Goldman Sachs Fined $5B for Faulty Mortgage Practices


By Andrew DePietro, Staff Writer

Goldman Sachs concluded a $5.06 billion settlement on April 11 due to federal charges of deceptive mortgage policies in the lead-up to the 2008 financial crisis. As part of the deal with the Justice Department, Goldman recognized that it had lied about "significant percentages" of the mortgages it packaged in securities and sold between 2005 and 2007.

Despite knowing that many of the home loans that made up mortgage-backed securities were in danger of failing, Goldman continued to approve every residential mortgage-backed security it issued. When these mortgages defaulted, the securities became worthless.

Here's a look at Goldman Sachs' settlement and their involvement in the financial crisis.

Goldman Sachs Settlement: $5.06 Billion

The settlement Goldman Sachs made with the government includes a $2.4 billion civil penalty, $1.8 billion in compensation for distressed borrowers and underwater homeowners, and another $875 million for additional claims.

Goldman Sachs isn't alone with its government deal. In the last two years, Citigroup, JPMorgan Chase, Wells Fargo and Bank of America have all reached civil settlement agreements with the U.S. government.

Goldman Sachs might have not been responsible for extending risky mortgage loans, but they still packaged them into securities knowing they were dangerous. Many of these loans were subprime mortgages with low teaser rates, which would increase after a few years. When the rates would jump, borrowers would often fail to keep up with payments, leading to defaults. When the underlying loans defaulted, residential mortgage-backed securities lost their value, hurting investors.

Goldman Sachs and the 2008 Financial Crisis

Goldman Sachs was one of the few Wall Street institutions to benefit from the 2008 financial crisis. In April 2010, the U.S. Senate's permanent subcommittee on investigations revealed the depth of Goldman's profiteering during the crisis.

As early as May 2007, Goldman recognized that its mortgage-backed securities were worth much less than they appeared. Besides hiding this fact, Goldman decided to profit by marking down the prices of portfolios comprised of such securities. Goldman's actions ignited a chain reaction in which competing banks followed suit, worsening the 2008 financial crisis.

Goldman recognized earlier than most firms that a crash in the real estate market was coming. The housing bubble peaked in 2005 and Goldman Sachs responded by making a large bet, or "hedge," against the housing market in 2006. While middle class homeowners defaulted on their mortgages and felt the impact of the economic downturn, Goldman Sachs recorded the most profitable year to date in 2007: $17.6 billion pretax.

Bernie Sanders on Goldman Sachs and 'Rigged Economy'

Bernie Sanders has frequently criticized Wall Street in his 2016 presidential campaign. Earlier this year, Sanders targeted Hillary Clinton for speaking fees she received from Goldman Sachs.

During the Jan. 16 democratic debate hosted by NBC News, Sanders said:

"The leader of Goldman Sachs is a billionaire who comes to Congress and tells us we should cut Social Security, Medicare, and Medicaid. Secretary Clinton ... you've received over $600,000 in speaking fees from Goldman Sachs in one year. I find it very strange that a major financial institution that pays $5 billion in fines for breaking the law, not one of their executives is prosecuted, while kids who smoke marijuana get a jail time."

Sanders used the Goldman Sachs settlement to further condemn America's "rigged economy," a system which strengthens the wealthy and powerful to the detriment of the masses. Sanders' allegations against Clinton has led to public calls for her to release speech transcripts to Goldman.

Goldman Sachs Fined Over Deceptive Practices

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