Goldman Sachs Will Pay $5B to Settle Financial-Crisis Claims

http://www.npr.org/sections/thetwo-way/2016/01/14/463107541/goldman-sachs-will-pay-5-billion-to-settle-financial-crisis-claims

by mashgin • 11 years ago

114 113 11 years ago

npr.org

sitkack• 11 years ago

Not enough. 500B would be more accurate.

littletimmy• 11 years ago

Can someone express this as a percentage of the claims themselves? The $5B figure is meaningless without knowing the size of Goldman's loot.

jsprogrammer• 11 years ago

Let's just go through the docs and bring it all out.

"We are pleased to have reached an agreement in principle to resolve these matters," said Lloyd C. Blankfein...

All you really need to know.

username223• 11 years ago

For context, that's about 3 months' profits. Not nothing, but not much compared to the damage they caused.

samfisher83• 11 years ago

They made 8 bil in 2014 fiscal year. That's 5/8 of their profit. It might not make up for what they did, but its a big fine.

tamana2• 11 years ago

Unless punishment sets you to negative net profit, it is not a punishment

mkhalil• 11 years ago

How about this:

"Two Goldman traders, Michael Swenson and Josh Birnbaum, are credited with being responsible for the firm's large profits during the crisis.[18][19] 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."[1]

Two tradesmen made this in less than one year. I wouldn't be surprised if it's an order of magnitude less that the whole firm made through the whole period of the crisis.

[1] https://en.wikipedia.org/wiki/Goldman_Sachs#Actions_in_the_2...

rtpg• 11 years ago

But not all the profits are gained illegally (a priori). Of course you want the punishment to fit the crime, so you qualify how much money they made off of the crime itself and charge an order of magnitude more than that.

Convict them of 4 similar crimes and you wipe out a year's profit! I don't think GS takes a 25% drop in profits lightly.

Now in this case it sounds like they caused a lot of damage for what they did.

rl3• 11 years ago

While this isn't trivial as far as settlement dollar figures are concerned, I can't help but think it represents a small fraction of Goldman's ill-gotten gains.

They've had eight years to literally make bank on the proceeds.

ksar2• 11 years ago

As a quick refresher, these guys sold CDOs that they knew weren't priced correctly, obfuscated the mispricing, and then profited on short positions against the securities. Took 7 years to settle for being straight up crooks. Still the Wild West out there.

tim3332• 11 years ago

There should really be some way to punish the individuals responsible, even just a fine comparable to the bonuses they made, rather than just having their employer pay compensation while those responsible continue to get richer.

oceanstone2• 11 years ago

Is there a definitive list somewhere? If there was, a boycott could be organized.

forgetsusername7• 11 years ago

There should really be some way to punish the individuals responsible

Honest question: do reasonable really look at the The Great Recession and think that there are "individuals" wholly responsible for what happened?

appleflaxen• 11 years ago

comparable to the bonuses they made

I realize this might be what you are saying already, but to be clear: tt should be /multiples/ of the bonuses they made, if you want to discourage this kind of behavior.

VeilEm• 11 years ago

that they knew weren't priced correctly

Things are priced at what they will sell for. It's more that they were hiding information about the risk (which of course would have drastically lowered the value and the price people would be willing to pay). I think the difference is significant, however.

jynnantonnyx• 11 years ago

I have a box for sale labeled AAA. Price $5. Guaranteed to contain $6. Email me for details.

deciplex3• 11 years ago

Can you expand on the significance of this difference? I guess you're asserting that the "correct price" is the one that someone will pay for it, and that something is only "incorrectly priced" if no one will buy it. But the point is precisely that no one would have bought these goods for the indicated price had GS not obfuscated what they were selling in the first place. It seems to me that you're really splitting hairs.

nl5• 11 years ago

They were hiding the risk, both from the purchases and the ratings agencies.

BUT - and this is pretty important - the ratings agencies were negligent in their rating methodology. Intelligent buyers could see the problems.

