The investment bank Goldman Sachs has agreed to pay a $5.1 billion settlement in their case with the United States Justice Department.
Goldman Sachs was accused of selling bad mortgage packages to investors, which was one of the main factors in helping to create the housing bubble that popped during the 2008 financial crisis. CBS News reported the Justice Department as saying that Goldman Sachs had admitted to making “false and misleading representations to prospective investors.”
This makes Goldman Sachs the last of the large companies who are thought to have participated in the financial crisis to be brought up on charges, reported the New York Times.
The Washington Post reported Benjamin C. Mozer as saying, “Today’s settlement is another example of the department’s resolve to hold accountable those whose illegal conduct resulted in the financial crisis of 2008.” Mozer is the head of the Justice Department’s civil division.
The fact of the matter is that when you go to get a loan, that loan will most likely not stay with who you got it from. Many times, the bank will sell your loan to an investment bank — otherwise known as selling to the secondary market — as a security, because the bank wants to keep the money moving while the individuals working there want the commission that your loan gives them.
This practice can lead to some bad loans being given out, because once the bank has made its money back from selling your loan to the investment bank, it’s no longer their problem as to whether you can pay it back or not.
These investment banks, like Goldman Sachs or J.P. Morgan Chase, then categorize the loans they’ve purchased into something known as a CMO, or “collateralized mortgage obligation.”
A CMO “tranche” is then implemented as a way of categorizing the risk factor of each of the individual loans within the CMO. This tranche usually consists of around three categories: high risk, low risk, and anywhere between. In order to figure out where a loan should be placed, the individual whose name is linked to the loan usually has their credit rating researched.
Here’s where it gets interesting, though, because investment banks like Goldman Sachs then want to make sure that there’s a profit coming their way whether their investment turns out to be a bad or a good one.
Usually, the best way to make sure that you hold onto profit if something goes wrong is to insure whatever the thing of value happens to be. Goldman Sachs, as well as many other investment banks, decided to do this with their CMO’s.
One of the biggest insurance companies involved was AIG, which many of you probably remember because after the financial crisis, the company had to accept $85 billion in bailout money from the government.
The initial reason for this bailout was because Goldman Sachs and many other investment banks had started to see their investments failing, and there wasn’t just a leak in the bag, the bag had been torn wide open. Everyone then came to the insurance companies to collect at once, and there simply wasn’t enough money to throw at the banks to pay back what was owed to them.
While many companies like Goldman Sachs have been charged, there are still no individual bankers at these Fortune 500 companies who have been held personally accountable, and it’s looking like there probably won’t be.
As the days go on we can only hope that the Bloomberg report in which Michael DuVally — who is a spokesperson for Goldman Sachs — says, “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,” turns out to be true.
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