The Justice Department has announced that Goldman Sachs has agreed to pay $5.06 billion to settle federal claims related to Goldman’s conduct in the packaging, securitization, marketing, sale and issuance of residential mortgage-backed securities (RMBS) between 2005 and 2007. 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.
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.
Of the $875 million Goldman has agreed to pay to settle claims by various other federal and state entities: Goldman will pay $575 million to settle claims by the National Credit Union Administration, $37.5 million to settle claims by the Federal Home Loan Bank of Des Moines as successor to the Federal Home Loan Bank of Seattle, $37.5 million to settle claims by the Federal Home Loan Bank of Chicago, $190 million to settle claims by the state of New York, $25 million to settle claims by the state of Illinois and $10 million to settle claims by the state of California.
Goldman will pay out the remaining $1.8 billion in the form of relief to aid consumers harmed by its unlawful conduct. $1.52 billion of that relief will be paid out pursuant to an agreement with the United States that Goldman will provide loan modifications, including loan forgiveness and forbearance, to distressed and underwater homeowners throughout the country, as well as financing for affordable rental and for-sale housing throughout the country. This agreement represents the largest commitment in any RMBS agreement to provide financing for affordable housing—a crucial need following the turmoil of the financial crisis. $280 million will be paid out by Goldman pursuant to an agreement separately negotiated with the state of New York.
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.”
Assistant U.S. Attorneys Colleen Kennedy and Kelli Taylor of the Eastern District of California investigated Goldman’s conduct in connection with RMBS, with the support of the Federal Housing Finance Agency’s Office of the Inspector General (FHFA-OIG) and the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP).
Jeffrey Newman represents whistleblowers. He does not represent any whistleblowers relating to this settlement.