The book The Big Short covers this in some detail.

javajosh• 11 years ago

The remarkable thing is that people still do business with Goldman. Why didn't the CDO debacle undermine people's trust in that firm? Isn't this a complete failure of the market?

ksar2• 11 years ago

Partly because this wasn't Goldman specific behaviour. Those participating were systemically important financial institutions. In 2008, credit markets/money markets completely froze up and banks wouldn't lend to one another, precisely because trust had been eroded. No one had a clear view on the extent to which financial counterparties were exposed.

rhino369• 11 years ago

The problem is that depending on banks roles, they are supposed to be trustworthy or not. In arms length negotiations, the banks aren't even supposed to have your interests at stake. But if they are managing your money, they are supposed to have a fiduciary duty to you.

Brokers don't owe you shit other than not lying to or defrauding you. But people don't realize this. Brokers are salesmen, pure and simple.

Worse, now brokers often have bullshit titles that hide their nature. For example, financial advisers sound like someone who has a fiduciary duty to you, but really they are just brokers. Trying to sell you on investments.

You should treat anyone who doesn't have an explicit fiduciary duty to you as you would a car salesman.

marklgr• 11 years ago

Still the Wild West out there.

Strangely enough, it is both a kind of freedom ideal to some, and an unfair, immoral and violent dog-eat-dog society for other.

forgetsusername7• 11 years ago

As a quick refresher

Maybe this topic isn't fit for "quick" refreshers. Some problems are more nuanced and complex.

these guys sold CDOs that they knew weren't priced correctly, obfuscated the mispricing

What does that even mean?

then profited on short positions against the securities.

What is the crime?

jrcii• 11 years ago

I guess I'm cynical but I'm worried that Goldman's takeaway here is to make the financial products, transactions, and their position more complex/opaque in the future.

kartan• 11 years ago

That's not being cynical. When a fine is less than your profits for breaking the law you are into a sound business model.

Suppose that when you caught a thief the sentence were to return 60% of whatever he has stolen, nothing else. The result is quite obvious. Even if it where 100%, it will still be a good business as you will get away with all the money when you are not caught.

Lloyd said it quite clear "We are pleased to have reached an agreement in principle to resolve these matters,". Of course they are pleased! We are not.

e12e2• 11 years ago

So a quick google search turned up this:

"Overall, Goldman Sachs received a $12.9 billion payout from the government's bailout of AIG, which was at one time the world's largest insurance company." [1]

Now, these might be related, but [not] identical - or indeed not connected - but on the face of it it seems rather outrageous... perhaps someone who's a bit more up on the details can comment?

[1] http://usatoday30.usatoday.com/money/industries/banking/2010...

melling• 11 years ago

When the government bailed out AIG, everyone who was owed money by AIG got paid. Is there more to the story?

We seem to revisit the crisis on HN. Someone should do a write up. We seem to rehash a lot of this. Basically , history just repeating itself. TARP, for example, being a loan:

https://en.m.wikipedia.org/wiki/Troubled_Asset_Relief_Progra...

e12e2• 11 years ago

From the USA Today article above, along with this story here, it would seem that government bailed out AIG, which benefited Goldman and a lot of financial institutions that really should have been in a position to "know better", and be prepared to take the loss themselves, while Goldman will happily make sure small home-owners go bankrupt. Or put another way, government pays Goldman 12 Billion for not knowing their business, and Goldman grudgingly passes on 2 billion in consumer relief.

That's a pretty sweet deal for Goldman?

Does remind me to keep "Swimming With Sharks" on my reading list:

http://www.amazon.com/Swimming-Sharks-Journey-World-Bankers-...

(I assume the Book has more along the lines of what's in this interview/promo-piece):

http://www.theguardian.com/business/2015/sep/30/how-the-bank...

