Goldman Sachs Plans Its Escape From Fraud Charges

When Goldman Sachs objected to Bank of America's proposed $8.5 billion settlement with investors (including Goldman Sachs subsidiaries!) because it claimed it lacked information, it seemed rather puzzling. Surely Goldman Sachs would jump at a chance to get rid of its MBS liabilities and fraudulent behavior in packaging up sub-prime mortgages, having them highly rated and then selling them to unwary investors before they turned to junk but not before GS earned huge fees and won big hedging bets as the mortgage market failed.

Well, Goldman Sachs is no slouch!

GS has negotiated its own way out of being accused of criminal and fraudulent behavior: it has negotiated its own little deal with a New York regulator, Benjamin M. Lawsky.

The background story about Litton Servicing has been dealt with on our blog here, here and here.

Which is more corrupting--having Goldman Sachs make a settlement deal with lots of promises to be good or having a regulator letting Goldman Sachs off the hook for fraudulent practices? Take your pick: it's both those things.

This action is not "cleaning up some of its most controversial practices." Nothing is clean here; instead, it is very dirty, filthy and foul.

Settling with Goldman Sachs is papering over fraud committed by Goldman Sachs and adds to the corruption of justice in the United States. Shame!

Rating junk as AAA is fraudulent.

Creating securities that you know will fail is fraudulent.

Not underwriting your own securities is fraudulent behavior.

Not fully disclosing information on an investment is fraudulent.

Breaking mortgage contracts is fraudulent.

Robo-signing is fraudulent.

Paying for protection from prosecution is fraudulent.

Obtaining great wealth using fraudulent means is corrupt.


Asking for a fine and a few promises rather than prosecuting for fraud is corrupt.

Banks, State Reach a Deal
By Liz Rappaport - The Wall Street Journal

The mortgage industry will take a step toward cleaning up some of its most controversial practices under a deal between a New York regulator and three financial firms, including Goldman Sachs Group Inc.

Under the agreement with the state's financial-services superintendent, Benjamin M. Lawsky, the three firms—Goldman, its Litton Loan Servicing business and Ocwen Financial Corp.—promised to end so-called robo-signing, in which bank employees signed foreclosure documents without reviewing case files as required by law. They also agreed to comb through loan files for evidence they mishandled borrowers' paperwork and to cut mortgage payments for some New York homeowners.

The settlement most affects mortgage servicers, the companies that collect monthly house payments from homeowners and pass them on to investors and lenders. They also work with troubled borrowers to restructure their debts, and they process foreclosures.

The agreement, expected to be announced Thursday, could provide a blueprint for other regulators as they pursue settlements with the largest U.S. banks over allegations they failed to properly handle home loans, according to people familiar with the matter.

Mr. Lawsky, the top banking regulator in New York state, may seek similar concessions from other banks or mortgage firms he regulates, according to a person familiar with his thinking. Because he oversees firms that account for nearly two-thirds of mortgage-servicing activity nationwide, the agreement is likely to have far-reaching effects on the industry.

The settlement stems from practices that predated the financial crisis. Banks and other financial firms lent freely during the housing bubble to borrowers with weak credit histories. When the economy slid into recession and house prices began falling, the mortgage servicers faced a sharp rise in late payments and defaults that overwhelmed their back offices.

In the past year, they have come under fire for their handling of mortgage documents. The courts have become clogged with cases in which investors and borrowers accuse the servicers of failing to uphold their contractual obligations.

Meanwhile, financial institutions have become saddled with hundreds of thousands of foreclosed properties at a time when a weak housing market is undermining an anemic economic recovery.

Lenders around the nation are facing inquiries from regulators over alleged improper mortgage procedures, and the five biggest mortgage banks—Bank of America Corp., J.P. Morgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc.—are discussing a settlement with state attorneys general that could see them pay billions of dollars in exchange for protection from future legal action, according to regulators and investors.

The reforms imposed by Mr. Lawsky were a condition to New York-based Goldman's sale of its Litton business to Ocwen, which is expected to close Thursday, said the people familiar with the matter. Litton collects mortgage payments from subprime borrowers and distributes them to lenders and mortgage-bond investors.

As another condition of the deal, Goldman has agreed to slice 25% off the principal of 143 New York mortgage loans. In each case, the borrower hadn't made a payment for at least 60 days as of Aug. 1, said the people familiar with the discussions. That amounts to a reduction of $13 million to Goldman's total $52 million in New York state mortgage loans.

The merger would make Ocwen the 12th-largest mortgage servicer in the U.S., with about 700,000 loans, said people familiar with the deal. After the merger, Ocwen will service loans with an unpaid principal balance of $109 billion, according to Inside Mortgage Finance.

Spokesmen for Ocwen and Goldman declined to comment. A spokesman for the New York Department of Financial Services also declined to comment.

Mr. Lawsky expressed concerns about the Litton-Ocwen merger when Goldman agreed in June to sell Litton, said people briefed on the matter. While Goldman had already been working on changing some of Litton's mortgage-servicing practices, Mr. Lawsky wanted to change the mortgage business so that practices such as robo-signing were effectively ended.

Goldman bought Litton, a major servicer of subprime loans, in 2007 as house prices were tanking in a bid to gather data on the mortgage market and build a subprime portfolio. Goldman at that time was making bearish bets on the mortgage market and creating securities for investors who wanted to make bearish bets. But the market downturn meant the subprime business never turned into the profit center Goldman expected, and the firm decided last year to try to sell Litton.

Goldman said in June it would sell Litton to the West Palm Beach, Fla.-based Ocwen for $264 million, far less than the $428 million Goldman spent to buy the company in 2007.

Both Litton and Ocwen have been under investigation by several regulatory bodies.

This summer, the Federal Reserve Bank of New York said it was investigating claims Litton denied borrowers the chance to modify their loans under a government program without reviewing their accounts. Litton is the 23rd-largest mortgage servicer, according to Inside Mortgage Finance, a trade publication. Goldman's mortgage servicer has said it has improved its practices in processing mortgage-loan documents since last fall.

The Federal Trade Commission is investigating how Ocwen trains employees, collects debts and modifies loans, as well. Ocwen has said in securities filings that it is cooperating with the investigation and that the FTC's request for information didn't make accusations of wrongdoing. The Treasury Department also cited Ocwen in a review of mortgage-servicing practices earlier this year as needing to improve its loan processing.

Read the article here