Goldman Sachs Resolves U.S. Mortgage Probe for $5.1B | Hacker News Reader

Goldman Sachs Resolves U.S. Mortgage Probe for $5.1B

bloomberg.com

109 pointschollida1162 comments

"839 people convicted in the savings-and-loan scandals of the 1980s."

"1 Wall Street executive convicted for actions during the recent financial crisis."

http://www.nytimes.com/2014/05/04/magazine/only-one-top-bank...

From this it seems that what financial executives learned from their buddies going to jail was that they need to lobby the correct people so that when the shit hits the fan (and it's their fault) no one will prosecute them. Every prosecutor who had the ability to investigate and eventually bring charges and did not should be ashamed of themselves.

Contrary to popular belief, there are no lucrative private practice jobs/political appointments waiting for unsuccessful prosecutors. Successfully prosecuting a major bank executive would have been a career-making win for an ambitious attorney in the DOJ. Indeed, shortly after Bear Stearns collapsed, the government brought criminal cases against two Bear Stearns executives: http://www.npr.org/templates/story/story.php?storyId=9189904.... Both men were acquitted at trial: http://www.wsj.com/articles/SB125788421912541971. That was a humiliating result, given the DOJ's white collar division boasts a 90%+ conviction rate.

People ignore the relevant differences between the S&L crisis and the mortgage crisis. The former took place during a time of heavy regulation, and involved thousands of smaller banks and relatively unsophisticated individuals. The latter took place at the tail of a long period of deregulation, and involved large, legally-sophisticated banks.

At a big bank like Goldman, a routine part of a banker's or trader's job is running things by the in-house lawyers. By and large that wasn't true for the savings and loans that failed decades ago. And while legal oversight doesn't prevent excessive risk-taking, or buying loans with bad underwriting, it does tend to prevent activities that can be easily prosecuted as criminally fraudulent.

It's notable that there were virtually no prosecutions in the aftermath of the Great Depression either. It's worth considering what similarities and differences there are between the Great Depression, the Savings and Loan crisis, and the 2008 real estate collapse.

> At a big bank like Goldman, a routine part of a banker's or trader's job is running things by the in-house lawyers. By and large that wasn't true for the savings and loans that failed decades ago. And while legal oversight doesn't prevent excessive risk-taking, or buying loans with bad underwriting, it does tend to prevent activities that can be easily prosecuted as criminally fraudulent.

I think this is one of the basic things going on here: this wasn't crime, by and large. This wasn't illegal. People have not understood that. And so they are angry...

It seems to me that a lot of people is angry precisely because it wasn't illegal.

Or rather, wasn't illegal when it was friends of the prosecutor and people too big to fail.

You try this and you'll be in jail tomorrow.

> It seems to me that a lot of people is angry precisely because it wasn't illegal.

Sure. And that's totally reasonable(I would personally not support that, but I can understand that).

But, that isn't generally how things are framed, though - "throw the banking crisis bankers in jail" is one of the popular memes.

I understand that things can look bad and perhaps even look illegal but then an investigation is done the prosecutors correctly conclude that no actual law was violated. That makes sense and is totally fine by me.

What's hard for me to understand and believe is that a company like GS would be willing to pay out that much money when no crime had occurred. If no crime had occurred why did they set aside nearly 2 billion dollars for legal defense. I can understand setting aside that much to defend against an actual prosecution but there was none here.

Another thing that is concerning is that if all of this happened but no actual crime was committed then maybe the laws need to be changed. I don't know enough about the current state of the law (or previous) but it would seem that through years of lobbying the big banks were able to buy themselves a much more comfortable legal and regulatory environment within which they could operate. One so comfortable that they could do what they did without even breaking the law. I think that is something worth being angry about.

> What's hard for me to understand and believe is that a company like GS would be willing to pay out that much money when no crime had occurred.

The settlement is for a civil action under the FIRREA: http://www.jonesday.com/firrea-civil-money-penalties-the-gov.... That Act provides for the government to bring a civil action for violations of 14 specific criminal statutes. While the government must prove the elements of these crimes, the burden of proof is only the "civil preponderance" of the evidence standard, not the criminal "beyond a reasonable doubt" standard.

Makes sense. Thanks for the info.

If it wasn't a crime, then why did the Justice Department extort 5.1B from GS? /s

There are two glaring areas of fraud that anyone can understand: Many derivatives are insurance by another name, and sold without insurance-like capital backing it. That's fraud. Then mis-rating those derivatives is fraud. There was clear and readily understood illegality at the core of the derivatives bomb. The rating agencies should have been prosecuted, the ibankers who fed them misinformation that caused misratings should be prosecuted, and the people who formulated and sold an insurance product outside the regulatory framework of insurance should be prosecuted.

> Many derivatives are insurance by another name, and sold without insurance-like capital backing it. That's fraud.

So 1) you're going to get an expert up there to testify that derivatives and insurance are the same thing; 2) get a jury to believe you in the face of conflicting expert testimony that nobody in the industry thinks they are the same thing; and 3) get the jury to believe that the bankers who sold the derivatives knew that equivalency beyond a reasonable doubt. That's bonkers. I don't think you get past step 1.

As for your second theory: the agencies couch all their ratings with the appropriate disclaimers (based on such and such models, etc). If they had a process, and followed that process to produce a rating, and disclosed as much, that's not fraud, even if the result of that process is garbage.

It's no more difficult than explaining that income, couched in all kinds of fancy lawyering, is still income, here or in Panama. On your W2 or in a unit trust. People understand that. Tax agencies regulate and prosecute that.

