Goldman Sachs said yesterday that it had agreed to a civil settlement of up to $5 billion with federal prosecutors and regulators to resolve claims stemming from the marketing and selling of faulty mortgage securities to investors, the New York Times reported today. Goldman, which is scheduled to report fourth-quarter earnings on Wednesday, said the settlement would reduce earnings in that period by approximately $1.5 billion on an after-tax basis. In the early days of the financial crisis, Goldman Sachs received an outsize share of criticism from politicians and the media as its trading desk made money by betting against the housing market in the run-up to the crisis. But in the end, Goldman’s role in churning out faulty mortgages and securities backed by home loans to borrowers who could not afford them was smaller than that of many other Wall Street firms like Bank of America or JPMorgan Chase. As a result, Goldman’s settlement is far smaller than the sums paid by other firms for selling flawed mortgage securities. Goldman is among the last firms to reach a civil settlement with a task force of federal prosecutors, state attorneys general and regulators empowered to investigate Wall Street’s role in cobbling together securities from all the mortgages that borrowers found themselves unable to afford. Read more.
In related news, the U.S. Securities and Exchange Commission said that Goldman Sachs & Co. will pay $15 million to settle civil charges that its securities lending practices violated federal regulations, Reuters reported yesterday. Goldman made improper representations to customers who requested that the firm locate certain stocks for short selling, the SEC said. Goldman told those customers that it had arranged to borrow, or believed it could borrow, the security to settle the short sale, a process known as "granting locates." Goldman, however, had not performed an adequate review of the securities customers had asked it to locate, the SEC said. At issue is U.S. regulation for short selling that requires brokerages to enter an agreement to borrow securities on behalf of customers or to have “reasonable grounds” for believing that it can borrow the security. A team of Goldman employees, between 2008 and 2013, relied on an automated system to fill customers’ stock requests. But a problem with the system allowed employees to grant customers’ “locate” requests based on the inventory reported to Goldman early in the day by other large financial institutions, even after the inventory had been depleted as the team processed requests during the day. Additionally, the team did not check other possible sources for securities or perform a “meaningful further review,” the SEC said. Read more.
