Why You Should Care About Big Banks Cutting Deals with the Feds to Avoid Prosecution
By Allie Conti
Apr 12 2016
On Monday, Wall Street behemoth Goldman Sachs agreed to shell out more than $5 billion for deceiving investors and contributing to the 2008 financial crisis. The settlement, which was brokered by several state attorneys general as well as the feds, is supposed to provide $1.8 billion in relief to distressed homeowners, along with a hefty civil penalty. In a statement, US Attorney Benjamin B. Wagner of the Eastern District of California said it shows that the United States “remain[s] committed to pursuing those responsible for the financial crisis,” while Acting Associate US Attorney General Stuart F. Delery said it “makes clear that no institution may inflict this type of harm on investors and the American public without serious consequences.”
But while $5 billion seems like a sizable punishment, it’s really just a drop in the bucket for a global player like Goldman.
Dennis M. Kelleher, CEO of the non-profit financial reform advocacy group Better Markets, tells me that in the last four years,
Goldman’s revenue has been more than $135 billion. In other words, the penalty will affect them about as much as a Nerf dart gun might upset an NFL linebacker.
Monday’s announcement is particularly glaring because after other majors like JP Morgan and Bank of America struck deals of their own, Goldman was the last of the big banks facing scrutiny over the meltdown.
That means it’s safe to say some the more notorious swindlers in American history have officially gotten off scot-free.
The statement of facts in the settlement tells a story familiar to anyone who followed the financial crisis or saw The Big Short. Like the other big banks, Goldman Sachs peddled residential Mortgage-Backed Securities (MBS), which is another way of saying they put bunches of crappy loans into bundles. They then sold those bundles to investors while vouching for their quality, when in reality they hadn’t bothered to look into borrower’s ability––or even desire––to repay them. As laid out in the settlement, between December 2005 and 2007, Goldman’s practice was to spot check various loans to see if they met underwriter’s guidelines. In many cases, 80 percent of the loans went unchecked. In fact, in numerous loan pools,
more than 20 percent of the loans were graded as “EV3,” which is shorthand for saying they carried an unacceptable level of risk and were basically doomed to fail.
Even when shit started to hit the fan in 2006, Goldman did not take its foot off the pedal. Fremont Bank was a top-priority client and originator of many of these bad loans, and in the middle of that year, Goldman found out that the smaller bank’s rate of early payment defaults was increasing in a way that should have set off an alarm. But at no point did Goldman put Fremont on their no-bid list, even while the client had unpaid claims from the defaults they had yet to even settle.
Around the same time, an outside analyst gave a positive report on the stock performance of Countrywide, another Goldman client that specialized in subprime mortgages. “If they only knew,” wrote the head of due diligence at Goldman Sachs, referencing the report.