Moreover prosecution is a light punishment for what these people did. They literally committed the fraud of the century, and stole massive amounts from the rest of us by it. I would find it difficult to vote to convict anyone who drags these asses into the street for a beating. At least until prosecutors get over having to work for a conviction.

The people involved 1) had a duty to understand the structure of the things they sold, and 2) have specific training meaning that they can't (realistically) say they were unable to understand them. If an engineer claimed not to understand the tools of their field they'd merely be trading one set of liability for another.

If the same standards were applied to these people as are applied to the non-rich we'd agree that their university transcripts are proof that they understand the field and that their relationship with the people they recommended these investments to was "customer like" enough to show conflict of interest and misrepresentation.

As for your process-protection theory, it doesn't hold up. Processes rule up until you have a reason to believe otherwise. You may normally delete email after three months but if you've been notified that the information in question is being sought as evidence in a trial all of a sudden your process has to change. If an engineer tells me he has a process and I show how that it is (dangerously) wrong he has a legal obligation to investigate and correct his recommendations. The ratings agencies had similar obligations and were given specific written evidence showing their claims to be incorrect. That they chose to ignore these communications means their process defense is worthless.

And if they had a process that contributed to them not getting this information, that right there should be enough to show malfeasance from a financial organization.

> If the same standards were applied to these people as are applied to the non-rich we'd agree that their university transcripts are proof that they understand the field and that their relationship with the people they recommended these investments to was "customer like" enough to show conflict of interest and misrepresentation.

Customer relationships aren't fiduciary relationships outside of finance either. How much utter crap do software companies knowingly sell to customers with zero liability? If selling crap as gold opened software companies up to liability, Microsoft wouldn't have survived the 1990's.

> Processes rule up until you have a reason to believe otherwise.

So if you tell US News that their college rankings don't correlate with employment outcomes, they have a legal obligation to fix their process?

It totally was illegal, it just didn't involve actions that are in isolation illegal. That's the thing with white-collar crime. No guns, etc.

Most of these people had a duty to their customers and they specifically recommended bad investments, knowing that they were bad. And I'm not talking about how a bank hedges all the risk by playing both sides - I mean that the banks which made these investments knew they were gaming the ratings agencies and they sold what they knew was junk to people they had agreed to represent.

Criminal behavior doesn't go away just because two people agree to split the work. It doesn't matter if one branch wrote the bonds and another sold them - they lied about what they knew at all levels.

And many stories suggest that there was probably direct criminal collusion with the ratings agencies - above and beyond the simple fact that the agencies serve those who pay them...

> Most of these people had a duty to their customers and they specifically recommended bad investments, knowing that they were bad.

Sellers generally do not have a fiduciary duty to buyers. Even to the extent that there were fiduciary duties, violation of a fiduciary duty is a civil wrong, not a crime.

I think it was illegal. 1) Appraisal fraud was rampant, known, and encouraged by the mortgage industry. 2) "Stated-Income" loans were created whereby borrowers were again encouraged to falsify applications by the industry. This is fraud.

Banks making mortgages did not pay for appraisals, sellers did. So prosecute the appraisers and sellers.

Banks did not falsify borrower income, borrowers did. So prosecute the borrowers.

Why blame banks for other people's lies? Or do you think that banks should be responsible for the statements of all parties in any transaction they underwrite or engage in?

That's whitewashing the banks' participation in a scheme that everybody knew was corrupt. The quality of the mortgages was several ranks lower than presented. Its arguable the banks knew that. If you know other people are lying, and pretend they aren't, you are complicit in the lie.

It wasn't illegal because these banks created deliberate loopholes in regulations by lobbying.

It turns out its not that simple. The conditions that allowed the housing bubble to happen were not created overnight. And contrary to popular belief these are highly regulated entities. The truth is that many individuals in government were just as complicit as the MBS desks at banks.

If a bank was prosecuted they would very rightly be able to point out that the GSEs and various agencies set a lot of the loan standards. You might be able to say something about material misrepresentation but a lot of firms buying securities based on these loans were asleep at the wheel. They were telling their investors that they were conducting extensive due diligence on these loans and they weren't really doing any.

If you have ever picked up a derivative contract (I mean the dead tree type) its full of disclaimers and warranties. It is true that the buy-side has become much more engaged when evaluating new financial products.

In the end most of the players were greedy. Politicians wanted to be elected and demanded "affordable housing" and the relaxation of loan standards. Individuals leveraged up and bought properties to make quick money. Investors around the world chased yield and created immense demand for securities. Banks are a flow business and loved the margins on this flow.

Its certainly not as simple as lets go find someone and put them in jail.

The conditions that allowed the housing bubble to happen were not created overnight.

Creating the housing bubble was official policy. Not an accident, not unintended consequences, not coincidence.

Very, very true.

You're comparing people vs executives. A lot of low-level predatory lenders were convicted this time around. The execs were all pretty careful to push the risk (and compliance violations) on to originators.

Question: did Goldman have a fiduciary responsibility to it's clients to _not_ sell them securities that they wanted to buy?

It's easy to blame the banks but don't forget that the people who were buying this crap were being paid millions of dollars a year for their "expertise." This is not a boiler-room stealing pensions from little old ladies. This happened in the board-room. The buyers were the one's who failed their fiduciary responsibility to their clients (i.e. the little old ladies who rely on their pension).

