Defrauding Investors Costs Goldman Sachs $5 Billion (GS.N)

Goldman Sachs Group Inc. has reached an agreement to pay a multi-billion dollar settlement to resolve claims that the company defrauded investors in the years leading up to the 2008 financial crisis. The company was accused of misleading mortgage bond investors in the packaging, securitization, marketing and sale of residential mortgage-backed securities between 2005 and 2007, specifically failing to properly vet mortgage-backed securities before selling them as high-quality debt. Investors lost billions of dollars on securities bought during the period.

The U.S. Department of Justice announced that the company has agreed to pay $5.06 billion to settle the claims. The company will pay a $2.385 billion civil penalty and $1.8 billion in relief to homeowners whose mortgages exceed the value of their property and distressed borrowers. Goldman has also agreed to pay $875 million to resolve claims by the New York and Illinois attorneys general, the National Credit Union Administration and the Federal Home Loan Banks of Chicago and Seattle.

The Justice Department has been criticized for years over the lack of significant cases brought against banks and their executives for creating and selling subprime mortgage bonds that helped spur the 2008 financial crisis. Just like in past settlements, no individual bankers at Goldman Sachs have been charged with wrong doing. The Justice Department said that the announced settlement does not prevent the government from bringing criminal charges against Goldman and does not release any individuals from potential criminal or civil liability.

Goldman Sachs originally announced details of the settlement in January. The bank has already provisioned for most of the charges, setting aside $1.95 billion for legal and litigation expenses in the fourth quarter. The company has set aside a total of $4.01 billion for all of 2015. Michael DuVally, a company spokesman, said in an e-mailed statement, “We are pleased to put these legacy matters behind us. 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.”

The government has reached five other multi-billion dollar settlements with U.S. banks over similar charges. J.P. Morgan Chase has agreed to a $13 billion settlement. Bank of America reached an agreement to pay $16.6 billion. Citibank paid $7 billion to settle claims against it and Morgan Stanley agreed to a $3.2 billion penalty. Royal Bank of Scotland Group Plc and Deutsche Bank AG are reportedly still under investigation.

 

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