WASHINGTON- Goldman Sachs (GS), which famously bet against the U.S. housing market ahead of the 2008 financial crisis, will pay $5.06 billion to settle federal charges of deceptive mortgage practices in the years leading up to the meltdown.
The deal announced Monday resolves state and federal probes into the sale of shoddy mortgages before the housing bubble and economic meltdown.
"This resolution holds Goldman Sachs accountable for its 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," said Acting Associate Attorney General Stuart Delery in a statement.
The Justice Department said Goldman admitted in the settlement that it made "false and misleading representations to prospective investors" about mortgage-backed securities it was selling.
In a statement of facts outlined in the agreement, Goldman acknowledged that "significant percentages" of the mortgages it packaged in securities sold between 2005 and 2007 did not conform with it had told investors about the loans.
The Justice Department said that senior executives in Goldman's mortgage unit, along with credit and legal department employees, were required to approve every residential mortgage-backed security (RMBS) issued by the bank. Goldman's so-called Mortgage Capital Committee approved every RMBS that it reviewed between December 2005 and 2007 despite knowing that many home loans in the securities had credit and compliance defects, the agency said.
The settlement also makes clear that Goldman suspected that many of the subprime loans it was rolling up into securities were potentially deficient. The Justice Department cites a security Goldman created in 2006 with loans made by Countrywide Financial, at the time the country's biggest provider of subprime loans.
"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," the agency said. "Goldman's head of due diligence, who had just overseen the due diligence on six Countrywide pools, responded 'If they only knew....' "
With Countrywide in deep financial distress, Bank of America bought the lender in 2008 for $4.1 billion.
The deal requires the bank to pay a $2.4 billion civil penalty and an additional $1.8 billion in relief to underwater homeowners and distressed borrowers, along with $875 million in other claims.
Under the law, Goldman could partially ease the financial pain from the settlement by deducting roughly $2.7 billion from its taxes, equivalent to the combined relief for homeowners and borrowers, along with the money for the other claims. The bank may not deduct any part of the $2.4 billion civil penalty.
Although part of the settlement is earmarked for homeowners, borrowers could owe tax on any money they get from Goldman.
"Most of the time, when corporations pay out to injured parties through settlements, the recipients do have tax liability for that money-- it's considered profitable income," said Michelle Surka, program associate with US PIRG, a consumer advocacy group.
Goldman is required under the agreement to inform anyone who gets such relief of the possible tax implications.
The agreement is the latest multi-billion-dollar civil settlement reached with a major bank. Other banks that settled in the last two years include Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM) and Wells Fargo (WFC).
Goldman had previously disclosed the settlement in January, but federal officials laid out additional allegations in a statement of facts.