Goldman in $5.1bn deal to settle mortgage bond fraud claims

Goldman Sachs said Thursday that it had reached a tentative $5.1 billion deal with US and state authorities to settle allegations related to fraudulent marketing of mortgage bonds before the financial crisis.

The Wall Street investment bank said that it would pay a civil penalty of $2.4 billion to settle with the authorities, as well as payments of $875 million and $1.8 billion in consumer relief.

Goldman said the "in principle" agreement is with the Department of Justice's Financial Fraud Enforcement Task Force which has been investigating fraud by banks in marketing residential mortgage-backed securities (RMBS), the financial assets that were at the heart of the 2007-2008 meltdown of the US financial sector.

The settlement related to Goldman's securitization, underwriting and sale of RMBS from 2005 to 2007, it said.

Goldman said the agreement will resolve civil claims on the issue with the Justice Department, the National Credit Union Administration -- which represents some financial institutions that failed after their RMBS investments soured -- and Federal Home Loan Banks in Chicago and Seattle. Also in the settlement are the state attorneys general of Illinois and New York.

"We are pleased to have reached an agreement in principle to resolve these matters," said Goldman chairman and chief executive Lloyd Blankfein in a statement.

Goldman said the settlement will reduce after-tax earnings for the fourth quarter of 2015 by about $1.5 billion.

The Justice Department declined to comment on the deal. A spokesman for the National Credit Union Administration would only confirm they are involved in the agreement, but offered no details.

Goldman is just the latest in a series of major banks fined billions of dollars for selling RMBS and other housing market-linked securities as safe investments when the underlying assets were low quality and highly risky.

Investors in them, including a number of banks and credit unions, suffered heavy losses, with many forced to close, when the value of the securities plummeted with the collapse of the housing market.

In 2014 Goldman agreed to pay $3.2 billion to resolve claims it misled the huge government-backed housing finance companies Fannie Mae and Freddie Mac on mortgage-linked securities it sold them.

And in 2013 a former Goldman trader, Fabrice Tourre, was convicted on charges of misleading investors on mortgage-linked securities that turned out to be high-risk.

Goldman shares fell 0.4 percent to $161.39 in after-hours trade Thursday after having closed up 1.5 percent before the announcement.