Goldman puts mortgages and naked shorts behind it: Matt Levine

by MPA19 Jan 2016
Matt Levine

(Bloomberg View) -- Here's some good news if you have a mortgage with Goldman Sachs:

Under the terms of the agreement in principle, the firm will pay a $2.385 billion civil monetary penalty, make $875 million in cash payments and provide $1.8 billion in consumer relief. The consumer relief will be in the form of principal forgiveness for underwater homeowners and distressed borrowers; financing for construction, rehabilitation and preservation of affordable housing; and support for debt restructuring, foreclosure prevention and housing quality improvement programs, as well as land banks.

That agreement in principle will "resolve claims from authorities including the Department of Justice and New York and Illinois attorneys general for the bank’s securitization, underwriting and sale of bonds from 2005 to 2007," and is the latest in a series of gigantic settlements between the government's mortgage task force and the big banks. As with the other settlements, a big chunk of this one consists of consumer relief: Because the banks' mortgage misdeeds hurt homeowners, the banks have to help homeowners to balance out the scales.

But of course you don't have a mortgage with Goldman Sachs. When Countrywide and Washington Mutual and other banks were churning out mortgages to feed the great securitization pipeline, Goldman ... wasn't. You couldn't walk into a Goldman Sachs branch and get a no-money-down stated-income mortgage. Goldman was, and is, an investment bank. Consumer mortgage lending has never really been its core business. It doesdo some mortgage lending -- to its wealthy Private Bank customers -- but I suspect that very little of that is subprime, and that very few of those customers are in much distress. And it did have a mortgage servicing business, Litton Loan Servicing, but it sold that to Ocwen Financial Corporation in 2011, and Ocwen has already had to provide $2 billion of consumer relief, in part for past misdeeds at Litton.

For the most part, though, Goldman's mortgage misdeeds came further down the mortgage-securitization pipeline: It didn't make bad loans to people, but just bought those bad loans from other lenders, packaged them into bad securities, misrepresented the badness of those securities, and sold them to investors who lost money on them. You are not supposed to do that, and Goldman has been fined before for doing that, and now it will be fined again for doing that. Obviously you are not supposed to lie about the securities that you sell to investors, and society has judged that Goldman did, and so now it must pay.

But it is a bit odd that it now has to pay, not the investors (whom it is accused of defrauding), but rather the homeowners (whom it didn't). This oddity existed even for the full-stack mortgage-fraud banks, like Bank of America/Countrywide or JPMorgan/Washington Mutual: JPMorgan's big Justice Department settlement, for instance, was for violations "in connection with the packaging, marketing, sale and issuance of" residential mortgage-backed securities, not for defrauding homeowners, but it nonetheless included $4 billion of consumer relief. There, though, you could at least point to bad stuff that Countrywide or WaMu did in their actual interactions with homeowners, and sort of hand-wavily argue that the settlement was rough justice for those homeowners. Goldman never even had interactions with homeowners.

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