WASHINGTON -- Goldman Sachs will pay $5.1 billion to settle an investigation into the bank's sale of mortgage-backed securities leading up to the 2008 financial crisis, the Justice Department said Monday. The government accused the bank of misleading investors about the quality of the loans.
Goldman is the last of the big U.S. banks to reach a settlement with the national working group that was set up in 2012 to investigate how Wall Street exacerbated the mortgage bubble and ensuing financial crisis. Goldman said in January that it had put aside money to cover a $5 billion settlement.
"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," said acting Associate Attorney General Stuart Delery.
The final bill for Goldman is less than the settlements of mortgage giants such as JPMorgan Chase, which paid $13.3 billion, and Bank of America, which paid $16.6 billion, but more than the $3.2 billion paid by Goldman's closest competitor, Morgan Stanley.
A number of foreign banks, including Royal Bank of Scotland Group PLC and Deutsche Bank AG, are still under investigation.
In a statement, Goldman said it was pleased to resolve the issue. "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 statement said.
As in previous settlements, the authorities did not name any particular bad actors at Goldman. The working group has been criticized for not punishing individual bankers.
Attempting to address those concerns, Deputy Attorney General Sally Quillian Yates issued departmentwide guidance last year aimed at encouraging more criminal prosecutions of individuals for corporate wrongdoing. It's unclear how many additional prosecutions will be brought as a result of the guidelines, which among other things direct civil and criminal lawyers to work together on investigations from the outset and to focus on individuals.
Federal officials laid out additional allegations Monday in a statement of facts that accused the bank of making serious misrepresentations about the quality of mortgage-backed securities it sold.
Like other banks, Goldman purchased loans that had been issued by subprime mortgage specialists such as Countrywide Financial. Goldman then packaged those loans into bonds that were assigned the highest rating from credit-rating agencies. Individual investors, investment groups and retirement funds bought up the bonds and sustained heavy losses when the underlying loans failed.
The higher-risk loans led to a slew of foreclosures, kicking off the recession that began in late 2007 as the housing market collapsed and investors suffered billions of dollars in losses.
Over the course of 2006, Goldman employees took note of the decreasing quality of loans that it was buying, according to the statement of facts released along with the settlement. When an outside analyst wrote a positive report about Countrywide in April 2006, the head of due diligence at Goldman wrote in an email: "If they only knew."
Despite the worrying signs, Goldman did not alert investors who were buying the bonds it was packaging, officials said Monday.
The settlement is divided into a $2.4 billion civil penalty, $1.8 billion for consumer relief and $875 million in cash.
"This settlement, like those before it, ensures that these critical programs -- such as mortgage assistance, principal forgiveness, and code enforcement -- will continue to get funded well into the future, and will be paid for by the institutions responsible for the financial crisis," New York Attorney General Eric Schneiderman, the co-chairman of the working group, said in a statement.
The cash payments will be divided among some of the members of the working group that negotiated the settlement, including the National Credit Union Administration, the Federal Home Loan Banks and the states of California, Illinois and New York.
Advocacy groups quickly pounced on the deal as too lenient, noting that the $5.1 billion settlement is dwarfed by Goldman's recent profits. Also, they said, the company will be able to deduct some of the cost of the settlement from its taxes. "That is not justice," said Dennis Kelleher, president and chief executive of Better Markets. "Every single individual at Goldman who received a bonus from this illegal conduct not only keeps the entire bonus, but suffers no penalty at all."
Information for this article was contributed by Eric Tucker, Jeff Horwitz and Josh Boak of The Associated Press; by Nathaniel Popper of The New York Times; by Tom Schoenberg of Bloomberg News; and by Renae Merle of The Washington Post.
A Section on 04/12/2016