
Goldman Sachs Finally Admits It Defrauded Investors During the Financial Crisis - adamnemecek
http://fortune.com/2016/04/11/goldman-sachs-doj-settlement/
======
rdtsc
$5B - not pocket change, but operating on $40B revenue not exactly too
damaging either.

Its stock hasn't nose dived. Nobody is going to jail. Investors think they are
ok. This is just business as usual.

They have 0 incentives not to do it again. In fact they'd be stupid not to do
it again. Given they know better how fines are calculated and can just fold
that into the total equation.

~~~
jobu
The prize for the DOJ in this settlement was an admission of wrongdoing.
Theoretically this opens Goldman Sachs up to a lot more lawsuits and damages
from private investors that were screwed when Goldman Sachs knowingly sold
them mortgage bundles that were doomed to fail.

That said, I'm really surprised the stock hasn't taken more of a hit from this
case.

~~~
chishaku
> I'm really surprised the stock hasn't taken more of a hit from this case.

Already priced in long ago. Agreement in principle was made in January.

[http://www.goldmansachs.com/media-relations/press-
releases/c...](http://www.goldmansachs.com/media-relations/press-
releases/current/announcement-14-jan-2016.html)

Reserves for these penalties were allocated last year.

~~~
dotndip
Yeah, and stock actually moved up in the short term when this was first
announced since a settlement was reached.

[http://www.nytimes.com/2016/01/15/business/dealbook/goldman-...](http://www.nytimes.com/2016/01/15/business/dealbook/goldman-
to-pay-5-billion-to-settle-claims-of-faulty-mortgages.html)

TLDR: Other wall street bank settlements were much greater.

------
SeanDav
Until people actually go to jail for like 30 years and until fines far exceed
any profits, companies will continue to indulge in this type of behaviour.

The rewards are just too good and the downsides too easy to live with.

~~~
slg
I wonder what people here would say if non-tech folks started talking like
this about the tech industry. For example, how many stories have we heard
about data leaks involving complete incompetence or negligence by the company
involved? How many of them have ended up in jail or even with a fine?

~~~
drewrv
GS "knowingly misled investors". This is worse than incompetence, it's
outright fraud.

It's less analogous to accidental customer data leaks and more analogous to
running a phishing operation.

~~~
slg
Similar things happen in the tech world. Ashley Madison had a feature that you
could pay to have your data deleted from their database. Except they never
deleted the data for those that paid. That is outright fraud as well.

When their user data eventually leaked, it resulted in countless lives and
relationships ruined and at least a handful of suicides. While civil lawsuits
have been filed, I haven't seen any talk of criminal charges.

~~~
adamnemecek
Dude, you aren't actually comparing the two are you. Do you actually believe
that tanking the global economy comes anywhere close to what you described?
May I ask where you work? No one not working on/with ties to Wall Street would
have this opinion.

~~~
slg
I don't work anywhere close or on anything similar to Wall Street. But I do
have a degree in econ and know that what "tanked the global economy" is a lot
more complicated than Goldman Sachs lying to investors. But whatever, let's
just lynch the bankers and their big bonuses and pretend that our industry is
without flaws.

------
rayiner
Fraud has a very specific meaning, and what Goldman admitted to wasn't fraud
(especially not criminal fraud). Here is the actual statement of facts:
[https://www.justice.gov/opa/file/839901/download](https://www.justice.gov/opa/file/839901/download).
They admitted to doing what companies do every day: overselling a product they
knew was crappy while having shoddy Q&A.

It's also worth noting the procedural posture of the government's case against
Goldman. It's under FIRREA, which allows the government to bring a civil
action for violation of 14 specific criminal laws. The burden of proof in the
civil action is the lower civil standard of proof, instead of the high "beyond
a reasonable doubt" standard.

~~~
chishaku
IANAL but I was able to look this up.

"While the exact wording of fraud charges varies among state and federal laws,
the essential elements needed to prove a fraud claim in general include: (1) a
misrepresentation of a material fact; (2) by a person or entity who knows or
believes it to be false; (3) to a person or entity who justifiably relies on
the misrepresentation; and (4) actual injury or loss resulting from his or her
reliance."

[http://criminal.findlaw.com/criminal-
charges/fraud.html](http://criminal.findlaw.com/criminal-charges/fraud.html)

The statement below appears to cover 1 and 2 and we already know 3 and 4 to be
true.

"Goldman received information indicating that, for certain loan pools,
significant percentages of the loans reviewed did not conform to the
representations made to investors about the pools of loans to be securitized,
and Goldman also received certain negative information regarding the
originators’ business practices."

[https://www.justice.gov/opa/file/839901/download](https://www.justice.gov/opa/file/839901/download)

rayiner, given your legal background, do you consider this type of
misrepresentation to be criminal fraud irrespective of what regulators have
achieved to date?