The reason pension funds, etc... would buy this crap is because they are underfunded and they need to generate impossible returns to meet their future payouts. We shouldn't give them a free pass on underfunding their liabilities and then blindly taking on extreme risk to make up the shortfall.

  extreme risk

You mean the Triple-A rated CDOs?

Yeah, exactly. Blaming the victim isn't really appropriate here.

I avoid buying things that I do not understand and I also avoid buying things that seem too good to be true. If both of those traits happen to reside in the same item, I avoid it even more.

Which is why you pay bankers at GS to inform you about those things you do not understand; and when they tell you this CDO is triple-A rated and safe, you think 'great, good safe investment for my pension fund'.

Ah, that leads to another one of my rules: if someone is paid commission based on me buying something, I try to scrutinize it just a tiny bit; especially if I have a fiduciary duty to do so.

Thats not really how the people doing the buying say it works. See in order to justify their compensation and fees they tell their investors about their detailed knowledge of the market. They talk about how their investment process works. They talk about the extensive due diligence they perform on their investments. They talk about their robust risk management procedures.

The CDO was triple-A rated. The buyers, despite what they told their LPs, just bought stuff without thinking too hard about it. You don't pay bankers to inform you. This is true whether you are a pension fund, hedge fund or other asset manager. If you told your LPs, "Well we just ring up GS and ask them what to buy and then buy it" you would be out of a job very quickly.

  "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."

"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"

GS told these investors that these were safe investments when they knew they weren't. This is not a case of a pension fund calling up GS-General-Store and demanding to buy CDOs, this is a case of GS saying 'hey these are really safe investments for you' when they knew full well they weren't.

My problem with this is that we trying to fix finance by expecting Goldman Sachs to act as good citizens. Guess what will never happen.

Goldman is not a good citizen. It is a market maker. It provides the function of creating financial products that people want to buy. Goldman also wrote the first swaps against the mortgages in these securities. Guess what, they didn't do it out of the goodness of their hearts. They did it for the fees.

Goldman is one of the few actors in this mess that performed their jobs well. Rating securities was not their job. Determining if mortgages were sound was not their job. Their job was to package loans that were underwritten by other banks and sell them to _qualified investors_ who wanted to buy them. Goldman did it's job very well.

Ratings agencies had the job of determining the quality of these securities. They did their job poorly.

Investment managers had the _incredibly high paying_ job of selecting sound investments. They did their job poorly.

Goldman is the only one who even comes close to being competent in this entire mess.

I'm not blaming the victims. The victims are people who are relying on the pension funds for their retirements.

I'm pointing out that the managers who were entrusted to invest the assets of those funds deserve a huge helping of blame. These managers were supposed to be experts and were literally paid millions of dollars a year to manage the assets. They failed even the most basic test of competency and they should be held accountable for it. Why aren't we talking about clawing back their fees?

Goldman did _not_ rate the CDOs they sold.

The big question is: Why are the rating agencies still in business? They labelled rotting poisoned rat meat as prime organic steak.

Part of cleaning up the mess should have been to create new rating agencies under regulatory probation, and to review all the rating agencies' ratings. I suspect that would hae found too many slimy things on banks' balance sheets, so instead the Fed sucked the poison out of the banks with QE.

I wonder what the quid pro quo was. I suspect if you look for anomalies between sovereign debt ratings and debt-to-gdp ratios you might find answers.

Ratings on sovereign debt seem kind of irrelevant to me. I don't see why the agencies would have any sort of edge.

But I agree one of the most dumfounding facts of the present situation are that these rating agencies are still in business. I think the argument is that they were transparent about what methodologies they used to produce these ratings. But regardless of that, the blatant conflict of interest means this whole business model should be dead. I think Jim Simons of Renaissance Technologies made the point that it's the buyers who should pay for stuff to be rated, not the issuers. Possibly it may have worked like that in the past until the government stepped in and changed it... can't quite remember.

Ratings are besides the point. Implied "ratings" should be recoverable from the market-clearing yield on any given bond. Bond buyers should perform their own due diligence, either in-house or by paying a third party.

What good does it do to have an intermediate institution (one that has no skin in the game) suppress the perceived riskiness of certain assets and inflate the perceived riskiness of others?

Because buyers don't want to be stuck with performing all the due diligence themselves. You have to understand that investment management as a business isn't really about returns. Its about gathering assets to manage and not losing them.

Yup. Unfortunately, the only reason S&P, Moodies and Fitch matter is because ... wait for it ... they were named in the Securities and Exchange act of 1934 as the only agencies that banks were allowed to use. It's one of those huge unintended consequences that the scheme to make sure that commercial banks were invested in high quality securities is at the heart of a financial meltdown 74 years later.

This lies solely on Obama's shoulders. Don't get me wrong: I campaigned for the guy in 2008, so I'm no right-wing-nut. But I have been very disappointed in how he's let them off with a slap on the wrist. Between this (lack of prosecution) and the drone campaign, he's been a big disappointment for me.

Yep. Same boat here. I voted for hope and change. Got Bush-lite.

Bernie Sanders seems like the only candidate in a long time that would be tough on this stuff, though they all promise to be tough on Wall Street.

If you think Obama has been stonewalled by Congress, having Sanders in office will open your eyes.

lol, the ACA passed without a single republican vote. This is just a BS "us vs them" rationalization... either you actually mean "Obama has been stonewalled by Democratic Party infighting", or you're just being disingenuous.

