Before he entered federal parliament in 2004 Australian Prime Minister Malcolm Bligh Turnbull was Chairman and Managing Director of Goldman Sachs Australia from 1997 to 2001 and a Partner in Goldman Sachs and Co from 1998 to 2001.
In 2009 it was reported that Goldman Sachs made a confidential settlement on his behalf in the matter of the HIH collapse.
To this day he still invests with Goldman Sachs and, this month that investment bank paid US$5.06 billion in civil penalties for serious misconduct which contributed to the Global Financial Crisis (GFC) of 2008.
Department of Justice
Office of Public Affairs
FOR IMMEDIATE RELEASE
Monday, April 11, 2016
Goldman Sachs Agrees to Pay More than $5 Billion in
Connection with Its Sale of Residential Mortgage Backed Securities
The Justice Department, along with
federal and state partners, announced today a $5.06 billion settlement with
Goldman Sachs related to Goldman’s conduct in the packaging, securitization,
marketing, sale and issuance of residential mortgage-backed securities (RMBS)
between 2005 and 2007. The resolution announced today requires Goldman to
pay $2.385 billion in a civil penalty under the Financial Institutions Reform,
Recovery and Enforcement Act (FIRREA) and also requires the bank to provide
$1.8 billion in other relief, including relief to underwater homeowners,
distressed borrowers and affected communities, in the form of loan forgiveness
and financing for affordable housing. Goldman will also pay $875 million
to resolve claims by other federal entities and state claims. Investors,
including federally-insured financial institutions, suffered billions of
dollars in losses from investing in RMBS issued and underwritten by Goldman
between 2005 and 2007.
“This resolution holds Goldman Sachs
accountable for its serious misconduct in falsely assuring investors that
securities it sold were backed by sound mortgages, when it knew that they were
full of mortgages that were likely to fail,” said Acting Associate Attorney
General Stuart F. Delery. “This $5 billion settlement includes a $1.8
billion commitment to help repair the damage to homeowners and communities that
Goldman acknowledges resulted from its conduct, and it makes clear that no
institution may inflict this type of harm on investors and the American public
without serious consequences.”
“Today’s settlement is another
example of the department’s resolve to hold accountable those whose illegal
conduct resulted in the financial crisis of 2008,” said Principal Deputy
Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s
Civil Division. “Viewed in conjunction with the previous
multibillion-dollar recoveries that the department has obtained for similar
conduct, this settlement demonstrates the pervasiveness of the banking
industry’s fraudulent practices in selling RMBS, and the power of the Financial
Institutions Reform, Recovery and Enforcement Act as a tool for combatting this
type of wrongdoing.”
“Today’s settlement is yet another
acknowledgment by one of our leading financial institutions that it did not live
up to the representations it made to investors about the products it was
selling,” said U.S. Attorney Benjamin B. Wagner of the Eastern District of
California. “Goldman’s conduct in exploiting the RMBS market contributed
to an international financial crisis that people across the country, including
many in the Eastern District of California, continue to struggle to recover
from. I am gratified that this office has developed investigations, first
against JPMorgan Chase and now against Goldman Sachs, that have led to
significant civil settlements that hold bad actors in this market
accountable. The results obtained by this office and other members of the
RMBS Working Group continue to send a message to Wall Street that we remain
committed to pursuing those responsible for the financial crisis.”
The $2.385 billion civil monetary
penalty resolves claims under FIRREA, which authorizes the federal government
to impose civil penalties against financial institutions that violate various
predicate offenses, including wire and mail fraud. 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. In addition, as part of the settlement, Goldman agreed to
fully cooperate with any ongoing investigations related to the conduct covered
by the agreement.
Of the $875 million Goldman has
agreed to pay to settle claims by various other federal and state entities:
Goldman will pay $575 million to settle claims by the National Credit Union
Administration, $37.5 million to settle claims by the Federal Home Loan Bank of
Des Moines as successor to the Federal Home Loan Bank of Seattle, $37.5 million
to settle claims by the Federal Home Loan Bank of Chicago, $190 million to
settle claims by the state of New York, $25 million to settle claims by the
state of Illinois and $10 million to settle claims by the state of California.
