The investment bank has reached separate agreements with the RMBS Working Group and the SEC that will jolt the firm’s bottom line.
The Goldman Sachs Group will be writing a lot of checks during 2016 as it has agreed to separate settlements with the SEC and the Residential Mortgage-Backed Securities Working Group of the U.S. Financial Fraud Enforcement Task Force (RMBS Working Group) that will likely total approximately $5.2 billion, and will impact the firm’s bottom line.
The agreement in principle with the RMBS Working Group is intended to resolve “actual and potential civil claims by the U.S. Department of Justice, the New York and Illinois Attorneys General, the National Credit Union Administration (as conservator for several failed credit unions) and the Federal Home Loan Banks of Chicago and Seattle,” according to a release from Goldman Sachs. The legal action is related to the firm’s securitization, underwriting and sale of residential mortgage-backed securities from 2005 to 2007.
The ill-fated securities were the keystone to the Great Recession that stretched from late 2007 to early 2009.
Goldman Sachs officials say the working group agreement “in principle will reduce earnings for the fourth quarter of 2015 by approximately $1.5 billion on an after-tax basis.”
The terms of the agreement in principle, which needs to be finalized, will require the firm to:
- 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,” according to Goldman Sachs.
In a prepared statement, Lloyd C. Blankfein, chairman and CEO of Goldman Sachs, said: “We are pleased to have reached an agreement in principle to resolve these matters.”
Officials at the firm say the agreement is subject to the negotiation of “definitive documentation, and there can be no assurance that the firm, the U.S. Department of Justice and the other applicable governmental authorities will agree on the definitive documentation.”
In the $15 million settlement with SEC officials, the case is related to charges that the investment bank’s securities lending practices violated federal regulations.
“According to the SEC’s order instituting a settled administrative proceeding, broker-dealers such as Goldman Sachs are regularly asked by customers to locate stock for short selling,” according to the regulator’s announcement. “Granting a ‘locate’ represents that a firm has borrowed, arranged to borrow, or reasonably believes it could borrow the security to settle the short sale.”
The SEC alleges that Goldman Sachs has violated Regulation SHO by “improperly providing locates to customers where it had not performed an adequate review of the securities to be located,” SEC officials say. “Such locates were inaccurately recorded in the firm’s locate log that must reflect the basis upon which Goldman Sachs has given out locates.”
The requirement that firms locate securities “before effecting short sales is an important safeguard against illegal short selling,” said Andrew J. Ceresney, director of the SEC’s Enforcement Division in a prepared statement. “Goldman Sachs failed to meet its obligations by allowing customers to engage in short selling without determining whether the securities could reasonably be borrowed at settlement.”
In addition, when SEC examiners questioned the firm’s securities lending practices “during an examination in 2013, Goldman Sachs provided incomplete and unclear responses that adversely affected and unnecessarily prolonged the examination,” according to the SEC.
SEC officials say further that Goldman Sachs employees “who were members of the firm’s Securities Lending Demand Team routinely processed customer locate requests by relying on a function of the Goldman Sachs order management system known as ‘fill from autolocate,’ which was accessed via the ‘F3’ key,” according to SEC officials.
“This function enabled employees to cause the system to grant locate requests based on the amount of reliable start-of-day inventory reported to Goldman Sachs by large financial institutions, even though its automated system had already deemed this inventory to be depleted based on locate requests processed earlier in the day,” according to SEC officials.
The SEC’s order alleges that Goldman Sachs employees “used this function to grant locate requests, they relied on their general belief that the automated model was conservative and the granting of additional locates would not result in failures to deliver when the securities became due for settlement,” according to the SEC. “In doing so, the Goldman Sachs employees did not check alternative sources of inventory or perform an adequate review of the securities to be located.”
The SEC also charges that Goldman Sachs’s “documentation of its compliance with Regulation SHO was inaccurate as it failed to sufficiently differentiate between the locates filled by its automated model and those filled by the Demand Team using the ‘fill from autolocate’ function,” SEC officials say.
“In both cases, the locate log simply mentioned the term ‘autolocate’ to refer to the start-of-day inventory utilized by the firm’s automated model as the source of securities underlying the grant of a locate,” according to the SEC.
In response to the SEC’s actions, a Goldman Sachs spokesman says, “We’re pleased to have concluded this matter.”
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