The Justice Department last week announced a $5 billion settlement with banking giant Goldman Sachs to resolve claims related to its packaging, securitization, marketing, sale, and issuance of residential mortgage-backed securities.
The resolution requires Goldman to pay $2.4 billion in a civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and also requires the bank to provide $1.8 billion in other relief, including relief to underwater homeowners, distressed borrowers and affected communities, in the form of loan forgiveness and financing for affordable housing.
Goldman will also pay $875 million to resolve claims by other federal entities and state claims, including:
$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.
Investors, including federally-insured financial institutions, suffered billions of dollars in losses from investing in RMBS issued and underwritten by Goldman between 2005 and 2007.
“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,” Acting Associate Attorney General Stuart Delery said in a statement.
Goldman will pay out the remaining $1.8 billion in the form of relief to aid consumers harmed by its unlawful conduct. According to the Justice Department, $1.52 billion of that relief will be paid out pursuant to an agreement with the United States that Goldman will 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.
This agreement represents the largest commitment in any RMBS agreement to provide financing for affordable housing. $280 million will be paid out by Goldman pursuant to an agreement separately negotiated with the state of New York.
The settlement includes a statement of facts to which Goldman has agreed. That statement of facts 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.
Some critics argue that the settlement is a slap on the wrist. “Goldman Sachs has admitted it was a key link in the chain of wrongdoing that led to the 2008 crash and the Great Recession—but eight years after the crash, there are still no criminal prosecutions of either the Big Banks themselves or their executives,” Public Citizen, a consumer rights advocacy group, said in a statement.
“Without criminal prosecution, there’s not even the illusion of accountability,” Public Citizen added. “This settlement, like others involving Goldman Sachs and the rest of the Wall Street perpetrators of the wrongdoing that led to the Great Recession, does virtually nothing to advance the objectives of deterrence, punishment or compensation for victims. The real message is—whether due to size, complexity or privileged access to politicians—Goldman Sachs and Wall Street remain above the law.”