Goldman to Pay $3.15 Billion to Settle Mortgage Claims

  
By NATHANIEL POPPER   

Goldman Sachs has agreed buy back $3.15 billion in mortgage bonds from Fannie Mae and Freddie Mac to end a lawsuit filed in 2011 by the Federal Housing Finance Agency.
Goldman Sachs has agreed buy back $3.15 billion in mortgage bonds from Fannie Mae and Freddie Mac to end a lawsuit filed in 2011 by the Federal Housing Finance Agency.Credit Shannon Goldman Sachs is paying its largest bill yet to resolve a government lawsuit related to the financial crisis.

The bank said on Friday that it had agreed to buy back $3.15 billion in mortgage bonds from Fannie Mae and Freddie Mac to end a lawsuit filed in 2011 by the Federal Housing Finance Agency, the federal regulator that oversees the two mortgage companies. The agency had accused Goldman of unloading low-quality mortgage bonds onto Fannie Mae and Freddie Mac in the run-up to the financial crisis. It estimates that Goldman is paying $1.2 billion more than the bonds are now worth.


Most of the other 18 banks that faced similar suits from the housing agency have already reached settlements. The previous settlements have included penalties, which Goldman avoided.

But Goldman had been hoping to avoid settling the suit altogether, contending as recently as last month that many of the government’s claims should be dismissed.

The $1.2 billion figure carries a sting because it is double the $550 million payment that Goldman made in 2010 to settle the most prominent crisis-era case it has faced — the so-called Abacus case.

Since then, Goldman has largely avoided the billion-dollar penalties paid by other banks for wrongdoing before the 2008 crisis. This week, Bank of America reached a $16.65 billion settlement with the Justice Department related to the bank’s handling of shoddy mortgages.

In a separate deal this year, Bank of America agreed to pay $9.5 billion to settle its part of the housing finance agency’s lawsuit. Some of that money was a penalty and the rest was used to buy back mortgage bonds.

The crisis bill for Goldman Sachs has been much lower largely because it did not originate subprime loans. The firm did, though, buy subprime mortgages and bundle them into bonds that it sold to investors, including Fannie Mae and Freddie Mac.

The primary business line for Fannie Mae and Freddie Mac has always been financing loans for homeowners, but before 2008 the two companies also bought mortgage bonds like the ones at issue in the Goldman case.

Goldman has argued that it did all it could to review the mortgages it was putting into the bonds.

But just last month, lawyers for the housing agency presented new evidence that Goldman was aware of weaknesses in the subprime mortgage market — and was placing bets against it — but did not pass on that information to the clients buying subprime bonds.

“Goldman Sachs promptly established massive and lucrative short positions in mortgage-related securities while continuing to sell such securities to investors without disclosing its true assessment of the underlying loans,” agency lawyers wrote in the July filing.

The accusations are similar to those that Goldman confronted in the Abacus lawsuit that was brought by the Securities and Exchange Commission in 2010, and in a Senate investigation that grew out of that case. The firm was accused of setting up a complicated mortgage security that it was marketing to investors without telling them it planned to bet against the same loans.

The finance housing agency’s suit was set to go to trial in late September, and it was likely to have dredged up a lot of unpleasant history for Goldman if the bank had not agreed to settle.

Goldman said on Friday that it had already put aside enough money to cover the costs involved in the new settlement. It is possible that Goldman could buy back the bonds and hold them until they increase in value, effectively negating the cost of the settlement.

After rumors of the agreement were reported Friday afternoon by The Financial Times, the bank’s stock ended the day up 0.2 percent.

The agreement, though, is unlikely to be the last settlement that Goldman will have to reach to put the financial crisis behind it. The Justice Department has extracted the biggest penalties in crisis-era cases and is said to be in the early stages of discussing a settlement with Goldman.

Culled from www.nytimes.com