The ACA was passed in the early days of the Obama administration. When Congress had the following numbers:

          D   R   I
  Senate  57  41  2
  House   255 179

In 2010 the distribution changed, so the 112th Congress (2011-2013) had this distribution:

          D   R   I
  Senate  51  47  2
  House   193 242

113th:

          D   R   I
  Senate  53  45  2
  House   201 234

114th (current):

          D   R   I  V(acant)
  Senate  44  54  2
  House   188 246    1

Further, the Republicans have tried to repeal it 62 times [1] without offering a viable option, fortunately without success so far.

[1] http://www.nytimes.com/2016/01/07/us/politics/house-votes-to...

EDIT: syntax.

The Congressional Democratic caucuses in the years 2009-2016 obstructed the Obama Administration's legislative agenda?

Sanders has worked with both sides of the Congress for decades. He has the record for the maximum number of amendments approved.

I encourage everyone to join your local political party, work on a campaign, help with endorsements, lobby for some policy change, and even run for office. Heck, just pick an issue and attend every relevant public hearing, just to see how policy is forged.

Once you see the game up close, you'll see that most everyone's acting completely predictably, rationally.

Mostly, the problem is the politics of attention. So many fires, so little time. Whoever screams loudest gets action. Bad things happen on the down-low when no one is watching.

I also learned that politicians and bureaucrats do not play to win. Rather they play to not lose. A real-life version of Survivor. No matter what they do, or not do, it'll come back to bite them in the ass. So the pack only moves when it's "safe", like responding to "overwhelming" public pressure.

> I encourage everyone to join your local political party,

The problem is: the Democratic Establishment is basically no different than the GOP when it comes to these matters. Case in point: the only reason the Carried Interest loophole is still around is because of Chunk Schumer, Democrat. He prevents Democrats from working on repealing it, and the GOP is more than happy to help him out. And Feinstein is very pro-war and pro-surveillance. And the PATRIOT Act renewal, as well as NSA's Warrantless Wiretapping getting approved, wouldn't have happened without Democrat support.

My point is: both parties are bad. We need a rational, third party with a clear agenda. I'd be happy to work on getting it off the ground, if people are interested. Start small, and slowly work your way up. Most third parties (like Independent, Green and Libertarian) just put up Presidential candidates, and don't do much else, which is ridiculous.

There is no Democratic Establishment. Just cabals of people protecting their power. At the national level, things like names, logos, bumberstickers are just tribal identifiers.

I'd be happy to work on getting it off the ground, if people are interested.

Less talk, more walk. Convert your outrage into action.

Find your local party, regardless of flavor (Green, Socialist, GOP, Democrat). Join. Pull your weight.

If you can't find your party, start a new one on meetup.com.

Pick an issue that pisses you off. Write a resolution. Persuade dozens of people to sign it. Present it to your council. Draft a bill. Use your new found tribe to pressure your representatives to sponsor and then pass it. Use your petition's popularity to change your party's platform. Send a press release to all your local media outlets. Write op eds. Meets with other interest groups to find allies.

Rinse, lather, repeat.

> Don't get me wrong: I campaigned for the guy in 2008, so I'm no right-wing-nut.

Was this disclaimer really necessary for your comment? No need for the emotional credibility; just make your argument.

You're downvoted, but I think you deserve an answer: It shouldn't be necessary, but people are all too willing to lump someone into a camp and attack them on that basis, so it's often necessary to note when you are doing something against the direction you'd normally be biased so people don't make that conclusion.

Getting downvotes for pointing out how problematic these types of disclaimers are? Evidently you can only criticize the president legitimately if you're not a "right-wing nut." How about the argument stand on its own regardless of political affiliation.

It is, because otherwise people would downvote him, probably assuming he's a bible-thumping conservative who's voting for Trump.

Bipartisanship has been poisoning this country for decades. Symptoms are only increasing in intensity.

And here I was assuming HN was a place for rational discussion. We now downvote people if we assume them to be part of an un-agreeable ideology to the master ideology on HN. Got it.

I just wanted to put it in the right context. There's a group of people for whom Obama can do no right; I'm not in that group. My point is: I was a strong supporter, and while I think he was better than the alternatives, I still believe that he could have done much more given the mandate he had.

This may be too pragmatic on my part but please consider the alternative before you think you made a really bad choice. Imagine if McCain/Palin had been elected in 2008 and/or Romney/Ryan had been elected in 2012 - I can imagine this 5B "slap on the wrist" turning into a "pat on the back" for this vaunted job creator (i.e. Goldman Sachs).

I agree with both. If i was given the same choice today, I'd still vote for Obama. I'd still be choosing from the lesser of two evils, though

> Imagine if McCain/Palin had been elected in 2008 and/or Romney/Ryan had been elected in 2012 - I can imagine this 5B "slap on the wrist" turning into a "pat on the back" for this vaunted job creator (i.e. Goldman Sachs).

This says more about your preconceptions than it does about anything in the real world, where John McCain joined Elizabeth Warren in introducing a bill to bring back Glass-Steagall and Mitt Romney has pointed out that Dodd-Frank was a gigantic gift to the New York banks.

That's a pretty aggressive tone on your part but I will try to respond.

You may be right about Sen. McCain but can you say the same about Palin? Further while I am happy to learn that he worked with Sen. Warren on trying to bring back Glass-Steagall, his eagerness to involve America in foreign wars is repulsive to some [3]. Nonetheless he is a class act and an American hero - in my opinion, people became afraid of his candidacy when Palin joined the ticket.

