
Goldman Sachs Resolves U.S. Mortgage Probe for $5.1B - chollida1
http://www.bloomberg.com/news/articles/2016-04-11/goldman-to-pay-5-1-billion-to-settle-u-s-mortgage-bond-probe
======
chishaku
"839 people convicted in the savings-and-loan scandals of the 1980s."

"1 Wall Street executive convicted for actions during the recent financial
crisis."

[http://www.nytimes.com/2014/05/04/magazine/only-one-top-
bank...](http://www.nytimes.com/2014/05/04/magazine/only-one-top-banker-jail-
financial-crisis.html)

~~~
dopamean
From this it seems that what financial executives learned from their buddies
going to jail was that they need to lobby the correct people so that when the
shit hits the fan (and it's their fault) no one will prosecute them. Every
prosecutor who had the ability to investigate and eventually bring charges and
did not should be ashamed of themselves.

~~~
rayiner
Contrary to popular belief, there are no lucrative private practice
jobs/political appointments waiting for _unsuccessful_ prosecutors.
Successfully prosecuting a major bank executive would have been a career-
making win for an ambitious attorney in the DOJ. Indeed, shortly after Bear
Stearns collapsed, the government brought criminal cases against two Bear
Stearns executives:
[http://www.npr.org/templates/story/story.php?storyId=9189904...](http://www.npr.org/templates/story/story.php?storyId=91899047).
Both men were acquitted at trial:
[http://www.wsj.com/articles/SB125788421912541971](http://www.wsj.com/articles/SB125788421912541971).
That was a humiliating result, given the DOJ's white collar division boasts a
90%+ conviction rate.

People ignore the relevant differences between the S&L crisis and the mortgage
crisis. The former took place during a time of heavy regulation, and involved
thousands of smaller banks and relatively unsophisticated individuals. The
latter took place at the tail of a long period of deregulation, and involved
large, legally-sophisticated banks.

At a big bank like Goldman, a routine part of a banker's or trader's job is
running things by the in-house lawyers. By and large that wasn't true for the
savings and loans that failed decades ago. And while legal oversight doesn't
prevent excessive risk-taking, or buying loans with bad underwriting, it does
tend to prevent activities that can be easily prosecuted as criminally
fraudulent.

It's notable that there were virtually no prosecutions in the aftermath of the
Great Depression either. It's worth considering what similarities and
differences there are between the Great Depression, the Savings and Loan
crisis, and the 2008 real estate collapse.

~~~
pnathan
> At a big bank like Goldman, a routine part of a banker's or trader's job is
> running things by the in-house lawyers. By and large that wasn't true for
> the savings and loans that failed decades ago. And while legal oversight
> doesn't prevent excessive risk-taking, or buying loans with bad
> underwriting, it does tend to prevent activities that can be easily
> prosecuted as criminally fraudulent.

I think this is one of the basic things going on here: this wasn't crime, by
and large. This wasn't _illegal_. People have not understood that. And so they
are angry...

~~~
RobertoG
It seems to me that a lot of people is angry precisely because it wasn't
illegal.

~~~
pnathan
> It seems to me that a lot of people is angry precisely because it wasn't
> illegal.

Sure. And that's totally reasonable(I would personally not support that, but I
can understand that).

But, that isn't generally how things are framed, though - "throw the banking
crisis bankers in jail" is one of the popular memes.

------
spinlock
Question: did Goldman have a fiduciary responsibility to it's clients to _not_
sell them securities that they wanted to buy?

It's easy to blame the banks but don't forget that the people who were buying
this crap were being paid millions of dollars a year for their "expertise."
This is not a boiler-room stealing pensions from little old ladies. This
happened in the board-room. The buyers were the one's who failed their
fiduciary responsibility to their clients (i.e. the little old ladies who rely
on their pension).

The reason pension funds, etc... would buy this crap is because they are
underfunded and they need to generate impossible returns to meet their future
payouts. We shouldn't give them a free pass on underfunding their liabilities
and then blindly taking on extreme risk to make up the shortfall.