Goldman will pay out the remaining
$1.8 billion in the form of relief to aid consumers harmed by its unlawful
conduct. $1.52 billion of that relief will be paid out pursuant to an
agreement with the United States that Goldman will provide loan modifications,
including loan forgiveness and forbearance, to distressed and underwater homeowners
throughout the country, as well as financing for affordable rental and for-sale
housing throughout the country. This agreement represents the largest
commitment in any RMBS agreement to provide financing for affordable housing—a
crucial need following the turmoil of the financial crisis. $280 million
will be paid out by Goldman pursuant to an agreement separately negotiated with
the state of New York.
The settlement includes a statement
of facts to which Goldman has agreed. That statement of facts describes
how Goldman made false and misleading representations to prospective investors
about the characteristics of the loans it securitized and the ways in which
Goldman would protect investors in its RMBS from harm (the quotes in the
following paragraphs are from that agreed-upon statement of facts, unless
otherwise noted):
- Goldman told investors in offering documents
that “[l]oans in the securitized pools were originated generally in
accordance with the loan originator’s underwriting guidelines,” other than
possible situations where “when the originator identified ‘compensating
factors’ at the time of origination.” But Goldman has today
acknowledged that, “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.”
- Specifically, Goldman has now acknowledged
that, even when the results of its due diligence on samples of loans from
those pools “indicated that the unsampled portions of the pools likely
contained additional loans with credit exceptions, Goldman typically did
not . . . identify and eliminate any additional loans with credit
exceptions.” Goldman has acknowledged that it “failed to do this
even when the samples included significant numbers of loans with credit
exceptions.”
- Goldman’s Mortgage Capital Committee, which
included senior mortgage department personnel and employees from Goldman’s
credit and legal departments, was required to approve every RMBS issued by
Goldman. Goldman has now acknowledged that “[t]he Mortgage Capital
Committee typically received . . . summaries of Goldman’s due diligence
results for certain of the loan pools backing the securitization,” but
that “[d]espite the high numbers of loans that Goldman had dropped from
the loan pools, the Mortgage Capital Committee approved every RMBS that
was presented to it between December 2005 and 2007.” As one example,
in early 2007, Goldman approved and issued a subprime RMBS backed by loans
originated by New Century Mortgage Corporation, after Goldman’s due
diligence process found that one of the loan pools to be securitized
included loans originated with “[e]xtremely aggressive underwriting,” and
where Goldman dropped 25 percent of the loans from the due diligence
sample on that pool without reviewing the unsampled 70 percent of the pool
to determine whether those loans had similar problems.
- Goldman has acknowledged that, for one August
2006 RMBS, the due diligence results for some of the loan pools resulted
in an “unusually high” percentage of loans with credit and compliance
defects. The Mortgage Capital Committee was presented with a summary
of these results and asked “How do we know that we caught
everything?” One transaction manager responded “we don’t.”
Another transaction manager responded, “Depends on what you mean by
everything? Because of the limited sampling . . . we don’t catch
everything . . .” Goldman has now acknowledged that the Mortgage
Capital Committee approved this RMBS for securitization without requiring
any further due diligence.
- Goldman made detailed representations to
investors about its “counterparty qualification process” for vetting loan
originators, and told investors and one rating agency that Goldman would
engage in ongoing monitoring of loan sellers. Goldman has now
acknowledged, however, that it “received certain negative information
regarding the originators’ business practices” and that much of this information
was not disclosed to investors.
- For example, Goldman has now acknowledged that
in late 2006 it conducted an internal analysis of the underwriting
guidelines of Fremont Investment & Loan (an originator), which found
many of Fremont’s guidelines to be “off market” or “at the aggressive end
of market standards.” Instead of disclosing its view of Fremont’s
underwriting, Goldman has acknowledged that it “[u]ndertook a significant marketing
effort” to tell investors about what Goldman called Fremont’s “commitment
to loan quality over volume” and “significant enhancements to Fremont
underwriting guidelines.” Fremont was shut down by federal
regulators within several months of these statements.