Romney campaigned in 2012 on a promise to repeal ObamaCare, which was based on Massachusetts' RomneyCare [1]. He made the "47%" comment. He is also known to have said "corporations are people too, my friend." [2] It is unclear to me that he is as good for the middle class as he is for corporations, compared to President Obama.

I maintain that McCain/Palin in 2008 and/or Romney/Ryan in 2012 would not have been as good for the US as the current administration. That remains my pragmatic opinion.

[1] http://www.cnbc.com/2015/10/23/mitt-romney-admits-romneycare...

[2] http://www.theatlantic.com/politics/archive/2015/02/if-corpo...

[3] http://www.motherjones.com/politics/2013/09/john-mccain-worl...

It's bigger than Obama. You pretty much can't get anything done in Washington without pandering to Wall Street. Executive power is one thing, but money ultimately makes all the decisions.

Also, if you piss off Wall Street, where will you go to work once your gov't tenure runs out?

Is a 5B settlement a slap on the wrist? Goldman's yearly revenue is 40B a year, while profit is ~8B last year and may be closer to 4-5B this year. Would it be better if they were sued out of existence? Is this enough penalty for them to never to it again in the future? Could the gov't legally be able to get more?

Yes. When the fine is less than the overall profit, and they can write it off via taxes, then it is not even a tickle on the wrist.

CEO, every member of the board, every manager in that division that made and sold the products, fine 100% of their pay, fine 4x revenue - not profits for the products affected, and do not let them write the costs off.

Is this fine tax deductible? What, then, is even the point?

Getting to write articles like this to make prosecutors look good, and for people feel like big bad Goldman Sachs is getting hurt.

Here's another thing to grind your gears: much of the fine will be paid in "consumer relief," which so far has meant a tax writeoff upfront, then negligible consumer relief.

No, it's not tax deductible.

Even if it is tax deductible, 'all' you're getting is a tax shield of your tax rate, if it's 30%, you still pay 70% of the fine. That's still about 50% of their annual net profit. It's nowhere near enough to me, but to say a 30% discount on a fine makes the fine pointless is exaggerated.

Either way though, no it's not tax deductible.

Whilst 5B is a huge sum, will it deter GS executives from repeating the act in the future?

Will the people responsible go to jail or pay from their personal wealth -made due to their "bad" desicions?

> Is a 5B settlement a slap on the wrist?

Yes it is, since no one went to jail (I'm assuming).

The govt getting 5B isn't the people getting any money they would've gotten. A penalty paid to the govt isn't paid to those who's wealth was reduced.

Oh, don't forget the whole spying+ prosecution of leakers/media thing.

Serious question: Which department specifically gets this $2.39 billion civil penalty & $875 cash payment?

What does that money go towards? I know with the recent UBS case, it ended up going to the NYDFS, and seemed to just pay down New York's deficit.

Not really helping the people who were actually damaged by this behaviour.

That's what disturbs me about these settlements. Shouldn't the settlements be used exclusively toward helping those that were negatively impacted by the bad behavior?

Well, if you take the view that everyone suffered (except a very tiny minority of shareholders and employees), then that money going into the general taxation pool is helping the victims. It pays off debt or buys bridges or whatever.

Or the money could be used for any of the vile activities the State is up to thus ironically contributing to more suffering. Let's not forget that.

In theory that makes sense. But in practice it's hard hunting down the actual effects of something this big.

Also, you might not be so happy with the results of helping those who were impacted. Some of the easiest to find of those who were hurt are those who bought the mis-rated mortgage backed securities. A lot were sold to non-US entities like foreign mutual funds and sovereign wealth funds. Can you imagine how happy everyone in the US would be if a big chunk of the settlement got shipped off to rich foreigners? It might be fair in some sense, but politically it would be awful. Hence, easier to just dump it into some state and/or federal budget's general fund.

I assume that's what the "$1.8 billion in consumer relief" is.

Previous settlements over 2008 have also had some of the money earmarked for helping out distressed homeowners that were affected. The JP Morgan settlement in 2013 (the mortgage one, not the London Whale one) had $4 billion earmarked for helping out borrowers[1].

[1] http://money.cnn.com/2013/11/19/investing/jpmorgan-mortgage-...

Most of those big fines get divided up into different state & federal departments. In NY its a big money earner. I dont think the banks did anything illegal so I view these fines as a shakedown.

http://www.businessinsider.com/r-bank-settlements-create-win...

When VW lies about its emissions it's a big deal, the stock drops, the public is appalled, the media can't stop talking about it. When GS gets fined $5B it's just business as usual.

This probably has nothing to do with that :)

http://priceonomics.com/porsche-the-hedge-fund-that-also-mad...

Maybe because VW had somewhat of a reputation for being a good quality car manufacturer that would have no need to cheat and lie about their vehicles. Whereas cheating and lying is a common perception of Wall St firms in general.

The former head of GS was US Treasury Secretary during the time these offenses took place. The former NY FRB (during the time these offenses took place) head was US Treasury Secretary in the immediate aftermath and beginning of investigations. The current US Treasury Secretary bet against MBS at Citigroup, which required a massive taxpayer bailout to survive.

When you can pull all the strings, you can do as you please.

And like every other corporate settlement, they will write off $5 billion in expenses on their taxes (likely another billion more with attorney fees)... effectively shorting the US billions in tax revenue...

One presumes that they paid taxes on $5B revenue in previous years, so there's no problem with this part.

