Goldman Sachs Group agreed on Thursday to pay $5.1 billion in tentative settlement of a federal and state investigation into its packaging of residential mortgage-backed securities before the national financial crisis.
The investment bank's agreement with the residential mortgage-backed security (RMBS) of the U.S. Financial Fraud Enforcement Task Force remains subject to finalization with the Justice Department and other authorities. There is no assurance that the U.S. Justice Department and other authorities will agree to the settlement.
In the agreement, Goldman Sachs will pay a $2.4 billion civil monetary penalty to settle investigations with the Department of Justice and other authorities, Financial Times reported.
The New York City-based bank will also pay $875 million in cash and provide $1.8 billion in consumer relief, including mortgage principal "forgiveness for underwater homeowners and distressed borrowers", foreclosure prevention, support for debt restructuring and other programs.
Goldman Sachs Chairman and CEO Lloyd C. Blankfein said in a statement announcing the agreement that the bank is "pleased to have reached an agreement in principle to resolve these matters."
The settlement would reduce the bank's fourth quarter earnings in 2015 by approximately $1.5 billion on an after tax basis, Forbes reported.
The settlement would cut off civil claims by the U.S. Department of Justice, attorneys general of New York and Illinois, the National Credit Union Administration and the Federal Home Loan Banks od Chicago and Seattle. The authorities concerned Goldman's securitization, underwriting and sale of residential mortgage-backed securities from 2005 to 2007.
The actual and potential civil claims were related to mortgages that were sold to people who could not afford them. The bank then repackaged the mortgages for investors without an adequate explanation of how risky they were.
According to Reuters, the U.S. Department of Justice and state officials have already made multi-billion dollars settlements from a number of large U.S. banks in the past few years, for mortgage-related misdeeds, Libor manipulation, and foreclosure abuse.
The biggest settlement made by a single bank was JP Morgan Chase $13 billion agreement with the Justice Department in 2013 to resolve RMBS claims. In 2012, five banks - Ally Financial, Citigroup, Bank of America, JP Morgan Chase and Wells Fargo - paid a $25 billion settlement of foreclosure abuse investigations.
In separate agreement, Goldman Sachs also agreed on Thursday to pay $15 million to settle claims from Securities and Exchange Commission (SEC), saying it had improperly handled short sales for customers.
The SEC claims Goldman Sachs had failed to meet its obligations by allowing customers to engage in short selling without determining whether the securities coud reasonably be borrowed at settlement.