~~~
rayiner
I think criminal prosecution should be reserved for the most outrageous and
clear-cut misrepresentations. Look at the examples on pages 6-9 of the
government's statement of facts. If any of those folks should go to prison?
Should the folks at Microsoft who keep stating that the latest firmware update
fixes Surface Book/Pro 4 sleep issues, even though people keep having troubles
getting their laptop to sleep properly, also go to prison?

~~~
chishaku
I don't see any value in that comparison.

Goldman Sachs, as part of a certain class of institutions, plays a systemic
role in the economy and as such, Goldman Sachs, its affiliates and the
activities under discussion are subject to innumerable pages of regulations
enforced by several different regulators. There is no equivalent regulation
for Microsoft's firmware update announcements.

> I think criminal prosecution should be reserved for the most outrageous and
> clear-cut misrepresentations.

Is this the same standard you apply to any type of criminal prosecution?

~~~
tptacek
I agree with you about Goldman, but we don't yet have the law that makes
materially harmful commercial misrepresentations made by systemically
important financial institutions a felony. We should, but we don't.

And, one of the very first things the founders said when they booted up this
country was "no _ex post facto_ laws".

~~~
chishaku
> we don't yet have the law ...

False.

[http://www.ag.ny.gov/sites/default/files/pdfs/bureaus/invest...](http://www.ag.ny.gov/sites/default/files/pdfs/bureaus/investor_protection/library/NY%20Gen%20Bus%20Law%20Article%2023-A.pdf)

[http://www.bloomberg.com/news/articles/2011-06-03/goldman-
sa...](http://www.bloomberg.com/news/articles/2011-06-03/goldman-sachs-
investigators-in-new-york-wield-laws-stronger-than-the-feds)

The link below is a general discussion of securities fraud and related legal
theory. Goldman is used as an example while discussing the case settled with
the SEC in 2010.

"The law allows a case like the one against Goldman to be alleged and argued
as securities fraud even if the seller merely failed to exercise due care as
to whether the buyer was misled about the nature of the securities being sold
or how those securities were selected. The law further permits a claim of
fraud—even when brought by a private litigant—to be founded on an allegation
of recklessness and allows the litigant to assert, in essence, gross
negligence as to whether the buyer was misled. If one takes the federal
appellate decisions on the issue at face value, the law would appear to
support a criminal conviction in a case like Goldman’s even if the seller were
merely reckless."

[http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=...](http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1518&context=dlj)

------
kauffj
The one thing I can never wrap my head around in the banking industry is why
this kind of behavior is tolerated by _customers_.

Imagine if wherever you work had to settle with the SEC / FTC / ABCXYZ for
fraud. Wouldn't this devastate your customer base?

Yet when a bank gets fined, it seems simply like business-as-usual. Even when
a government agency levies a fine for fraud, or emails are released in which
employees actively mock their customers for being suckers, investment banks'
abilities to find customers seems unhindered.

1) Are my perceptions wrong? Do these events damage reputation more than it
seems?

2) If banks acting in this manner is the standard... why? Why isn't a firm
carving out the "niche" of not being assholes?

~~~
cm2187
I would nuance that:

1\. investors were fighting to get their hands on subprime assets. There was
so much liquidity around that it was the only way to make a little bit of
money, very much like today. Investors have been piling cash into tech
companies and EM markets where they probably shouldn't have. Is it financial
intermediaries' role to bar them from doing so? Is it the supermarket's role
to bar you from buying snacks and sodas because it's bad for your health?

2\. what annoys me is that these "unsuspecting investors" were professional
buyers. It is people who's job it is to do their homework and understand these
products. We are not talking about selling complex products to grannies. These
are highly educated, highly paid finance professional who simply did not do
their job of vetting what they were buying.