I partially see where you are coming from... the equivalent made up story goes something like this:

I am a payroll clerk at Company A and I pay myself an extra $10,000 a month illegally for 10 years. For some crazy insane reason no criminal charges are ever brought directly against me but a civil court finds me at fault for stealing the money. I pay the $1,200,000 back to Company A and pay a fine, $1,000 to the man. I claimed that $1.2 million as income and paid taxes on it so I should get my tax money back!

The sad part is the damage they did was probably in the trillions, but this civil court couldn't realistically make them pay that back. Much of their meager slap on the wrist is tax deductible...

I don't think that is correct.

"penalties or fines paid to any government agency or instrumentality because of a violation of any law are not deductible"

https://www.irs.gov/publications/p535/ch11.html

These aren't criminal violations... And actually they probably aren't penalties or fines either. I'm not a lawyer of any sort but I don't believe restitution == fines/penalties. All depends on verbiage in criminal court, IRS loopholes, and the details of the case.

"Big banks such as Bank of America and JPMorgan Chase will receive deductions against the corporate tax that will amount to between half and nearly three-quarters of their multibillion-dollar settlements, at least. Meanwhile, midsized banks and nonbank lenders generally get to deduct the whole shebang."

http://www.newsweek.com/2014/11/07/giant-penalties-are-giant...

and even expenses related to criminal violations can be deducted if they stemmed from your job

Did some digging. The amount that relates to the fine (criminal or civil) is not deductible. Settlement amounts that relate to relief may be deductible. It depends on how the various sums are described in the settlement. According to the Bloomberg article $2.39b of the $5.1b is a fine. So that piece is almost certainly, not deductible. The rest might be, but it depends on how the settlement is worded. Assuming the $2.39b is the only amount that is not deductible, that means Goldman Sachs will be able to offset about $1b in future tax liability.

Below is an article about BP. They had to pay about $20b in total, with about $5.5b being considered a fine. That $5.5b was not deductible.

http://blogs.wsj.com/moneybeat/2016/04/05/bp-can-take-tax-de...

Good point, I didn't read into the ratio of fines/restitution. Appears that half is deductible + any other expense they associate with the case/trial

Paying this fine won't impact GS at all. In fact, their stock has risen today, albeit financials as an industry are up. Investors will chalk this up as a one-time charge and earnings estimates will be revised down appropriately without any downside.

If the government actually wanted to punish them, the fine would have to be astronomically high. Or, you know, they could actually fix banking regulations.

In the article it says GS had previously provisioned about enough money to pay these damages.

Even better for them

Something I often wonder. It's quite common on HN to get insiders comments but less on this type of articles. How is it so? what do GS employees or people working in that field think about this?

Probably along the lines of, 'Hopefully we can make an extra $5.1 billion in the next 8 months so this doesn't impact our commission cheques'

You would have to check their financials to be sure but typically banks set aside money to cover settlements in pending litigation. This has been common at banks of the last few years.

Senior insiders from tech companies are often techies and will spend time in places like this. Senior insiders at banks are rarely techies. The techies at the banks that do spend time here probably are so far removed from this activity there's not a lot to talk about.

Not a GS employee, but I work in the industry.

Fixed-income securities (like the bonds in question) went from being the most profitable division for investment banks to one of the least.

Major banks around the world and shutting down or significantly shrinking their investment banking divisions (Deutsche Bank, Credit Suisse) and specifically closing fixed-income desks.

The reaction from those of us in the industry is that there was a problem, and we corrected it.

Possibly violating non-disparagement clause in contract and getting sued into oblivion > Hacker News karma

GS cracks down hard on leaks. There's a fake Twitter account called GSElevator which pretends to be tweets of things over-heard in the elevator at Goldman Sachs. Goldman has since banned talking in elevators. They don't play.

TBH if you mean the fine then there's not an awful lot to think about. All the big banks have been taking fines on this sort of scale for their mortgage securitisation activity.

As the article says, this is more or less what was expected hence it didn't have much impact on share price.

From the bank's POV it's better to have the fines over with, even though they're large, as there is a tendency to over compensate on the balance sheet when it's uncertain.

The situation today is very different from what it was back then primarily as a consequence of the regulatory changes. As we've not had a equivalent shock since, it's difficult to say whether the changes have been sufficient.

I have a bit of a concern that one of the big changes: moving to a predominantly cleared model in preference to bilaterals. It definitely reduces exposure but puts an awful lot of concentration onto a small number of clearing houses and exchanges.

Lots of comments here regarding 'blame'. On that subject, I found this interview with Michael Burry (featured in the book and movie "The Big Short") to be worth reading:

http://nymag.com/daily/intelligencer/2015/12/big-short-geniu...

Two bankers from Goldman Sachs profited around as much as the fine is in the Summer of 2007.

Slap on the wrist is an understatement.

Source please.

"The pair, members of Goldman's structured products group in New York, made a profit of $4 billion by "betting" on a collapse in the sub-prime market, and shorting mortgage-related securities. By summer 2007, they persuaded colleagues to see their point of view and convinced skeptical risk management executives."

https://en.wikipedia.org/wiki/Goldman_Sachs#Actions_in_the_2... http://www.guardian.co.uk/business/2007/dec/21/goldmansachs.... http://www.telegraph.co.uk/finance/newsbysector/banksandfina...

Profited makes it sound like their bonuses were $4bn. It's a borderline useless number when framed vs a group. Regardless of what the article says, there is no way those two made that much solely on their own.