Laaw5• 11 years ago

I mean, we gave them loans, not free money, right? The American people profited in a literal sense on the bailout.

pak5• 11 years ago

Sure, it was a loan--that no other financial institution could have dared to make, thereby making the expected interest rate on the open market for such a loan much higher than whatever accounting tricks are used today to determine that the government turned a "profit." Furthermore, the loans involved the government purchasing financial instruments that were basically impossible to value fairly [1], because much of it was junk at the time, and so the Treasury probably overpaid for them [2]. Finally, as far as using the money for long-lasting economic change, the loans were given with basically no strings attached, so banks that "qualified" for TARP (does anybody seriously believe that the Treasury selected participants in a neutral, transparent manner?) could use the money to swallow up smaller institutions for a bargain [3], basically subsidizing more of the bad behavior that led to the collapse in the first place.

[1] http://web.archive.org/web/20090110184334/http://www.uiowa.e...

[2] http://web.archive.org/web/20090207100935/http://cop.senate....

[3] http://www.nytimes.com/2009/01/18/business/18bank.html

hueving• 11 years ago

whatever accounting tricks are used today to determine that the government turned a "profit."

The government got back more money than it loaned out? Does that qualify as an accounting trick now?

cookiecaper2• 11 years ago

The firm said it will pay a civil monetary penalty of $2.385 billion, a cash payment of $875 million and $1.8 billion in consumer relief

Where is that $3.26 billion of cash going? I know you're going to say the SEC, the DOJ, or some other [combinations of] government entity. I get that. But then where does it go? It seems that people often forget that when this happens, there's still a human that sees a $3.26 billion uptick in the amount of money he controls (though it's possibly divided between branches/depts).

What does that guy do with it? Build a (few dozen) new office building(s)? Hire 10k more employees for the agency that employs him (only 50 of which are his family and friends collecting 250% of their market rate)? Does he keep it in a bank account and collect interest on it? Send it into a black hole somewhere in the Treasury so that it can help pay off "the national debt"? Spend it on contractors? Bonuses for himself and the other people who helped "take the bad guys down"? Motorboats? Yachts?

People act like it's just an inherent truth that fined money is better off on a bureaucrat's desk than a banker's. Is that really real life?

deciplex3• 11 years ago

Do you have a better idea? It sounds like you're trying to make a "taxes are theft" argument against fines for committing theft which is pretty hard to take seriously.

cookiecaper2• 11 years ago

Do you have a better idea?

I think almost any idea is a better idea than that.

It sounds like you're trying to make a "taxes are theft" argument against fines for committing theft which is pretty hard to take seriously.

I'm not making an argument that taxes are theft. I'm really just trying to illustrate that while there may not be an institutional profit motive for governmental bureaus, there is a personal and/or professional profit motive for whoever gets to spend that money. A lot of young people seem to think that it's always better to have the government providing a service because "they care about more than just profit" or something similar.

Moving the money between a third-party contractor that provides a service bought by the government into the actual government itself doesn't necessarily mean anything good is going to happen. You don't have to look very far, either into the past or into the map, to see that; in many countries, the absolute richest people are politicians and bureaucrats.

It's a lot easier to fire a contractor that does a bad job than it is to replace a government bureau that does a bad job. I think it's important to convey that bureaucrats can and sometimes do still get a large amount of money, and that can affect their motives and decisions just as easily as it can for anyone else. These positions deserve scrutiny and oversight too. The people running the private sector are not that different from the people running public services.

edelans2• 11 years ago

IMHO a reasonable use of this money should be to be spent to fix the problems that lead to this crisis.

suprgeek• 11 years ago

So the company that was one of lead bad actors in a global crisis that wiped out lots of little folks gets -

No execs (or anybody else) go to Jail

Continues to do business as usual

Pays a small fraction of its profits in fines (but gets to keep the multi-billions of tax-payer money under various govt. programs)

Admits to no wrong doing

Basically a speeding-ticket that gets dismissed when you pony up the cash after being caught drunk driving with dead body stuck on your fender.

tn132• 11 years ago

And interestingly almost all politicians of all hue and color and with capacity to do something seem to be siding with them.

oceanstone2• 11 years ago

Bernie Sanders wants to break up the banks that took bailout money, creating smaller banks that are no longer "too big to fail." What are people's thoughts on this proposal?

x5n1• 11 years ago

The fair and free market with level or shall I say leveled playing fields everybody.

jevgeni4• 11 years ago

Could you elaborate on the multi-billion gov't subsidies to GS?