Now if Goldman made misrepresentations (i.e. lied) on the nature of the
assets, then there is clearly fraud, and by reading quickly the DoJ
announcement it seems to be what Goldman is accused of. But in my opinion
investors bear a very large part of the blame for this credit bubble. It's not
a case of nasty Goldman vs nice unsuspecting investors.

~~~
prostoalex
> It is people who's job it is to do their homework and understand these
> products. We are not talking about selling complex products to grannies.
> These are highly educated, highly paid finance professional who simply did
> not do their job of vetting what they were buying.

Sure, but how many of professional money managers had their clients entire
portfolios in subprime mortgages?

My guess is that it was mainly allocated to the portions of portfolio deemed
"high risk", and if they're not buying subprime mortgages, they're buying
high-yield bonds, Puerto Rico munis, assets of bankrupt North Dakota frackers,
and high-risk high-yield real estate projects like casinos and theme parks.

There's daily trading activity on JNK and MORL and similar other instruments.
I don't think there's any pretending going on that those are high-quality
assets, and I also doubt anyone (in a clear state of mind with no gambling
addiction) is going 100% into those ETFs.

~~~
cm2187
I am not sure of that. The financial system is built to absorb expected
losses. Where things go really wrong is when a big loss occurs where it was
not expected. A lot of senior tranches in subprime RMBS had AAA ratings, which
made then eligible for safe, low yielding portfolios. Banks could also pile
them up on the balance sheet because the RWA footprint was really small given
the rating. And that's why when it went "bang" it really hurt.

~~~
prostoalex
Right, the AAA rating is the cornerstone of the entire thing. On one hand you
have originators eager to offload risk, on the other pension fund managers are
under the pressure to boost their yields, but are limited into what they can
invest.

The credit agencies are to blame, but they were an enabler. AIG FP was the
main cause of the AAA rating by simply lending its name to the whole deal and
promising to make the pension funds whole in case of any defaults.

~~~
nradov
This is another reason why defined benefit pension plans are a bad idea and
ought to be discouraged as a matter of public policy. Pension fund managers
tend to take excessive risks in order to meet unrealistic return targets. They
have little personal stake in the outcome and if they fail then employers and
taxpayers are forced to cover the gap. As a thought experiment, consider what
would have happened if that money had instead been in defined contribution
retirement plans utilizing low-cost index funds. I think that would have
reduced the severity of the financial crisis.

------
chollida1
If anyone is actually interested in the theory behind the rating of Mortgage
backed securities(MBS), have a look at this wired article.

[http://www.wired.com/2009/02/wp-
quant/?currentPage=all](http://www.wired.com/2009/02/wp-
quant/?currentPage=all)

It does a good job of explaining the intuition, behind the Gaussian Copula,
and of course where it fell apart.

I submitted the below article a few days ago and I think at this point this
topic can be considered a very dead horse.

[https://news.ycombinator.com/item?id=11472094](https://news.ycombinator.com/item?id=11472094)

~~~
jsprogrammer
>I submitted the below article a few days ago...

That article was submitted yesterday, when the US DOJ released a statement.

One day of light beating (didnt even see a link to GS' statement of facts) and
this horse is 'very dead'?

~~~
jessaustin
Move along people! Nothing to see here!

------
bogomipz
They will pay a 5 billion dollar fine out of the hundreds of billions of
dollar they made. That's just the cost of doing business then isn't it. If a
regular person is found guilty of fraud they generally wind up inside a jail
cell. If a wall street bank does the same, its settled by writing a check
behind closed doors and then everyone goes to lunch.

~~~
tma-1
GS makes around $10 billion a year, are you saying that the profits for the
last 10 years or more came purely from sales of MBS?

I know no one has been imprisoned over the financial crisis mess, but
settlements like these truly show that the justice department and the SEC are
doing a pretty good job at penalising the banks. Combined, the fines probably
add up to hundreds of billions, my personal opinion is that this is way more
than the banks did from selling these securities.

~~~
bogomipz
I'm not following you. I don't understand your point. This fraudulent practice
went on for the better part of a decade.

You think that the SEC and DOJ are doing a good job? You are in an extremely
small minority then. Not only is this settlement a slap on the wrist its also
"engineered" courtesy of the warm and friendly relationship Washington and
Wall Street have. Please read this:

[http://www.nytimes.com/2016/04/12/business/dealbook/goldman-...](http://www.nytimes.com/2016/04/12/business/dealbook/goldman-
sachs-to-pay-5-1-billion-in-mortgage-settlement.html)

~~~
ChrisLomont
>I'm not following you. I don't understand your point.

You claimed Goldman made "hundreds of billions of dollar[sic]". Their entire
profit for a year is around 10 billion. Are you claiming their entire profit
for multiple decades came solely from MBS?

It did not.

------
nxzero
Official DOJ statement: [https://www.justice.gov/opa/pr/goldman-sachs-agrees-
pay-more...](https://www.justice.gov/opa/pr/goldman-sachs-agrees-pay-
more-5-billion-connection-its-sale-residential-mortgage-backed)

Statement of Facts:
[https://www.justice.gov/opa/file/839901/download](https://www.justice.gov/opa/file/839901/download)

~~~
joering2
Don't you love how they say "agrees to pay", like it just some friends where
one is trying to convince another one to pick up a bar tab.

