Goldman's $60 Million Settlement - Why Is Goldman Getting the Blame?

| About: Goldman Sachs (GS)

I saw this article Monday from CBSMarketwatch detailing a $60 Million settlement reached between Goldman Sachs (NYSE:GS) and the Mass. Attorney General to account for Goldman's role in the securitization of subprime mortgage loans and found myself wondering...why?

I understand the anger on the street over the current economic malaise. You can't avoid reading about it, hearing about it, living it. People are angry that their home values have declined, their 401Ks have become 201Ks and now, people are losing their jobs in pretty large numbers. There's plenty of blame to go around, but to date, the only blame I really see being assigned is to the usual suspects - large, multinational, easily-vilified "rich" Wall Street firms. It's evident this process is more political than it is fair, ethical or practical.

I have yet to read about a single prosecution for falsification of loan documents by loan officers, mortgage outfit leadership or individual homeowners. In fact, the administration has decided to throw more money at the same cast of characters that blatantly lied about income, and knew this house of cards wasn't sustainable and would eventually crumble - while they collected never before seen bonuses and income based on insane loan volume.

Let's take a look at the settlement in a little more detail:

Goldman will pay $50 million to Massachusetts homeowners who will be able to modify their mortgages to help them stay in their homes.

  • So, yes, Goldman was one of the players tinkering with "financial innovations" that helped facilitate the collaterilization, or re-packaging of loans which were in turn sold to suckers the world wide (if you can believe it, American retail investors almost had a crack at publicly traded CDOs and were saved by the bell).
  • They essentially created a secondary market for these loans that eventually went sour and they did profit handsomely in the process.
  • But what about the source? Goldman didn't cause people to default on their obligations, nor did they facilitate fraudulent transactions on the retail end.
  • Wall Street certainly provided the incentive with an endless stream of income to mortgage originators, but where are they and the public in this settlement? Oh, they're on the receiving end! Yes, Goldman, for their role, will now be paying to keep people in their homes that took on mortgages they had no business being in to begin with.

It Gets Better...

For homeowners with loans held by Goldman entities, Goldman has agreed to reduce the principal of first mortgages by up to 25-35% and second mortgages by 50% or more.

  • Not only is Goldman eating a substantial amount of principal (it takes over a decade to put a 35% crack in the principal on an amortized 30 year loan), but the people who took on second mortgages get a special bonus! The speculators who had no income/assets or very little to speak of but bought a condo in Las Vegas or Miami to flip it...then got caught with their pants down...well, they get a half-off sale! Amazing.

Goldman has also agreed to make a $10 million payment to the Commonwealth.

  • Hmmm. I'll take a little legal extortion with that spanking. What's this extra $10 Million for, a little budget shortfall? I assume all the states (well, the speculative states on the coasts; middle America seems to have been a bit less greedy/stupid during this frenzy) will jump on the bandwagon and look for their piece to cover their budget shortfalls.
  • Just like they spent like drunken sailors during the good years by completely squandering the Tobacco Settlements and blew other surpluses, now, they'll be using suits like this as the next revenue source until the next scapegoat comes around.
  • Who knows, maybe Microsoft (NASDAQ:MSFT) and big tobacco will be up again for another shakedown or perhaps a new round of bait is brewing. Oh wait, Google's (NASDAQ:GOOG) getting its big - search ruined my state's budget! The damn iPhones are to blame for god knows what, but let's get Apple (NASDAQ:AAPL)! You don't hear politicians chastising Americans for making stupid bets because that doesn't win votes. There's been more time spent investing peanut plants and steroids than how our political leadership greased the skids for this inevitable train wreck.

Now, don't get me wrong, I'm no cheerleader for the Wall Street machine (several firms, not GS specifically) that was so inept (or complicit) that CDO models assumed home prices would continue to rise at 6-8% per year indefinitely and that people with no verifiable income would actually make payments on homes that they had no business owning. Heck, there's an entire website dedicated to the hatred of Goldman, but where's the outrage and legal action toward the actual source of the problem? Instead, they're getting a redistribution of wealth and incentive bonuses to concoct a do-over.

Disclosure: No holding in GS, MSFT. I am long Google with a credit spread for income as well. Long AAPL covered call position.


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