Goldman Sachs to Pay $5.1B in Mortgage-Backed Securities Investigation, $15M Over Purported Improper Securities Lending Practices

Goldman Sachs Group Inc. (GS) has consented to pay approximately $5.1B to resolve a government investigation into the way it dealt with mortgage-backed securities leading up to the 2008 financial crisis. The settlement was reached in principal with the Residential Mortgage-Backed Securities Working Group of the U.S. Financial Fraud Enforcement Task Force. It must be finalized, still, with definitive documentation to be agreed upon by the parties involved.

The settlement resolves potential and current claims made by attorneys general in Illinois and New York, the US Justice Department, Federal Home Loan Banks of Chicago and Seattle, and the National Credit Union Administration. Goldman is accused of packaging mortgage securities it knew would do badly and selling them off to investors. At issue are the bank’s underwriting, securitization, and sale of bonds from ’05 to ’07.

As part of the settlement, Goldman will pay a $2.39B civil penalty, $1.8B in consumer relief, and $875 million in cash payments. The consumer relief includes loan forgiveness for beleaguered borrowers and homeowners, affordable housing support, construction financing, debt restructuring support, improvement programs related to housing quality, and foreclosure prevention.

The federal government has been working hard to make financial firms on Wall Street accountable for creating and selling the subprime mortgage bonds that played such a big part in causing the 2008 financial crisis. Already, Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), and Bank of America Corp. (BAC) have collectively paid over $37B to resolve allegations that they misrepresented to investors that mortgage loans that were securitized into high risk bonds were of better quality that what was actual.

Last year, Morgan Stanley (MS) and the DOJ arrived at a proposed $2.6B settlement to conclude investigations into its involvement with MBSs. That case, however, has yet to be finalized.

However, there are those who remain dissatisfied with how the government has chosen to go after mortgage lenders over MBSs leading up to 2008. While firms have had to pay high penalties, there have been no individual prosecutions for wrongdoing.

Goldman Resolves SEC Case Over Improper Lending Practices
Goldman also has settled another securities case, this one with the Securities sand Exchange Commission, for $15M. The charges involve allegations that the firm violated federal regulations related to securities lending practices.

In the SEC’s order instituting a settled administrative proceeding, the regulator said that the broker-dealer violated Regulation SHO when it improperly gave locates to customers even though it had not sufficiently reviewed the securities that were to be located.

Customers will often ask firms to locate stock that they can short sell. When a locate is granted, this is supposed to signify that the firm has borrowed, made arrangements to borrow, or has reasonable grounds to believe that it could borrow the security to settle the sale.

The Commission said that when Goldman employees processed customer locate requests, they used a function that caused their order management system to approve locate requests based on how much reliable start-of-day inventory large firms had reported. This occurred even after the system had determined that the investment was depleted according to locate requests that were already processed. The SEC order said that Goldman staff assumed that the automated model was “conservative” and allowing for more locates would not cause a failure to deliver when the securities were due for settlement.

Goldman just got wiped out, Business Insider, January 14, 2016

Goldman Sachs Pays $15 Million Over Securities Lending Claims, Bloomberg, January 14, 2016