~~~
Zigurd
The big question is: Why are the rating agencies still in business? They
labelled rotting poisoned rat meat as prime organic steak.

Part of cleaning up the mess should have been to create new rating agencies
under regulatory probation, and to review all the rating agencies' ratings. I
suspect that would hae found too many slimy things on banks' balance sheets,
so instead the Fed sucked the poison out of the banks with QE.

I wonder what the quid pro quo was. I suspect if you look for anomalies
between sovereign debt ratings and debt-to-gdp ratios you might find answers.

~~~
Tycho
Ratings on sovereign debt seem kind of irrelevant to me. I don't see why the
agencies would have any sort of edge.

But I agree one of the most dumfounding facts of the present situation are
that these rating agencies are still in business. I think the argument is that
they were transparent about what methodologies they used to produce these
ratings. But regardless of that, the blatant conflict of interest means this
whole business model should be dead. I think Jim Simons of Renaissance
Technologies made the point that it's the buyers who should pay for stuff to
be rated, not the issuers. Possibly it may have worked like that in the past
until the government stepped in and changed it... can't quite remember.

~~~
theseatoms
Ratings are besides the point. Implied "ratings" should be recoverable from
the market-clearing yield on any given bond. Bond buyers should perform their
own due diligence, either in-house or by paying a third party.

What good does it do to have an intermediate institution (one that has no skin
in the game) suppress the perceived riskiness of certain assets and inflate
the perceived riskiness of others?

------
1024core
This lies solely on Obama's shoulders. Don't get me wrong: I campaigned for
the guy in 2008, so I'm no right-wing-nut. But I have been very disappointed
in how he's let them off with a slap on the wrist. Between this (lack of
prosecution) and the drone campaign, he's been a big disappointment for me.

~~~
eanzenberg
Is a 5B settlement a slap on the wrist? Goldman's yearly revenue is 40B a
year, while profit is ~8B last year and may be closer to 4-5B this year. Would
it be better if they were sued out of existence? Is this enough penalty for
them to never to it again in the future? Could the gov't legally be able to
get more?

~~~
askyourmother
Yes. When the fine is less than the overall profit, and they can write it off
via taxes, then it is not even a tickle on the wrist.

CEO, every member of the board, every manager in that division that made and
sold the products, fine 100% of their pay, fine 4x revenue - not profits for
the products affected, and do not let them write the costs off.

~~~
ack
Is this fine tax deductible? What, then, is even the point?

~~~
kolbe
Getting to write articles like this to make prosecutors look good, and for
people feel like big bad Goldman Sachs is getting hurt.

Here's another thing to grind your gears: much of the fine will be paid in
"consumer relief," which so far has meant a tax writeoff upfront, then
negligible consumer relief.

------
moeadham
Serious question: Which department specifically gets this $2.39 billion civil
penalty & $875 cash payment?

What does that money go towards? I know with the recent UBS case, it ended up
going to the NYDFS, and seemed to just pay down New York's deficit.

Not really helping the people who were actually damaged by this behaviour.

~~~
Osiris
That's what disturbs me about these settlements. Shouldn't the settlements be
used exclusively toward helping those that were negatively impacted by the bad
behavior?

~~~
chillydawg
Well, if you take the view that everyone suffered (except a very tiny minority
of shareholders and employees), then that money going into the general
taxation pool is helping the victims. It pays off debt or buys bridges or
whatever.

~~~
ahallock
Or the money could be used for any of the vile activities the State is up to
thus ironically contributing to more suffering. Let's not forget that.

------
bjoernw
When VW lies about its emissions it's a big deal, the stock drops, the public
is appalled, the media can't stop talking about it. When GS gets fined $5B
it's just business as usual.

~~~
justinhj
Maybe because VW had somewhat of a reputation for being a good quality car
manufacturer that would have no need to cheat and lie about their vehicles.
Whereas cheating and lying is a common perception of Wall St firms in general.

