Goldman Sachs Pays $5 Billion, Joins Growing List of Questionable Multi-Billion Dollar Bank Settlements

Last week, Goldman Sachs agreed to pay $5 billion in settlement over legal claims relating to the bank’s involvement in the financial crisis, specifically its packaging, securitization, marketing, sale and issuance of residential mortgage-backed securities between 2005 and 2007. Many have complained that Goldman Sachs is getting off easy. As the New Republic notes, Goldman Sachs could end up paying far less than the $1.8 billion directed to consumer relief, as it gets extra credit for spending in certain areas or for certain purposes. However, we should be just as concerned with the terms of the settlement and whether the law is being applied in an equitable and appropriate manner.

My analysis of the Goldman Sachs settlement indicates that the bank may not have been given (or negotiated) as good of a deal as Bank of America and Citigroup, which got extra credit for certain consumer relief spending. In those agreements, the banks were given $2 credit for every dollar spent on donations to third party non-profit organizations such as housing counseling agencies. These provisions in the settlement agreements have come under heavy criticism, and it is notable that the recent Goldman Sachs settlement does not allow Goldman to get such extra credit. Perhaps the criticism has been taken under advisement at the Department of Justice?

Regardless of the particular payments in each settlement, another troubling aspect of these settlements besides the unimpressive consumer relief payments is the use of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). FIRREA was passed in 1989 following the Savings and Loan scandal and its civil provisions have been little used until recently. FIRREA allows the government to sue anyone that commits fraud in connection to a financial institution, including the financial institution itself.

Specifically, the law allows the government to use civil process — preponderance of the evidence, administrative subpoenas, extended statutes of limitation — to win civil monetary penalties against anyone who commits certain crimes, such as wire fraud, mail fraud, or making false statements. Its scope is broad and its burden on the government to prove is less than if the government had to pursue a criminal charge.

We should be careful in utilizing such broad laws that blur the distinction between civil and criminal liability. Given the history of the Department of Justice utilizing the criminal settlement process in a way that forces corporations into paying a lot of money and opening up their business to regulation by prosecutors, the use of FIRREA to induce banks to settle civil claims should also be concerning. It appears that the Department of Justice will continue to pursue more bank settlements in the near future.

The Goldman Sachs settlement should be put in context and compared to how other banks have been handled by the Department of Justice. However, we should also question whether these settlements and their terms are the appropriate way to seek justice for the victims of the financial crisis.