Published: April 21, 2016
Goldman Sachs procured a settlement with both federal and state governments on Monday to ostensibly pay $5.1 billion for its role in the events that precipitated the mortgage bubble and subsequent financial crisis.
Goldman is the last of the major American banks to settle, and many experts believe the Manhattan based investment bank
received the best deal. The $5.1 billion price tag may seem like a large amount, but there are plenty of incentives delineated in the fine print that make the deal much more palatable to the banking giant.
“I think the fine is completely necessary. Goldman knowingly acted in ways that made them a lot of profit in 2007, but worsened the 2008 financial crisis. I feel this fine placed on Goldman and other banks will discourage banks from profiting off of imminent financial crises in the future,” said Natalie Russo, a junior economics and finance major.
Goldman Sachs, along with the other big American banks, was found guilty in the court of public opinion shortly after the advent of the Great Recession. Goldman packaged subprime mortgages loans into a convoluted type of bond and then sold these bonds to investors. The problem is that Goldman Sachs knew that the subprime mortgage market would likely collapse. This collapse would wipe out the value of the bonds, yet Goldman still willingly sold these bonds to investors by providing them misleading statements. The head of due diligence at Goldman Sachs even went as far as typing, “If only they knew” in an email when talking about investors buying the bonds.
A working group, which consists of both state and federal agents, was formed in 2012 to investigate the mortgage-backed securities market and it was this working group that secured the deal with Goldman. Goldman’s settlement amount of $5.1 billion is lower than that of Bank of America ($16.6 billion), J.P. Morgan Chase ($13 billion), and Citibank ($7 billion). The amount is greater than that of its main rival Morgan Stanley ($3.2 billion), but Goldman’s deal includes provisions that could significantly lower that amount. The deal calls for $2.385 billion to be paid as a civil penalty and $1.8 billion to be paid out as other relief, such as affordable housing.
“They appear to have grossly inflated the settlement amount for P.R. purposes,” Dennis Kelleher, the founder of an advocacy group that watches the markets, commented.
He said that Kelleher made these remarks because the provisions in the fine print of the settlement may lower the amount Goldman pays by up to $1 billion. The New York Times points out that Goldman Sachs will receive a 30 percent tax reduction on the affordable housing subsidies, as well as a $2 tax credit for every dollar it spends on community reinvestment in the New York area.
“They’re paying about one years worth of annual revenue in fines, but they likely made much more than that by engaging in that kind of behavior. This penalty may slightly reduce unethical behavior on Wall Street, but it likely will not have a significant impact,” Aram Balagyozyan, Ph.D., a professor of economics here at The University, said.
It comes as no surprise that the government gave Goldman Sachs clemency. Many Goldman alumni obtain powerful jobs in government, and the investment bank holds an immense amount of political clout. Timothy Geithner and Henry Paulson, two former secretaries of the treasury, are Goldman alumni, as is the current head of the Minneapolis Fed, Neel Kashkari. This unscrupulous marriage between Wall Street and Washington has engendered vexation all across America. This ire seems to be manifesting itself in the form of support for anti-establishment candidates such as Bernie Sanders and Donald Trump. These candidates, especially Sanders, routinely criticize Wall Street and the oversized role financial institutions have in the world today. Goldman Sachs may only face a $5.1 billion fee today, but the penalty for this kind of behavior may be much more severe in the future as anti-Wall Street candidates continue to gather momentum.
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