------
r0m4n0
And like every other corporate settlement, they will write off $5 billion in
expenses on their taxes (likely another billion more with attorney fees)...
effectively shorting the US billions in tax revenue...

~~~
generalledger
I don't think that is correct.

"penalties or fines paid to any government agency or instrumentality because
of a violation of any law are not deductible"

[https://www.irs.gov/publications/p535/ch11.html](https://www.irs.gov/publications/p535/ch11.html)

~~~
r0m4n0
These aren't criminal violations... And actually they probably aren't
penalties or fines either. I'm not a lawyer of any sort but I don't believe
restitution == fines/penalties. All depends on verbiage in criminal court, IRS
loopholes, and the details of the case.

"Big banks such as Bank of America and JPMorgan Chase will receive deductions
against the corporate tax that will amount to between half and nearly three-
quarters of their multibillion-dollar settlements, at least. Meanwhile,
midsized banks and nonbank lenders generally get to deduct the whole shebang."

[http://www.newsweek.com/2014/11/07/giant-penalties-are-
giant...](http://www.newsweek.com/2014/11/07/giant-penalties-are-giant-tax-
write-offs-wall-street-279993.html)

and even expenses related to criminal violations can be deducted if they
stemmed from your job

~~~
generalledger
Did some digging. The amount that relates to the fine (criminal or civil) is
not deductible. Settlement amounts that relate to relief may be deductible. It
depends on how the various sums are described in the settlement. According to
the Bloomberg article $2.39b of the $5.1b is a fine. So that piece is almost
certainly, not deductible. The rest might be, but it depends on how the
settlement is worded. Assuming the $2.39b is the only amount that is not
deductible, that means Goldman Sachs will be able to offset about $1b in
future tax liability.

Below is an article about BP. They had to pay about $20b in total, with about
$5.5b being considered a fine. That $5.5b was not deductible.

[http://blogs.wsj.com/moneybeat/2016/04/05/bp-can-take-tax-
de...](http://blogs.wsj.com/moneybeat/2016/04/05/bp-can-take-tax-deduction-on-
big-chunk-of-its-oil-spill-settlement/)

~~~
r0m4n0
Good point, I didn't read into the ratio of fines/restitution. Appears that
half is deductible + any other expense they associate with the case/trial

------
sna1l
Paying this fine won't impact GS at all. In fact, their stock has risen today,
albeit financials as an industry are up. Investors will chalk this up as a
one-time charge and earnings estimates will be revised down appropriately
without any downside.

If the government actually wanted to punish them, the fine would have to be
astronomically high. Or, you know, they could actually fix banking
regulations.

~~~
jsprogrammer
In the article it says GS had previously provisioned about enough money to pay
these damages.

~~~
sna1l
Even better for them

------
yodsanklai
Something I often wonder. It's quite common on HN to get insiders comments but
less on this type of articles. How is it so? what do GS employees or people
working in that field think about this?

~~~
fleitz
Probably along the lines of, 'Hopefully we can make an extra $5.1 billion in
the next 8 months so this doesn't impact our commission cheques'

~~~
sseveran
You would have to check their financials to be sure but typically banks set
aside money to cover settlements in pending litigation. This has been common
at banks of the last few years.

------
gdubs
Lots of comments here regarding 'blame'. On that subject, I found this
interview with Michael Burry (featured in the book and movie "The Big Short")
to be worth reading:

[http://nymag.com/daily/intelligencer/2015/12/big-short-
geniu...](http://nymag.com/daily/intelligencer/2015/12/big-short-genius-says-
another-crisis-is-coming.html)

------
mkhalil
Two bankers from Goldman Sachs profited around as much as the fine is in the
Summer of 2007.

Slap on the wrist is an understatement.

~~~
whatok
Source please.

~~~
mkhalil
"The pair, members of Goldman's structured products group in New York, made a
profit of $4 billion by "betting" on a collapse in the sub-prime market, and
shorting mortgage-related securities. By summer 2007, they persuaded
colleagues to see their point of view and convinced skeptical risk management
executives."