Ntrails• 11 years ago

"Oh Shit. Banks are in trouble. Lets offer them emergency capital so they can make it through the year.

GS uses the capital to buy government bonds with governments own money to make literally riskless profit."

I have zero sources for this, so if I'm wrong please say

gadders2• 11 years ago

What about the government people that encouraged "Ninja" loans to people who couldn't afford to repay them?

wavefunction2• 11 years ago

Nobody forced anyone to make any loans, and I will note that the folks working in the finance industry are supposed to be finance professionals well-versed in risk assessment and a strong inclination to make smart investments. Or they're supposed to be.

forgetsusername7• 11 years ago

Basically a speeding-ticket that gets dismissed when you pony up the cash after being caught drunk driving with dead body stuck on your fender.

If only they would have put you on the case instead of Federal investigators, I'm sure all of these alleged crimes would have been proven to a legal standard, I suppose?

Business as usual? The banking sector has shed hundreds of thousands of jobs, paid billions in fines, faces increased scrutiny and the executives have been pilloried without crimes being proven.

I wish I could go back in time to 2001 when Hacker News was calling for the heads of VC firms and tech-stock CEOs for perpetuating a fraud on the people and causing a financial crash. But that didn't really happen; instead many people when to work for them.

saiya-jin2• 11 years ago

1) government encourages by all means available to them (=plenty) cheap, affordable loans to everybody, reasonable or not.

2) banks jump on the wagon, just as any other business would do having similar chance in their field

3) plenty of folks are plain math-stupid, lending as much as they can and trying even more for outright stupid reasons (ie TV, cars etc.) on top of other loans they already have, usually for housing

4) SHTF, since economy is never stable and we have cycles and whatnot

5) blame the banks, who cares about Clinton's administration allowing and pushing for this in first place. easy part.

the topic is of course more complex, ie derivative trading is/was in some cases pure evil, but that's another topic.

Btw, correct me if I am wrong, but wasn't the money just lended and now it's (being) paid back, maybe even with interest?

RobertoG2• 11 years ago

I don't get it.

How government encouraging something free a business of their responsibility of lending money following good business practices?

How is derivatives another topic? Is not this the real problem?

The money could be paid back, but, as in any investment we should take into account the opportunity cost of that investment. Instead of helping people they are saving banks. Is not there a very strong moral hazard?

Instead of saving big private entities because their fall would crash the world, what if we follow the fashion and start implementing micro-services?

rayiner2• 11 years ago

My dad was heavily invested in NASDAQ-listed stocks and lost half his 401k in the 2000 crash. Who on Sand Hill Road should be in prison right now?

will_brown• 11 years ago

I think most investors w defrauded by Goldman would believe "mid level" individuals like Fabrice Tourre. He was convicted of fraud by the SEC, for selling toxic mortgages to clients that he and a major fund were secretly betting against, costing his clients $1B in loses.

It's quite tacky to name individuals who "should be in prison" without the benefit of all the facts that Gov investigators have. But it's safe to say if a "mid level" guy like Tourre was found guilty, that he was just an actor (w/knowledge) but there must be others more responsible for the fraud.

duncanawoods• 11 years ago

The 2000 IPO process was pretty much a pump and dump for both the VCs and IBs. There were legal consequences for bad investment advice and misuse of shareholder money.

According to wikipedia, Citi and Merrill were both fined for this. I don't know who was held legally accountable for misusing shareholder money but there was the worldcom fraud which ended in jail sentences.

Zigurd• 11 years ago

Everyone on Wall Street who wrote insurance-like contacts without insurance-like capital to back thenmshould be prosecuted for selling insurance outside the appropriate regulatory framework.

jetskindo• 11 years ago

So they are paying back some of the bail out money. Not exactly a fine, and the individuals responsible are not affected.

ttctciyf• 11 years ago

Relevant wikipedia link: https://en.wikipedia.org/wiki/Regulatory_capture

Edit to add:

For a specific Goldman Sachs context, see for example: http://www.theguardian.com/business/2014/sep/26/us-regulator...

