Nearly a decade after the housing bubble burst, Goldman Sachs is clearing up pesky allegations that it knowingly defrauded people by selling them bad mortgage securities. The powerful banking firm agreed to a $5 billion settlement over the allegations, New York Attorney General Eric Schneiderman announced Monday afternoon.
The deal resolves a number of different accusations against Goldman stemming from its mortgage securities business from 2007 to 2009. The firm will pay New York State $190 million in cash and take $480 million worth of consumer relief actions for New York residents. The remaining $1.3 billion in consumer relief will be spread around other agencies and consumers that brought similar allegations. Schneiderman heads a joint state and federal task force that works to consolidate such complex claims and resolve them more efficiently than multiple long-running court cases would allow.
But the way such consolidated settlements are structured means Goldman will not pay the full $5 billion price tag touted by Schneiderman.
The so-called “vampire squid” of the banking industry, which manages $861 billion in assets, will be able to write off $1.8 billion worth of consumer relief actions that Goldman must take under the settlement, for example. The same goes for $875 million in payments to settle related cases brought by Schneiderman, his Illinois counterpart Lisa Madigan, the National Credit Union Administration, and federally-backed housing lenders in Chicago and Seattle.
Less than half of the total sticker price — $2.385 billion — is structured as a civil penalty, which is generally not deductible. The settlement papers do prohibit Goldman from seeking FDIC reimbursement for any of the deal’s costs, but that language does not rule out simple deductions.
Schneiderman’s office and the U.S. Department of Justice did not immediately respond to questions about the Goldman settlement.
What’s more, most of the consumer relief actions Goldman is agreeing to take are not really cash expenditures. The bulk of the consumer relief orders come from promises to restructure and refinance individual home loans. That process makes it more likely that borrowers will be able to keep making payments rather than face foreclosure. Paying customers are better than foreclosures for the industry’s long-term bottom line.
And individual homeowners aren’t as lucky as the bank when it comes to taxes. Any debt relief they receive from Goldman as part of this deal will likely count as taxable income. An appendix to the settlement notes that Goldman has to “clearly disclose to borrowers the potential tax consequences of any relief offered or provided” but is not itself liable for covering any tax hit a borrower might take after Goldman helps them.
The Goldman deal is the latest in a long line of settlements where finance industry players simultaneously avoid admitting guilt for alleged systemic fraud in the housing market and minimize the actual cost of securing that freedom from both corporate and individual prosecution. Previous government deals with JP Morgan, Bank of America, Citibank, Morgan Stanley, and others have a combined on-paper value in the tens of billions of dollars, but a far lower bottom-line impact in reality.
As with those deals, Monday’s announcement wipes away strong evidence that Goldman knowingly cheated the markets for its own gain during the closing stages of the housing bubble and throughout the panic that drove the Great Recession. A Department of Justice statement praising the deal describes Goldman’s “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.”
Since the initial JP Morgan deal that sparked outrage over tax deductions, consumer relief wiggle room, and other fine-print details that make such deals cheaper for companies than press releases indicate, Sen. Elizabeth Warren (D-MA) and other lawmakers have tried to force federal and state lawyers to stop the doublespeak. Warren and Sen. Tom Coburn (R-OK) have pushed for the Truth in Settlements Act since early 2014.
The measure would require federal agencies to clearly delineate between deductible and non-deductible settlement costs, and include an estimate of the actual corporate costs of such deals in their formal communications about them. It passed the Senate in September, but hasn’t moved out of any of three separate committees with jurisdiction over it in Speaker Paul Ryan’s (R-WI) House.
The economic crisis that shady mortgage lenders, lax credit ratings agencies, and fraudulent securities brokers conspired to create allowed many insiders to walk away with huge fortunes to their name. But the resulting recession cost the world tens of trillions of dollars. Even the face value of all the combined settlements announced by government prosecutors since then comes up several hundred times short of the damage the financial sector inflicted on the world.