[https://en.wikipedia.org/wiki/Goldman_Sachs#Actions_in_the_2...](https://en.wikipedia.org/wiki/Goldman_Sachs#Actions_in_the_2007.E2.80.932008_mortgage_crisis)
[http://www.guardian.co.uk/business/2007/dec/21/goldmansachs....](http://www.guardian.co.uk/business/2007/dec/21/goldmansachs.useconomy)
[http://www.telegraph.co.uk/finance/newsbysector/banksandfina...](http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/2788346/Subprime-
star-Josh-Birnbaum-leaves-Goldman.html)

~~~
whatok
Profited makes it sound like their bonuses were $4bn. It's a borderline
useless number when framed vs a group. Regardless of what the article says,
there is no way those two made that much solely on their own.

------
askyourmother
We would not accept shitty ingredients in our food, being told it was a grade
beef, when it turned out it was actually alley cat, sewer rat and suchlike
mixed in.

How on earth did they get away with a grade securitised mortgage products that
actually contained a stink load of ready to default loans?

Forget blaming a specific person, or whether it may have been technically
legal, what can be done to stop them doing this again?

~~~
wfo
Yes we would. We would say "just don't buy from that particular meat seller,
it's a free market, buyer beware, the market will take care of it and adjust,
competition, I'm very smart I would never get tricked and buy bad stuff like
that it's just dumb people who are not as smart as me that would get hurt" \--
there is this exact discussion happening higher up in this very comment
section.

------
vaadu
Why no criminal probe? Her are three reasons: GS has friends in high places.
GS would have brought a legal force more formidable than the governments and
stretched the case out for a decade or more. Many government people involved
in the case may not want to alienate the company they want to work for after
government service.

Too big to fail should also be too big to charge criminally.

------
abpavel
I wonder what would be the actual figure without settlement, since settlement
in corp vs. gov cases means that a corp has calculated that it is cheaper to
settle than to argue in the court of law. What where they avoiding? Brand
damage? Management responsibility? More unopened cans of worms? I guess we'll
never know...

~~~
chillydawg
Executives using shareholder money to bribe their way out of jail is what is
going on. If I were a shareholder I'd prefer my execs to go to jail - it's
_far_ cheaper.

~~~
whatok
You could very well be a shareholder of a bankrupt company if execs start
going to jail.

------
xutopia
I hear a lot about how this is just a slap on the wrist but can you explain to
me why it is? 5B is a lot of money afaik. Why is this so insignificant?

~~~
bicknergseng
According to Wikipedia, GS made $39.20 billion in revenue in 2015, with $6.08
billion in net income. I'd say a penalty of about half a quarter's worth of
revenue and less than one year's worth of profit for being a major player in
the greatest financial meltdown in almost 100 years is about as insignificant
as it comes.

Imagine if bank robbers were penalized by taking 4/5ths of the profit from
only one bank robbery, then released to continue robbing banks.

~~~
zaroth
Obviously revenue is a red herring, but almost a whole year of profit paid in
fines seems pretty substantial to me. 35,000 people worked for 9.5 months to
earn the money to pay this.

In 2014 they paid an additional $3B. Worth noting that GS played a much
smaller role in underwriting the bad loans than the likes of BoA and JPM
($16.6B and $13B settlements), mostly they were vilified for seeing the train
wreck coming and helping some investors profit off the implosion.

I think the reality is that the fines are absolutely significant and do change
behavior at the banks. It is a typical human response to want to crush them
under your boot into oblivion, but I think counter-productive.

~~~
bicknergseng
> Obviously revenue is a red herring

I disagree. What if it were a company like Amazon that operates with over 100
billion in revenue but less than a billion in income (many years actually
ending up red)? Would 500 million an appropriate fine for, say, willingly
misleading consumers about billions of dollars in fraudulent items? If
anything, I'd argue income should be the irrelevant number in a scenario like
this, though the only numbers that really should matter are ones based on the
magnitude of the damage the wrongdoing causes.

> the fines are absolutely significant and do change behavior at the banks Is
> there any evidence of this?

> It is a typical human response to want to crush them under your boot into
> oblivion, but I think counter-productive. Maybe, but I'd argue penalizing
> one of the major creators of a global financial crisis with a fine that
> doesn't even cause them to go into red for _one_ year is even worse. Fines
> all accounted for, GS profited off of the crisis, no executive lost their
> job, and the behavior that caused millions to lose homes and pensions
> continues on almost totally unchanged. The human response is to want justice
> served, and this isn't it.

------
dragonbonheur
Still nobody gets a criminal record. But the kids getting caught smoking pot
will get to face a lifetime of stigma and get a criminal record.

US employers have to realize that since so many US citizens get thrown in
prison, being a former convict and having paid your dues to society by having
been in prison should not prevent anyone from getting a decent job. If someone
has been punished once, the debt to society is already paid.

