[Marxism] In Settlement’s Fine Print, Goldman May Save $1 Billion

Louis Proyect lnp3 at panix.com
Tue Apr 12 07:36:52 MDT 2016


NY Times, Apr. 12 2016
In Settlement’s Fine Print, Goldman May Save $1 Billion
By NATHANIEL POPPER

State and federal officials said on Monday that Goldman Sachs would pay 
$5.1 billion to settle accusations of wrongdoing before the financial 
crisis.

But that is just on paper. Buried in the fine print are provisions that 
allow Goldman to pay hundreds of millions of dollars less — perhaps as 
much as $1 billion less — than that headline figure. And that is before 
the tax benefits of the deal are included.

The bank will be able to reduce its bill substantially through a 
combination of government incentives and tax credits. For example, the 
settlement calls for Goldman to spend $240 million on affordable 
housing. But a chart attached to the settlement explains that the bank 
will have to pay at most only 30 percent of that money to fulfill the 
deal. That is because it will receive a particularly large credit for 
each dollar it spends on affordable housing.

Goldman is the last of the major American banks to settle with the 
government. Past deals with other banks also contained some of these 
concessions, but Goldman appears to have negotiated an even sweeter deal 
on certain points. For all the banks, the credits suggest that the 
amounts that the banks will have to actually spend on consumer relief 
will be much lower than the numbers announced in the news releases.

“They appear to have grossly inflated the settlement amount for P.R. 
purposes to mislead the public, while in the fine print, enabling 
Goldman Sachs to pay 50 to 75 percent less,” said Dennis Kelleher, the 
founder of the advocacy organization Better Markets, referring to the 
government announcement. “The problem all along, with all of these 
settlements — and this one highlights it even more — is that they are 
carefully crafted more to conceal than reveal to the American public 
what really happened here — and what the so-called penalty is.”

A Justice Department official with direct knowledge of the negotiations, 
who spoke on the condition that his name not be disclosed, said that the 
banks were given extra credit for activities that the government wanted 
to encourage, like funding development of low-income housing or 
providing relief to areas hit by natural disasters. But he also said 
that the final terms were a result of a back and forth between the banks 
and government officials.

Goldman is the last of the big American banks to reach a settlement with 
the national working group that was set up in 2012 to investigate how 
Wall Street exacerbated the mortgage bubble and ensuing financial 
crisis. The group included several federal regulators and state 
attorneys general.

The final bill for Goldman is less than the settlements of mortgage 
giants like JPMorgan, which the government said was paying $13.3 
billion, but more than the $3.2 billion settlement the government 
secured with Goldman’s closest competitor, Morgan Stanley.

The special credits negotiated by the banks are laid out in annexes 
connected to each settlement.

JPMorgan Chase, for instance, earned a $1.15 credit toward its 
settlement requirements for each dollar of loan forgiveness it offered 
within the first year, according to the settlement it completed in 2013. 
Goldman, in contrast, is getting $1.50 of credit for each dollar of loan 
forgiveness within the first six months after the settlement — an 
additional incentive that JPMorgan did not receive. JPMorgan also did 
not get the 70 percent discount on money going to affordable housing.

When asked about these differences, the Justice Department official said 
that the wrongdoing that the banks were accused of was different and, as 
a result, the negotiations took different courses.

  Like other banks, Goldman bought loans issued by subprime mortgage 
specialists like Countrywide Financial. Goldman then packaged these 
loans into bonds that were able to get the highest rating from credit 
rating agencies. The loans were sold to investors, who sustained losses 
when the loans went sour.

Over the course of 2006, Goldman employees took note of the decreasing 
quality of loans that it was buying, according to a statement of fact 
released along with the settlement. When an outside analyst wrote a 
positive report about Countrywide’s stock in April 2006, the head of due 
diligence at Goldman wrote in an email: “If they only knew.”

Despite the worrying signs, Goldman did not alert investors who were 
buying the bonds it was packaging, officials said on Monday.

“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,” Stuart F. Delery, the acting associate 
attorney general, said in a statement. The bank agreed to a statement of 
facts outlining its wrongdoing.

Goldman said in a statement on Monday: “We are pleased to put these 
legacy matters behind us. Since the financial crisis, we have taken 
significant steps to strengthen our culture, reinforce our commitment to 
our clients and ensure our governance processes are robust.”

Nearly half of Goldman’s settlement — $2.4 billion — will be paid in a 
civil penalty. Most of the rest will go to provide relief to consumers 
who were hurt by the financial crisis.

Goldman will benefit from considerable concessions when it comes to 
consumer relief.

On the broadest level, any money that Goldman spends on consumer relief 
will be deductible from its corporate tax bill. If Goldman spends $2.5 
billion on consumer relief, and pays the maximum United States corporate 
tax rate of 35 percent, it could, in theory, reap $875 million in tax 
savings.

But Goldman could easily pay less than $2.5 billion in consumer relief 
because of the sections of the settlement that give it extra credit for 
certain types of activity.

For every $1 that the bank spends on affordable housing developments, 
the bank will get a $3.25 credit toward the $240 million, with the 
possibility of getting 15 percent more credit if it pays early.

Eric T. Schneiderman, the New York attorney general, announced that 
Goldman would pay $280 million for community reinvestment and 
neighborhood stabilization in New York. But an annex to the agreement 
with New York explains that Goldman will get $2 of credit for every 
dollar it spends in this area, meaning that it will ultimately have to 
pay only $140 million to meet the terms of the deal.

In sum, the details in the various annexes suggest that Goldman could 
end up paying over $1 billion less than the $5 billion than was 
announced on Monday.




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