Them (example Hillary Clinton):

 _FBI will invite Ms. Clinton for an interview sometime next month._

You:

 _FBI raided Mr. Johns house and will jail him without bail until next week 's
scheduled interrogation begins._

Them (Goldman Sachs):

 _They agreed to pay a fee._

You:

 _Mr. Johns was sentenced to pay a penalty for his crime._

Is this really happening in the United States of America??

~~~
talmand
Dave Chappelle had an excellent skit on his show about that very thing.
Except, true to Dave's style, it was reversed.

------
beloch
So finally they admit a crime was committed. Is anyone going to jail? I didn't
think so.

~~~
harryh
There was no admission of a criminal offense. Or even an accusation.

------
mtgx
They'll likely pay _billions less_ , because why not?

[http://www.nytimes.com/2016/04/12/business/dealbook/goldman-...](http://www.nytimes.com/2016/04/12/business/dealbook/goldman-
sachs-to-pay-5-1-billion-in-mortgage-settlement.html)

This part is especially infuriating:

> On the broadest level, any money that Goldman spends on consumer relief will
> be deductible from its corporate tax bill.

So Goldman Sachs will get a government subsidy for defrauding the American
public. The government is literally subsidizing their fraud with taxpayer
money.

~~~
jonknee
> So Goldman Sachs will get a government subsidy for defrauding the American
> public. The government is literally subsidizing their fraud with taxpayer
> money.

That's not a fair shake at how deductions work. They aren't getting paid a
subsidy, they are paying less tax because of higher expenses. No money is
going from "the taxpayer" to Goldman.

The government wanted it this way because they can point to a bigger number
and get money to where they want it without having to get Congress to do
anything (which they won't).

~~~
karmelapple
> They aren't getting paid a subsidy, they are paying less tax because of
> higher expenses.

They broke the law, but get to claim it on their taxes as an expense.

That's like deducting my speeding ticket payments as an expense on my tax
return.

~~~
CPLX
It's actually not quite like that.

Payments of fines to governments are not deductible, neither for you or
Goldman. Payments of compensation and restitution are.

For what it's worth there is some vague consistency on this issue.

~~~
karmelapple
Interesting - I didn't know that, and I think the penalty levied here should
have been levied as a fine, rather than compensations or restitution.

Where did the legal precedent or IRS rule be set that restitution should be a
deductible business expense? If you need to pay compensation or restitution,
it means you did something you should not have done as decided by a
judge/jury, so having it be treated more like a "penalty" seems prudent to me.

------
malloreon
Fine them all their profits from the fraud then triple the penalty.

Then realize solution to financial crimes is to put people in jail for 1 year
for every multiple of the median yearly household income.

Steal $1M when the median income is $50K? 20 years. Steal $1B? Enjoy dying in
prison.

------
chishaku
If there is any silver lining...

"The settlement expressly preserves the government’s ability to bring criminal
charges against Goldman, and does not release any individuals from potential
criminal or civil liability."

[https://www.justice.gov/opa/pr/goldman-sachs-agrees-pay-
more...](https://www.justice.gov/opa/pr/goldman-sachs-agrees-pay-
more-5-billion-connection-its-sale-residential-mortgage-backed)

Who may or may not do something about it?

[http://www.opensecrets.org/industries/recips.php?cycle=2016&...](http://www.opensecrets.org/industries/recips.php?cycle=2016&ind=F)

~~~
alexqgb
No silver lining there. This is just pro for a bullshit to keep the pitchforks
at bay. To see just how seriously these "deferred judgements" are taken by
parties on either side of the table, see HSBC (found guilty of massive and
very deliberate money laundering for Mexican drug cartels), which has
continued to rack up offences with impunity while operating under one of these
agreements.

------
riprowan
As long as a politician can say the words "Too Big To Fail" with a straight
face this will continue.

"Too Big To Fail" should mean "Too Big To Be Allowed To Exist" but apparently
it _still_ means "Open Checkbook to Taxpayer-Funded All-You-Can-Eat Buffet"

------
Osiris
How does one find out if they qualify for part of the $1.8 billion set aside
for those affected?

------
__abc
and the penalty is ..... ?

~~~
Phlarp
4-8 hours worth of operating revenue. Hardly even a speeding ticket.

~~~
ikeboy
It's over a month worth of revenue and almost a year's worth of profit.