~~~
6stringmerc
In alignment with what you've put forward, I'd also consider that a lot of
studies point to the US prison system as not helpful for skills or emotional
state when returning to society. Holding the repaid debt of punishment over
the person when seeking employment is a stigma unfortunately. This difficulty
re-entering can lead to frustrations and poor choices, increasing the
potential for another offense.

------
humbleMouse
So Goldman gets to sell these mortgages, short the mortgages they sold, and
then are fined only 5.1B for the privilege of doing so? Pure insanity.

~~~
forgetsusername
> _So Goldman gets to sell these mortgages, short the mortgages they sold_

Yes, they do. And as a market maker, there's nothing at all wrong with this
and isn't the origin of the probe.

They're in trouble for "improperly vetting" mortgages that they sold, which in
my opinion is pretty subjective. But the politicians want to exact a price.

------
chillydawg
Bargain.

~~~
shimon
What would be a fair price in your view?

~~~
eplanit
Well they were bailed out with $10B plus lots of other props[1]. Some
significant portion [some might say all + interest] of that would seem fair.

[1]
[https://en.wikipedia.org/wiki/Goldman_Sachs](https://en.wikipedia.org/wiki/Goldman_Sachs)

~~~
marnett
When will people stop talking about the "bailout." It was a relief fund.
Goldman paid the 10B back in ONE year. TARP turned a profit. When will you
stop living in 2008?

------
alva
NYSE: GS up 2.5% at time of this comment, which is unintuitive to me.

Is this because a significant fine was expected so "baked" into the price?
Presumably if the fine was smaller than expected by the market then it could
cause an upward evaluation?

~~~
whatok
Baked into the price long ago because the fine announced months ago:

[http://www.bloomberg.com/news/articles/2016-01-14/goldman-
sa...](http://www.bloomberg.com/news/articles/2016-01-14/goldman-says-it-will-
settle-u-s-mortgage-probe-for-5-1-billion)

------
droithomme
Goldman Sachs received a $10 billion bailout.

[https://projects.propublica.org/bailout/list](https://projects.propublica.org/bailout/list)

~~~
praxulus
They paid back $11.4 billion though.

~~~
sosuke
That's an excellent loan isn't it. A home loan usually ends up in twice the
price being paid back over the length of the loan.

~~~
dangrossman
A home loan would've generated 3-4% in interest a year. The US government made
over 14% in less than a year on this loan. That would make it terrible, not
excellent, for the borrower -- more akin to a high interest credit card than a
mortgage. Mortgages involve paying so much back because you have interest
compounding on a large balance for 15-30 years.

~~~
IkmoIkmo
Actually this wasn't a terrible rate for GS, it was a great rate. And it can't
simply be compared to a mortgage.

------
whatok
For everyone asking why or cynically pointing out that no one went to jail
over this, you need to have people agree on what caused all of this before any
of that happens.

------
oxide
awfully cheap.

------
chinathrow
Settled, no one goes to jail.

Why am I not surprised?

------
wahsd
Fraud pays ... REALLY WELL. Good Job, Obama.

------
itissid
Never forget... the vampire squid.
[http://www.rollingstone.com/politics/news/the-great-
american...](http://www.rollingstone.com/politics/news/the-great-american-
bubble-machine-20100405)

------
forrestthewoods
How is this not criminal fraud? The public wants blood. Why is the DOJ not
similarly bloodthirsty? You'd think they would be. That'd be a career making
case. Prosecutors would be famous for 40 years.

I don't get it.

Edit: I don't mind downvotes if someone can explain how the fraud wasn't
criminal.