Maybe there's some reason I missed that this didn't make a bigger or longer-lasting splash.

qaq• 11 years ago

OK this would not be popular opinion here, but it's a problem of people that bought those products and not GS. They went to same biz schools and were paid millions to run their funds. It's their job to do due diligence on the deals they make with GS or any other counterparty.

gadders2• 11 years ago

It used to be in the 90's/2000's in the UK that all was fair in love and war between banks - they are the big boys and are supposed to know what they are doing.

If you rip off "widows and orphans" though you will get punished severely.

yodsanklai• 11 years ago

I'd be curious to hear GS employees points of view. We often get "insiders" comments here on HN, but not so much on this topic.

edelans2• 11 years ago

Am I the only one finding it odd that the company who has triggered a global financial crisis is paying a fine to the US ???? The damage spread far outside US borders ! I would rather see this fine paid to a global organisazion, like the IMF (https://www.imf.org/external/np/exr/facts/finfac.htm).

Lazare4• 11 years ago

the company who has triggered a global financial crisis

I'm hardly a defender of Goldman, but that's a bizarre characterization.

What do you think Goldman did to cause RBS's failures, exactly?

nl5• 11 years ago

RBS bought subprime mortgage backed securities - the same ones that were (mostly) created by Goldman[1].

RBS (along with most buyers) didn't realize that the AAA-rated securities they bought were actually subprime-backed (because of completely stupid rules by the ratings agencies, which Goldman exploited)

When people suddenly discovered what a disaster these were, RBS wrote down £5.9bn, and was forced to seek additional capital[2].

RBS was responsible for heir own fate of course. But Goldman sure made money out of it.

[1] http://www.telegraph.co.uk/finance/recession/5025115/RBS-tra...

[2] http://news.bbc.co.uk/2/hi/business/7096845.stm

chrisbennet• 11 years ago

Suppose I buy something(1) and collude with an appraiser(2) to value it much higher than its actual worth and then get it insured (3). Now suppose the market discovers the true value of that it and massively devalues it. Consequently, I collect on the insurance.

Why isn't this insurance fraud?

(1) home loans (2) rating agencies like Moodies (3) AIG

AmirS2• 11 years ago

The $1.8 billion in consumer relief is not actually a penalty, since most of it is money that has already been lost, and is only being recognised now under the pretence of it being a penalty.

"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."

The principal forgiveness had to happen anyway in the normal course of business, one way or another. If underwater homeowners and distressed borrowers owe you a billion dollars, that does not mean that those mortgages and loans are worth a billion dollars in reality. At best you can realistically hope to eventually be repaid 60% of that (to pick an arbitrary number), given that these are distressed borrowers we're talking about. So writing down those assets in your books to e.g. $600 million dollars does NOT constitute a penalty or consumer relief of $400 million, since your assets were not really worth a billion to begin with and probably haven't been for years.

Same for the rest of the "relief", for example foreclosure prevention is almost always a net positive for the lender. Finding a way for the owner to stay in the house, look after it, and keep repaying whatever they can afford, will usually recoup more money for the bank than a distressed sale at auction (how foreclosed properties are usually sold).

Principal relief for homeowners who are above water and up to date with mortgage payments, now that would be an actual penalty

rdlecler1• 11 years ago

Not to mention, low interest rates gave banks 7 years to bolster their balance sheets. They have as much money as ever. It's really hard to see how Goldman gets penalized for this under that regime: "We're going to help you make tens of billions to recover and then we're going to charge you $5B for damages. I hope you've learned your lesson."

pasbesoin• 11 years ago

Financial penalties/settlements: The modern world's indulgences.

I expect a similar amount of change in the underlying behavior.

Goldman Sachs Will Pay $5B to Settle Financial-Crisis Claims

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