Photographer: Ron Antonelli/Bloomberg

Goldman Says U.S. Mortgage Settlement to Cost $5.1 Billion

  • Resolution includes $1.8 billion in relief to consumers
  • Final deal with Justice Department could still be weeks away

Goldman Sachs Group Inc. said it agreed to settle a U.S. probe into its handling of mortgage-backed securities for about $5.1 billion, cutting fourth-quarter profit by about $1.5 billion and closing out a year of record legal and litigation costs. 

The proposed deal, which the bank announced in a statement Thursday, would be the latest multibillion-dollar settlement resulting from the government’s push to hold Wall Street firms to account for creating and selling subprime mortgage bonds that helped spur the 2008 financial crisis.

Authorities have already penalized the three biggest U.S. banks -- JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. -- more than $37 billion in the form of cash and consumer relief. In those cases, the government said the banks misrepresented to investors the quality of mortgage loans they securitized into risky bonds.

New York-based Goldman Sachs will pay a $2.39 billion civil penalty, make $875 million in cash payments and provide $1.8 billion in consumer relief under an agreement in principle with a U.S. task force, according to its statement. 

The bank had already provisioned for some of the charges. Goldman set aside $2.41 billion for legal and litigation expenses in the first nine months of 2015, almost as much as the totals for the two previous years combined. The cost of the agreement will affect fourth-quarter earnings, allowing 2016 results to be free of the expense.

The deal would resolve claims from authorities including the Department of Justice and New York and Illinois attorneys general for the bank’s securitization, underwriting and sale of bonds from 2005 to 2007. The accord would also resolve claims by the National Credit Union Administration and the Federal Home Loan Banks of Chicago and Seattle, according to the statement.

A final resolution could still be weeks away. Morgan Stanley, which announced a proposed $2.6 billion agreement with the Justice Department in February to end probes into its creation and sale of mortgage-backed securities, has yet to resolve its case.

“We are pleased to have reached an agreement in principle to resolve these matters,” Lloyd Blankfein, Goldman Sachs’ chairman and chief executive officer, said in the statement.

Justice Department spokesman Patrick Rodenbush declined to comment.

“These are a continuation of investigations that have been ongoing now for many years and reflect the hard work and dedication of career prosecutors, investigators and analysts from around the country,” said Geoffrey Graber, a former Justice Department lawyer who until September directed the group investigating the banks and is now a partner at Cohen Milstein Sellers & Toll Pllc in Washington.

The government’s mortgage-backed security resolutions stem from a working group of prosecutors and other officials that President Barack Obama ordered up in 2012 to punish Wall Street for fueling the financial crisis with bonds linked to souring mortgages. Until then, the Justice Department had been pilloried for years for not having brought significant cases against banks and their executives.

Settlements with Goldman or Morgan Stanley would be the first since Attorney General Loretta Lynch took over the department from Eric Holder in April. As U.S. Attorney in Brooklyn, Lynch had a hand in Bank of America’s $16.7 billion subprime-mortgage settlement, the biggest at the time against a U.S. corporation.

Some lawmakers and public-interest advocates have criticized the government’s approach to holding mortgage lenders accountable. Without individual prosecutions, the settlements allow banks to pay money to atone for bad behavior, making financial penalties a cost of doing business.

Investigators are using the Financial Institutions Reform Recovery and Enforcement Act, which allows the government to seek civil penalties for actions that occurred as long as a decade ago. The statute also permits authorities to go after bank employees as well as institutions.

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