We would not accept shitty ingredients in our food, being told it was a grade beef, when it turned out it was actually alley cat, sewer rat and suchlike mixed in.

How on earth did they get away with a grade securitised mortgage products that actually contained a stink load of ready to default loans?

Forget blaming a specific person, or whether it may have been technically legal, what can be done to stop them doing this again?

>We would not accept shitty ingredients in our food, being told it was a grade beef, when it turned out it was actually alley cat, sewer rat and suchlike mixed in.

This is America. Some percentage of the population not only would accept it but get pretty bitter about government overreach if you proposed that more be done about food safety, and refuse to believe you if you said that selling rat meat is already illegal...

You have put your finger right on why "It's hard to find what was illegal." is bullshit. Either...

1. The issuers of CDOs defrauded the rating agencies giving them false data

2. Or the rating agencies conspired with the issuers to mis-rate the CDOs

Or both. And nobody went to prison.

Yes we would. We would say "just don't buy from that particular meat seller, it's a free market, buyer beware, the market will take care of it and adjust, competition, I'm very smart I would never get tricked and buy bad stuff like that it's just dumb people who are not as smart as me that would get hurt" -- there is this exact discussion happening higher up in this very comment section.

Why no criminal probe? Her are three reasons: GS has friends in high places. GS would have brought a legal force more formidable than the governments and stretched the case out for a decade or more. Many government people involved in the case may not want to alienate the company they want to work for after government service.

Too big to fail should also be too big to charge criminally.

I wonder what would be the actual figure without settlement, since settlement in corp vs. gov cases means that a corp has calculated that it is cheaper to settle than to argue in the court of law. What where they avoiding? Brand damage? Management responsibility? More unopened cans of worms? I guess we'll never know...

Executives using shareholder money to bribe their way out of jail is what is going on. If I were a shareholder I'd prefer my execs to go to jail - it's far cheaper.

You could very well be a shareholder of a bankrupt company if execs start going to jail.

I hear a lot about how this is just a slap on the wrist but can you explain to me why it is? 5B is a lot of money afaik. Why is this so insignificant?

According to Wikipedia, GS made $39.20 billion in revenue in 2015, with $6.08 billion in net income. I'd say a penalty of about half a quarter's worth of revenue and less than one year's worth of profit for being a major player in the greatest financial meltdown in almost 100 years is about as insignificant as it comes.

Imagine if bank robbers were penalized by taking 4/5ths of the profit from only one bank robbery, then released to continue robbing banks.

That assumes that all of their profit is earned illegitimately, which at the very least you'd need to argue for.

Obviously revenue is a red herring, but almost a whole year of profit paid in fines seems pretty substantial to me. 35,000 people worked for 9.5 months to earn the money to pay this.

In 2014 they paid an additional $3B. Worth noting that GS played a much smaller role in underwriting the bad loans than the likes of BoA and JPM ($16.6B and $13B settlements), mostly they were vilified for seeing the train wreck coming and helping some investors profit off the implosion.

I think the reality is that the fines are absolutely significant and do change behavior at the banks. It is a typical human response to want to crush them under your boot into oblivion, but I think counter-productive.

> Obviously revenue is a red herring

I disagree. What if it were a company like Amazon that operates with over 100 billion in revenue but less than a billion in income (many years actually ending up red)? Would 500 million an appropriate fine for, say, willingly misleading consumers about billions of dollars in fraudulent items? If anything, I'd argue income should be the irrelevant number in a scenario like this, though the only numbers that really should matter are ones based on the magnitude of the damage the wrongdoing causes.

> the fines are absolutely significant and do change behavior at the banks Is there any evidence of this?

> It is a typical human response to want to crush them under your boot into oblivion, but I think counter-productive. Maybe, but I'd argue penalizing one of the major creators of a global financial crisis with a fine that doesn't even cause them to go into red for _one_ year is even worse. Fines all accounted for, GS profited off of the crisis, no executive lost their job, and the behavior that caused millions to lose homes and pensions continues on almost totally unchanged. The human response is to want justice served, and this isn't it.

You have to contextualise it.

Imagine you were partly responsible in one of the biggest financial meltdowns of all time in your country, that made similar waves across the entire planet.

You get caught, and get a penalty. What should it be?

Then imagine your penalty was 0 days of jail time, and about 50% of your salary of 2015. Or hell, not your salary, just 50% of your disposable income.

Then consider that you profited a multiple of that fine I just mentioned, by engaging in this illegal behaviour in the first place.

That's what is called a slap on the wrist.

Still nobody gets a criminal record. But the kids getting caught smoking pot will get to face a lifetime of stigma and get a criminal record.

US employers have to realize that since so many US citizens get thrown in prison, being a former convict and having paid your dues to society by having been in prison should not prevent anyone from getting a decent job. If someone has been punished once, the debt to society is already paid.

In alignment with what you've put forward, I'd also consider that a lot of studies point to the US prison system as not helpful for skills or emotional state when returning to society. Holding the repaid debt of punishment over the person when seeking employment is a stigma unfortunately. This difficulty re-entering can lead to frustrations and poor choices, increasing the potential for another offense.

So Goldman gets to sell these mortgages, short the mortgages they sold, and then are fined only 5.1B for the privilege of doing so? Pure insanity.

>So Goldman gets to sell these mortgages, short the mortgages they sold

Yes, they do. And as a market maker, there's nothing at all wrong with this and isn't the origin of the probe.

They're in trouble for "improperly vetting" mortgages that they sold, which in my opinion is pretty subjective. But the politicians want to exact a price.