- In another example, Goldman was aware in
early-mid 2006 of certain issues with Countrywide Financial Corporation’s
origination process, including a pattern of non-responsiveness and
inability to provide sufficient staff to handle the numerous loan pools
Countrywide was selling. In April 2006, while Goldman was preparing
an RMBS backed by Countrywide loans for securitization, a Goldman mortgage
department manager circulated a “very bullish” equity research report that
recommended the purchase of Countrywide stock. Goldman’s head of due
diligence, who had just overseen the due diligence on six Countrywide
pools, responded “If they only knew . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .”
- Meanwhile, as Goldman has acknowledged in this
statement of facts, “[Around the end of 2006], Goldman employees observed
signs of uncertainty in the residential mortgage market [and] by March
2007, Goldman had largely halted new purchases of subprime loan
pools.”
Assistant U.S. Attorneys Colleen Kennedy
and Kelli Taylor of the Eastern District of California investigated Goldman’s
conduct in connection with RMBS, with the support of the Federal Housing
Finance Agency’s Office of the Inspector General (FHFA-OIG) and the Office of
the Special Inspector General for the Troubled Asset Relief Program (SIGTARP).
“Goldman Sachs had a fiduciary
responsibility to investors, which they blatantly side stepped,” said Deputy
Inspector General for Investigation Rene Febles of FHFA-OIG. “They
knowingly put investors at risk and in so doing contributed significantly to
the financial crisis. The losses caused by this irresponsible behavior
deeply affected not only financial institutions but also taxpayers and one can
only hope that Goldman Sachs has learned the difference between risk and
deceit. Two Federal Home Loan Banks suffered significant losses so we are
pleased to see both entities receive a portion of this settlement. We
will continue to work with our law enforcement partners to hold those accountable
who have engaged in misconduct.”
“Goldman took $10 billion in TARP
bailout funds knowing that it had fraudulently misrepresented to investors the
quality of residential mortgages bundled into mortgage backed securities,” said
Special Inspector General Christy Goldsmith Romero for TARP. “Many of
these toxic securities were traded in a taxpayer funded bailout program that
was designed to unlock frozen credit markets during the crisis. While
crisis investigations take time, SIGTARP is committed to working with our law
enforcement partners to protect taxpayers and bring accountability and
justice.”
The settlement is part of the ongoing
efforts of President Obama’s Financial Fraud Enforcement Task Force’s RMBS
Working Group, which has recovered tens of billions of dollars on behalf of
American consumers and investors for claims against large financial
institutions arising from misconduct related to the financial crisis. The
RMBS Working Group brings together attorneys, investigators, analysts and staff
from multiple state and federal agencies, including the Department of Justice,
U.S. Attorneys’ Offices, the FBI, the U.S. Securities and Exchange Commission
(SEC), the Department of Housing and Urban Development (HUD), HUD’s Office of
Inspector General, the FHFA-OIG, SIGTARP, the Federal Reserve Board’s OIG, the
Recovery Accountability and Transparency Board, the Financial Crimes
Enforcement Network and multiple state Attorneys General offices around the
country. The RMBS Working Group is led by Director Joshua Wilkenfeld and
five co-chairs: Principal Deputy Assistant Attorney General Mizer, Assistant
Attorney General Leslie R. Caldwell of the Justice Department’s Criminal
Division, Director Andrew Ceresney of the SEC’s Division of Enforcement, U.S.
Attorney John Walsh of the District of Colorado and New York Attorney General
Eric Schneiderman. This settlement is the fifth multibillion-dollar RMBS
settlement announced by the working group.
Learn more about the RMBS Working Group and the
Financial Fraud Enforcement Task Force at www.StopFraud.gov.
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