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By CotoBlogzz
Rancho Santa Margarita, CA - Goldman Sachs agrees to pay
more than $5 Billion in connection with Its sale of residential mortgage backed
securities (RMBS) between 2005 and 2007, according
to announcement by the Justice Department
(DOJ
The resolution announced today requires
Goldman to pay $2.385 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. 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.
Considering that The Goldman Sachs
Group, Inc. (NYSE: GS) reported net revenues of $6.86 billion and net earnings
of $1.43 billion for the third quarter ended September 30, 2015, and the damaged caused by its RMBS, the settlement
announced today is hardly a deterrent for future bad behavior and more like a
slap on the wrist, not withstanding Acting Associate Attorney General Stuart F.
Delery comments:
“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,”.
The
$2.385 billion civil monetary penalty resolves claims under FIRREA, which
authorizes the federal government to impose civil penalties against financial
institutions that violate various predicate offenses, including wire and mail
fraud. The settlement expressly preserves the government’s ability to
bring criminal charges against Goldman, and does not release any individuals
from potential criminal or civil liability. In addition, as part of the
settlement, Goldman agreed to fully cooperate with any ongoing investigations
related to the conduct covered by the agreement.
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 (the quotes in the following paragraphs are from that
agreed-upon statement of facts, unless otherwise noted):
- Goldman told investors in offering documents that “[l]oans in the securitized pools were originated generally in accordance with the loan originator’s underwriting guidelines,” other than possible situations where “when the originator identified ‘compensating factors’ at the time of origination.” But Goldman has today acknowledged that, “Goldman received information indicating that, for certain loan pools, significant percentages of the loans reviewed did not conform to the representations made to investors about the pools of loans to be securitized.”
- Specifically,
Goldman has now acknowledged that, even when the results of its due
diligence on samples of loans from those pools “indicated that the
unsampled portions of the pools likely contained additional loans with
credit exceptions, Goldman typically did not . . . identify and eliminate
any additional loans with credit exceptions.” Goldman has acknowledged
that it “failed to do this even when the samples included significant
numbers of loans with credit exceptions.”
- Goldman’s
Mortgage Capital Committee, which included senior mortgage department
personnel and employees from Goldman’s credit and legal departments, was
required to approve every RMBS issued by Goldman. Goldman has now
acknowledged that “[t]he Mortgage Capital Committee typically received . .
. summaries of Goldman’s due diligence results for certain of the loan
pools backing the securitization,” but that “[d]espite the high numbers of
loans that Goldman had dropped from the loan pools, the Mortgage Capital
Committee approved every RMBS that was presented to it between December
2005 and 2007.” As one example, in early 2007, Goldman approved and
issued a subprime RMBS backed by loans originated by New Century Mortgage
Corporation, after Goldman’s due diligence process found that one of the
loan pools to be securitized included loans originated with “[e]xtremely
aggressive underwriting,” and where Goldman dropped 25 percent of the
loans from the due diligence sample on that pool without reviewing the
unsampled 70 percent of the pool to determine whether those loans had
similar problems.
- Goldman has acknowledged that, for one August 2006 RMBS, the due diligence results for some of the loan pools resulted in an “unusually high” percentage of loans with credit and compliance defects. The Mortgage Capital Committee was presented with a summary of these results and asked “How do we know that we caught everything?” One transaction manager responded “we don’t.” Another transaction manager responded, “Depends on what you mean by everything? Because of the limited sampling . . . we don’t catch everything . . .” Goldman has now acknowledged that the Mortgage Capital Committee approved this RMBS for securitization without requiring any further due diligence.
-
- Goldman
made detailed representations to investors about its “counterparty
qualification process” for vetting loan originators, and told investors and
one rating agency that Goldman would engage in ongoing monitoring of loan
sellers. Goldman has now acknowledged, however, that it “received
certain negative information regarding the originators’ business
practices” and that much of this information was not disclosed to
investors.
- For
example, Goldman has now acknowledged that in late 2006 it conducted an
internal analysis of the underwriting guidelines of Fremont Investment
& Loan (an originator), which found many of Fremont’s guidelines to be
“off market” or “at the aggressive end of market standards.” Instead
of disclosing its view of Fremont’s underwriting, Goldman has acknowledged
that it “[u]ndertook a significant marketing effort” to tell investors
about what Goldman called Fremont’s “commitment to loan quality over
volume” and “significant enhancements to Fremont underwriting
guidelines.” Fremont was shut down by federal regulators within
several months of these statements.
- In
another example, Goldman was aware in early-mid 2006 of certain issues
with Countrywide Financial Corporation’s origination process, including a
pattern of non-responsiveness and inability to provide sufficient staff to
handle the numerous loan pools Countrywide was selling. In April
2006, while Goldman was preparing an RMBS backed by Countrywide loans for
securitization, a Goldman mortgage department manager circulated a “very
bullish” equity research report that recommended the purchase of
Countrywide stock. Goldman’s head of due diligence, who had just
overseen the due diligence on six Countrywide pools, responded “If they
only knew . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. .”
- Meanwhile,
as Goldman has acknowledged in this statement of facts, “[Around the end
of 2006], Goldman employees observed signs of uncertainty in the
residential mortgage market [and] by March 2007, Goldman had largely
halted new purchases of subprime loan pools.”
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