Under the terms of the agreement in principle, the firm will pay a $2.385 billion civil monetary penalty, make $875 million in cash payments and provide $1.8 billion in consumer relief. The consumer relief will be in the form of principal forgiveness for underwater homeowners and distressed borrowers; financing for construction, rehabilitation and preservation of affordable housing; and support for debt restructuring, foreclosure prevention and housing quality improvement programs, as well as land banks.
That agreement in principle will ”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,” and is the latest in a series of gigantic settlements between the government’s mortgage task force and the big banks. As with the other settlements, a big chunk of this one consists of consumer relief: Because the banks’ mortgage misdeeds hurt homeowners, the banks have to help homeowners to balance out the scales.
But of course you don’t have a mortgage with Goldman Sachs. When Countrywide and Washington Mutual and other banks were churning out mortgages to feed the great securitization pipeline, Goldman … wasn’t. You couldn’t walk into a Goldman Sachs branch and get a no-money-down stated-income mortgage. Goldman was, and is, an investment bank. Consumer mortgage lending has never really been its core business. 2 It does do some mortgage lending — to its wealthy Private Bank customers – but I suspect that very little of that is subprime, and that very few of those customers are in much distress. And it did have a mortgage servicing business, Litton Loan Servicing, but it sold that to Ocwen Financial Corporation in 2011, and Ocwen has already had to provide $2 billion of consumer relief, in part for past misdeeds at Litton.
For the most part, though, Goldman’s mortgage misdeeds came further down the mortgage-securitization pipeline: It didn’t make bad loans to people, but just bought those bad loans from other lenders, packaged them into bad securities, 3 misrepresented the badness of those securities, and sold them to investors who lost money on them. You are not supposed to do that, and Goldman has been fined before for doing that, 4 and now it will be fined again for doing that. 5 Obviously you are not supposed to lie about the securities that you sell to investors, and society has judged that Goldman did, and so now it must pay.
But it is a bit odd that it now has to pay, not the investors (whom it is accused of defrauding), but rather the homeowners (whom it didn’t). This oddity existed even for the full-stack mortgage-fraud banks, like Bank of America/Countrywide or JPMorgan/Washington Mutual: JPMorgan’s big Justice Department settlement, for instance, was for violations ”in connection with the packaging, marketing, sale and issuance of” residential mortgage-backed securities, not for defrauding homeowners, 6 but it nonetheless included $4 billion of consumer relief. There, though, you could at least point to bad stuff that Countrywide or WaMu did in their actual interactions with homeowners, and sort of hand-wavily argue that the settlement was rough justice for those homeowners. Goldman never even had interactions with homeowners.
So its consumer relief requirement is a little weird. “It is unclear exactly how Goldman’s consumer relief will be doled out and to whom,” says the New York Times; clearly it won’t go to Goldman mortgage customers. One obvious answer is that it could go to distressed borrowers whose mortgages are in pools securitized, underwritten, managed or serviced by Goldman. But that too is weird. Goldman doesn’t own those loans. 7 We don’t know how the Goldman consumer relief will work — it’s just an agreement in principle for now — but the JPMorgan and Bank of America settlements gave those banks 50 cents of consumer-relief credit for every dollar of mortgage forgiveness that they provided on loans that they serviced but that were owned by other investors. But it would be odd if Goldman’s punishment for selling bad loans to investors is that it has to take more money away from those investors, by forgiving principal on those loans, and give it to homeowners. That seems to punish Goldman’s victims again, and not to punish Goldman at all. This may be why Thursday’s $5.1 billion agreement ”will reduce earnings for the fourth quarter of 2015 by approximately $1.5 billion on an after-tax basis.” 8
This is too simplistic — principal forgiveness could in some cases be good for the loan investors, and it’s not hard to imagine Goldman, you know, just finding some consumers and handing them cash — but the important point is that Goldman has to pay — or “pay” — $1.8 billion to consumers, even though no one thinks that Goldman ever directly ripped off, or even met, a consumer.
Of course that makes perfect sense. The theory behind these settlements — and the mainstream of thinking about the financial crisis — is that the mis-selling of mortgage-backed securities did not only, or even primarily, harm the investors who bought them. It brought on a financial crisis, crashed banks, cratered the economy, and left people unemployed and out of their homes. That causal chain is not hard to understand, exactly — there is literally a Hollywood movie about it – but it’s a tough thing to wedge into a lawsuit. It is not what you’d call a proximate cause. It’s easy enough to sue a bank for lying about bonds that lost value and caused losses to investors, and to demand that the bank pay back those investors for their losses. It’s harder to sue a bank for causing a recession, and to demand that the bank pay back consumers for that recession. The mortgage settlements are a very vague and approximate way to do that. But as a way to adapt the legal system to assign blame and seek compensation for an economic crisis, they’re an impressive effort.
Also naked shorting.
Besides the mortgage agreement, on January 14 Goldman also entered into a settlement with the Securities and Exchange Commission over some short-selling violations. This one is barely even noticeable financially — it’s for just $15 million, or 0.3 percent of the mortgage one — but it is funnier, so I ought to tell you about it briefly.