Goldman $5.1bn to draw line under inquiry

Goldman Sachs

The bank said its fourth-quarter earnings, due out next Wednesday, will be reduced by $1.5 billion as a result of the agreement with the Financial Fraud Enforcement Task Force, reports The Times.

The settlement, yet to be finalised by the government, enables the Obama administration to hold another large Wall Street firm to account for the 2008 financial crisis. For Goldman it should represent the last major settlement with US regulators over its mortgage securities offerings, although it could still face civil litigation.

Lloyd Blankfein, chairman and chief executive, said last night: “We are pleased to have reached an agreement in principle to resolve these matters.”

Goldman was the first bank to be fined in relation to allegations that banks misled investors as to the risks associated with mortgage securities, when it agreed with a $550 million settlement with the Securities and Exchange Commission back in 2010 over a synthetic collateralised debt obligation known as Abacus 2007-AC1.

In 2014 it struck an agreement with the Federal Housing Finance Agency to pay $3.5 billion over mortgage-based securities sold to the government-sponsored home loan agencies Fannie Mae and Freddie Mac between 2005 and 2007. Last August it paid $270 million to settle claims from investors who claimed the bank misled them as to the quality of the loans underlying mortgage-backed securities sold before the financial crisis.

Under the terms of yesterday’s agreement, the firm will pay a $2.4 billion civil monetary penalty, make $875 million in cash payments and provide $1.8 billion in consumer relief.

It will not necessarily be out of pocket for the full $5.1 billion and the consumer relief portion could be in the form of principal forgiveness for homeowners who are in the red with their mortgages and for distressed borrowers. It took a $1.45 billion provision for the investigation in its second quarter last year.

Three of Goldman’s biggest US rivals have made similar settlements, with JPMorgan Chase paying $13 billion, Citigroup paying $7 billion and Bank of America agreeing to a $16.65 billion settlement between 2013 and 2014. Morgan Stanley agreed to a $2.6 billion settlement last year, but it is understood that this has not yet been finalised.

British banks have also been targeted. HSBC announced a $550 million settlement with the FHFA in September 2014, while Barclays agreed a $280 million settlement last April. Royal Bank of Scotland is facing a potential claim of $13 billion from the regulator.

Last October Barclays also agreed to pay $325 million to settle two lawsuits from US investors related to the sale of mortgage-backed securities.

The Department of Justice declined to comment on the settlement. Goldman shares slipped by 0.37 per cent to $160.80 in trading after the closing bell.