According to Goldman Sachs’s website: “Our Business Principles, the foundation of our culture of client service, teamwork, excellence, personal initiative and accountability, are fundamental to our long-term sustainability and success.”

Fine words, indeed, but they would seem to be contradicted by the fact that Goldman Sachs, one of the world’s leading investment banks with a diversified client base including individuals, corporations, financial institutions, governments (notably, Greece!) and high-net worth individuals, has just agreed to pay American authorities $5.1 billion to settle claims that it used fraudulent marketing to sell mortgage backed securities in the run up to the Global Financial Crisis.

Banks lent money to “sub-prime” borrowers at elevated rates (to compensate for the additional risk) who would otherwise be unlikely to have qualified for a mortgage. These loans were then bundled together (securitised) and marketed as investment grade bonds and sold to investors by firms such as Goldman Sachs. The idea was that only a small minority of borrowers would default and so the bonds should be safe. Of course, this failed to consider the possibility that confidence might evaporate and that the financial sector and investors would find themselves heavily exposed to potential bad debt (masquerading as an AAA investment-grade vehicle) which they would seek to divest themselves of, precipitating the crisis.

A press release on the Goldman Sachs site details the breakdown of how the fine is made up:

“Under the terms of the agreement in principle, the firm will pay a $2.385 billion civil monetary penalty, make $875 million in cash payments and provide $1.8 billion in consumer relief. The consumer relief will be in the form of principal forgiveness for underwater homeowners and distressed borrowers; financing for construction, rehabilitation and preservation of affordable housing; and support for debt restructuring, foreclosure prevention and housing quality improvement programs, as well as land banks.”

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