Bargain.

What would be a fair price in your view?

If the penalty isn't higher than the derived value, it's not a penalty, but a cost of doing business.

OK, so what was the derived value?

Shareholders and directors paying that money out of personal wealth. To be honest, I don't know whether it actually was a bargain, but it probably is. Goldman seem to make vast sums of money and routinely factor in 11 digit legal bills as a matter of course. They appear to break the law knowing that their eventual bill will be considerably less than their overall profits and even better - no one has to go to jail.

The shareholders are paying out of their personal wealth. This was expected and already priced into the stock.

Well they were bailed out with $10B plus lots of other props[1]. Some significant portion [some might say all + interest] of that would seem fair.

[1] https://en.wikipedia.org/wiki/Goldman_Sachs

When will people stop talking about the "bailout." It was a relief fund. Goldman paid the 10B back in ONE year. TARP turned a profit. When will you stop living in 2008?

3x Revenues for the years in question. The current penalty is not much more than a slap on the wrist, because even after paying the fine Goldman Sachs makes a profit from the business for the years in question. People see Billions and think the fine is significant, but unless the fine is linked to actual income, it is fairly meaningless.

We'll get an idea of how others think of the value of this settlement by how the stock price moves after this...

Felony convictions, jail time, and a life-long industry ban for the perpetrators. In addition to the fines of course.

And if there are repeated violations, dismantling of GS as a corporate entity + nationalization of its assets would be a good place to start.

GS is a corporation, an entity that exists at society's pleasure. When society grows displeased at the antics of habitual corporate offenders, society should impose a form of bankruptcy, in which the corporation ceases existence and its assets are divided among lenders and victims.

The norms of corporate governance would change, swiftly.

Jail for everyone who demonstrated a conflict of interest. Total recovery of lost funds by selling off assets of the guilty.

The fine is roughly 10% of their Mkt cap [1]. Remember the original $500M fine in 2010? That was truly awful [2].

[1] http://finance.yahoo.com/q?s=GS

[2] http://www.nytimes.com/2010/07/16/business/16goldman.html

Much of their market cap is dispersed in the form of compensation to employees and management, so market cap is an underestimate of the profit from activities.

NYSE: GS up 2.5% at time of this comment, which is unintuitive to me.

Is this because a significant fine was expected so "baked" into the price? Presumably if the fine was smaller than expected by the market then it could cause an upward evaluation?

Baked into the price long ago because the fine announced months ago:

http://www.bloomberg.com/news/articles/2016-01-14/goldman-sa...

Yes, it was "baked in":

> The bank already provisioned for most of the charges. Goldman set aside $1.95 billion for legal and litigation expenses in the fourth quarter, and $4.01 billion for all of 2015, more than double the totals for the two previous years combined.

In other words, Goldman normally spends about 1 billion dollars a year fighting and/or settling lawsuits. This year they spent 4. That's elect-a-president money, a couple bucks for every person in the US, or a few hundred for every likely voter in a swing state. Normal intuitions about money simply don't apply at this scale.

Goldman Sachs received a $10 billion bailout.

https://projects.propublica.org/bailout/list

They paid back $11.4 billion though.

That's an excellent loan isn't it. A home loan usually ends up in twice the price being paid back over the length of the loan.

A home loan is also paid back over 15 to 30 years. The bailout loans were paid back in under 5 years. Are you familiar with the "time value of money"?

You're right, at 5 years only a billion dollars of interest would have accrued with 4% interest.

A home loan would've generated 3-4% in interest a year. The US government made over 14% in less than a year on this loan. That would make it terrible, not excellent, for the borrower -- more akin to a high interest credit card than a mortgage. Mortgages involve paying so much back because you have interest compounding on a large balance for 15-30 years.

Actually this wasn't a terrible rate for GS, it was a great rate. And it can't simply be compared to a mortgage.

Home loans are for 10,15, or 30 years unless you're comparing ARMs. In any case, there's no comparison here. The government made 15% on a 5 year loan. That's terrible for GS and great for the government.

A better comparison would be an auto loan which has a comparable time value. I don't know of any auto loan which comes close to that (15% after 5 years).

Not hard when the Fed will let you flip paper for profit.

Which is ridiculously cheap. Remember that today the cost of equity for GS is > 14%, that's the 2016 figure. In the financial crisis, that rate probably skyrocketed to a much higher number, as did the cost of debt during the credit crunch when nobody was looking to lend because default risk was going through the roof and everyone needed to pad the books with cash and deleverage.

So the government stepping in with debt at this rate can be considered to have been very cheap. And that's why they took it. If they could've gotten a better market rate they would've, that should tell you enough about how good that deal was. Did the government make a bunch of money? Absolutely. And so would anyone investing in highly risky assets in a highly risky time when the bet pays off, it's just called compensation for risk.

* was forced to receive

What was the other alternative?

For everyone asking why or cynically pointing out that no one went to jail over this, you need to have people agree on what caused all of this before any of that happens.

awfully cheap.

Settled, no one goes to jail.

Why am I not surprised?

Fraud pays ... REALLY WELL. Good Job, Obama.

Never forget... the vampire squid. http://www.rollingstone.com/politics/news/the-great-american...

How is this not criminal fraud? The public wants blood. Why is the DOJ not similarly bloodthirsty? You'd think they would be. That'd be a career making case. Prosecutors would be famous for 40 years.

I don't get it.

Edit: I don't mind downvotes if someone can explain how the fraud wasn't criminal.

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