~~~
drumdance
Fortunately for them they received more than twice this amount as part of the
AIG bailout.

~~~
ikeboy
They also paid it back.

~~~
drumdance
Wat. That $12.9 billion wasn't a loan. Maybe AIG paid some back but Goldman
Sachs definitely did not. It was an insurance policy, except they (AIG) didn't
call it "insurance" because that would have made it subject to regulation.

------
xupybd
So many people should be in jail for what happened here. I'm not sure how we
got here, but capitalism some how turned into socialism. Only it was not the
people that the government redistributed the wealth to, it was the failing
businesses. I know the reasoning was to prevent a bad recession, but I don't
know how capitalism is going to work with that sort of interference from the
governments.

------
known
Govt will do nothing due to
[https://en.wikipedia.org/wiki/Stockholm_syndrome](https://en.wikipedia.org/wiki/Stockholm_syndrome)

------
haberman
I'll never forget this comment on HackerNews that blamed the public for the
financial crisis:
[https://news.ycombinator.com/item?id=5168312](https://news.ycombinator.com/item?id=5168312)

That was the moment that I realized that some of these people live in a
reality distortion zone where it really wasn't their fault.

~~~
fweespee_ch
> That was the moment that I realized that some of these people live in a
> reality distortion zone where it really wasn't their fault.

To be fair, the public isn't 100% blameless as a large number of people made
poor choices to create the situation. Supply without demand is largely
useless, after all. Similarly, the public hasn't shutdown the routes after the
fact but rather accepted a smokescreen of a solution.

The blame primarily rests on the shoulders of the banks and credit rating
agencies because they provided the supply. They also were the best informed
side of the transaction and engaged in a certain degree of deception that they
should be punished severely for.

The best lies, or distortions of reality, do have a kernel or two of truth.

~~~
haberman
Mortgages (or any loan really) implies risk. This is part of why the loan is
profitable: repayment isn't guaranteed. It is the bank's job to protect itself
from risk. That is why it takes collateral and assesses that collateral. It's
why the bank requires a down payment, especially if the borrower is on the
edge of what they can afford. If the buyer defaults, the bank takes the
collateral back and it's their job to make sure they are in an ok place
afterwards.

So yeah, when the entire industry comes to the government and says "unless you
bail us out right now our entire industry will collapse, but you're definitely
going to save us because we're too big to fail," then yes, it means it's their
fault. The public may have been complicit, but it's not the public's job to
keep the financial industry healthy when the profits from that industry are
kept privately.

~~~
forgetsusername
> _when the entire industry comes to the government and says "unless you bail
> us out right now our entire industry will collapse_

That's an interesting interpretation of the events. In fact, there were
institutions that were coerced by the government to participate in the
bailout. Much of the derivatives betting was zero-sum, and done amongst the
banks. The winners of those bets would have been more than happy to watch
their competitors fail (fire sale!).

~~~
haberman
Institutions had to be coerced into letting the government buy their toxic
assets through TARP? I would love to see a reference on that.

~~~
sokoloff
Claim by Jamie Dimon that they didn't want TARP funds but were pressured to
take it: [http://cnsnews.com/news/article/jpmorgan-chase-ceo-bank-
took...](http://cnsnews.com/news/article/jpmorgan-chase-ceo-bank-took-tarp-
because-we-were-asked-treasury-secretary)

~~~
haberman
So that speaks very highly of JPMorgan, and none of my criticism then applies
to them. It's all the banks that were going to fail without TARP that I am
criticizing.

------
pasbesoin
Dear DoJ et al.:

No jail? You fail.

------
tomp
"defrauded"... What a nice word. Why don't we just say "robbed" instead?!

~~~
mikestew
If you look up the definition of "defrauded", you'll likely answer your own
question: it's a superset of "robbed".

~~~
tomp
The problem is that it sounds less threatening, more sophisticated. It's meant
to obscure the crimes that were happening.

~~~
mikestew
_It 's meant to obscure the crimes that were happening._

I no more know what the author's intent was than you do, but I'm going to go
with a more charitable interpretation: it's meant to clarify the means by
which the robbery took place. In other words, the exact opposite of "obscure".
But if you have a narrative, by all means stick to it.

------
X86BSD
Shocker! Why is Jamie not in prison!

~~~
tanderson92
One of the simpler answers to your 'question' is that Jamie Dimon is not and
has never been affiliated with Goldman.

~~~
X86BSD
You are correct I misread that. But if you think JPM is any different or less
criminal you are delusional.

