Goldman Sachs is paying its largest bill yet to resolve a US government lawsuit related to the 2007 to 2009 financial crisis.
The bank said on Friday that it had agreed to a US$3.15 billion buyback of mortgage bonds from Fannie Mae and Freddie Mac to end a lawsuit filed in 2011 by the US Federal Housing Finance Agency, the regulator that oversees the two mortgage companies.
The agency had accused Goldman Sachs 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 now paying US$1.2 billion more than the bonds are worth.
Most of the other 18 banks that faced similar suits from the agency have already reached settlements. The previous settlements have included penalties, which Goldman avoided.
However, Goldman had been hoping to avoid settling the suit altogether, contending as recently as last month that many of the agency’s claims should be dismissed.
The US$1.2 billion figure is poignant because it is more than double the US$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 Sachs has largely avoided the billions of US dollars paid in penalties by other banks for wrongdoing before the 2008 crisis. This week, Bank of America reached a US$16.65 billion settlement with the US Department of Justice related to the bank’s handling of mortgages.
In a separate deal this year, Bank of America agreed to pay US$9.5 billion to settle its part of the agency’s lawsuit. Some of that money was a penalty and the rest was used to buy back mortgage bonds.
The bill for Goldman Sachs has been much lower than that of other banks largely because it did not originate subprime loans. The firm did, however, 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 is financing loans for homeowners, but before 2008, the two companies also bought mortgage bonds like the ones at issue in the Goldman case.
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 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 filing last month.
The accusations are similar to those that Goldman Sachs confronted in the Abacus lawsuit that was brought by the US Securities and Exchange Commission in 2010, and those in a US Senate investigation that grew out of that case.
The firm was accused of setting up a complicated mortgage security that it marketed to investors without telling them it planned to bet against the same loans.