Updated Jan. 14, 2016 7:12 p.m. ET
Group Inc. agreed to the largest regulatory penalty in its history, resolving U.S. and state claims stemming from the Wall Street firm’s sale of mortgage bonds heading into the financial crisis.
In settling with the Justice Department and a collection of other state and federal entities for more than $5 billion, Goldman will join a list of other big banks in moving past one of the biggest, and most costly, legal headaches of the crisis era.
Goldman said litigation legal expenses stemming from the accord would trim its fourth-quarter earnings by about $1.5 billion, after taxes. The firm is scheduled to report results Wednesday.
“We are pleased to have reached an agreement in principle to resolve these matters,” Lloyd Blankfein, Goldman’s chief executive, said in a statement.
Government officials previously won multibillion-dollar settlements from J.P. Morgan Chase
& Co., Bank of America Corp.
and Citigroup Inc.
The probes examined how Wall Street sold bonds tied to residential mortgages, and whether banks deceived investors by misrepresenting the quality of underlying loans.
The government’s inquiry into Goldman related to mortgage-backed securities the firm packaged and sold between 2005 and 2007, the years when the housing market was soaring and investor demand for related bonds was still strong.
The same market later served as ground zero to the worst financial crisis in decades, tipping the economy into recession. In its wake, governments pushed through a spate of new regulations—and pursued legal actions against many of the banks and securities firms later blamed for deepening the slide.
A working group of federal and state agencies, led by the Justice Department, came together in 2012 after public criticism that the government hadn’t done enough to hold Wall Street accountable for alleged misdeeds that contributed to the financial crisis.
Crisis-related settlements by banks, mortgage firms, brokerages and others total at least $181.1 billion, according to an analysis done this month by Jeff Nielsen, a managing director at Navigant, a litigation consulting firm.
The latest accord is one of several penalties Goldman has paid in relation to the crisis. Goldman settled with the Federal Housing Finance Agency in 2014, agreeing to pay the regulator $1.2 billion in penalties to resolve claims it failed to disclose the risks on mortgage bonds it sold. In 2010, the firm resolved a Securities and Exchange Commission complaint stemming from its handling of a complex mortgage-linked deal by paying $550 million.
Last February, Morgan Stanley
said it had reached a preliminary accord with the Justice Department. The pact, in which the firm agreed to pay $2.6 billion, didn’t cover probes by state litigators.
That month, Goldman said in a regulatory filing that it had been informed by U.S. officials in December 2014 that it might face a civil lawsuit stemming from the government’s mortgage-bond probe. In May, the firm said it was in talks with U.S. and state authorities to resolve those claims.
In the settlement, the New York firm agreed to pay to the Justice Department a $2.385 billion civil monetary penalty. Other state and federal entities will divvy up a $875 million cash payment. Goldman will also provide $1.8 billion in consumer relief through debt forgiveness to borrowers, the construction and financing of affordable housing, and other programs.
Earlier Thursday in a separate case, Goldman agreed to pay $15 million to settle allegations that its securities lending violated federal regulations, the Securities and Exchange Commission said. Specifically, the SEC accused the broker-dealer of failing to adequately secure the stock needed to administer a short-selling trade.
—Aruna Viswanatha contributed to this article.
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