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Why Goldman Sachs settlement is a slap on the tentacle

Americans not buying as many cars and more Mo... 01:04

"Goldman Sachs would never condone one of its employees misleading anyone, certainly not investors, counterparties or clients. We take our responsibilities as a financial intermediary very seriously and believe that integrity is at the heart of everything that we do."

That was the Wall Street firm in 2010 after one of its traders, Fabrice Tourre, was accused of hawking bad mortgage securities to some clients, resulting in a roughly $1 billion loss, at the same time Goldman (GS) was teaming with other investors to bet against the deal. Six years later, the bank admitted this week that it misled investors, agreeing to pay more than $5 billion to settle federal charges that its mortgage practices in the run-up to the 2008 financial crisis were deceptive.

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Has justice been served? Certainly, the settlement seems to go out of its way to ease the pain for Goldman. For one, the bank could deduct up to $1 billion of the settlement amount from its taxes. And because of tax credits offered under the deal, the Wall Street firm may also end up writing a much smaller check for affordable housing than the $240 million the settlement requires on paper.

Meanwhile, homeowners who are eligible for a payout under the agreement -- presumably including some of the same taxpayers who were called on to bail out Goldman after its bets soured -- could end up with a higher tax bill because money from corporate settlements are typically treated as income.

The upshot? Goldman, which in the aftermath of the housing crash was famously described as a "great vampire squid wrapped around the face of humanity," seems to be wriggling away in a tide of black ink. After all, the bank generated more than $6 billion in profits last year.

Just ask William Black, a professor of law and economics at the University of Missouri-Kansas City, who as a former top financial regulator helped lock up hundreds of bankers for fraud after the savings and loan crisis in the 1980s and '90s.

"It is fundamentally more of the same -- no prosecution of the culpable elites, no one fired and no one has their fraudulent proceeds 'clawed back,'" said Black in blasting the Department of Justice settlement with Goldman.

Black said the fine print in the deal effectively insulates Goldman from further civil litigation. For instance, the settlement notes vaguely that the bank knew that it had bundled dodgy mortgages into "certain loan pools" that it then sold to investors. But the pact fails to specify loan pools known to have contained defective mortgages.

"This makes it useless for a plaintiff lawyer bringing a complaint based on particular loan pools," Black said.

Still, isn't $5 billion a pretty penny even for a Wall Street bank? Not if you consider who's really picking up the tab for Goldman's misconduct: the company's shareholders. The individual executives and other employees who were responsible for peddling deceptive financial products -- securities that Justice said they knew were "full of mortgages that were likely to fail" -- won't pay a cent.

As a result, Black predicts the settlement will have "zero deterrent effect" on big banks.

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