts that it approved the security without requiring any further due diligence.
In a statement following the announcement of the deal, Goldman CEO Lloyd Blankfein said the group was happy to have these “legacy matters” behind it.
“Since the financial crisis, we have taken a number of significant steps to strengthen our culture, reinforce our commitment to our clients, and ensure our governance oversight and processes are robust,” Blankfein said.
