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RMBS Settlement Cuts Into Goldman Sachs’ Profits

cutting-money [1]As expected, fourth quarter earnings for Goldman Sachs took a huge hit as a result of last week’s announced settlement for $5.1 billion [2] to resolve claims of mortgage-backed securities fraud. The investment banking firm’s Q4 2015 net earnings totaled $765 million, approximately one-third of the $2.17 billion net earnings reported for the prior-year quarter, according to the firm’s Q4 and full year 2015 earnings statement [3] released Wednesday.

Goldman Sachs’ net earnings for the full year of 2015 were $6.08 billion, down from $8.48 billion in 2014 [4]. Earnings per common share were reported at $12.14 for 2015, having been reduced by $6.53 due to the RMBS settlement.

Despite the substantial decline in net earnings and earnings per common share, Goldman Sachs Chairman and CEO Lloyd Blankfein characterized the results as “solid.”

“We are pleased that our diversified business mix allowed us to deliver solid results in a year characterized by uneven global economic activity,” Blankfein said. “Looking ahead, we believe our strong global client franchise leaves us well positioned to generate superior returns over the long term.”

“Looking ahead, we believe our strong global client franchise leaves us well positioned to generate superior returns over the long term.”

Lloyd Blankfein, Goldman Sachs Chairman and CEO

The settlement, announced on Friday, January 15, concluded an investigation by the Presidential Mortgage-Backed Securities Working Group of the U.S. Financial Fraud Enforcement Task Force (RMBS Working Group) relating to Goldman Sachs’ securitization, underwriting and sale of residential mortgage-backed securities from 2005 to 2007. The fraud allegations were brought about by the U.S. Department of Justice, the New York and Illinois Attorneys General, the National Credit Union Administration (NCUA), and the Federal Home Loan Banks of Chicago and Seattle. As part of the settlement, Goldman Sachs admitted no wrongdoing and no executives from the firm will be prosecuted.

Goldman Sachs paid significantly more in non-compensation expenses for both Q4 and the full year 2015 as a result of the settlement. For the full year, non-compensation expenses rose by 30 percent up to $12.36 billion due to the higher net provisions for mortgage-related litigation and regulatory matters in 2015 than in 2014 ($4.01 billion compared to $754 million), according to the firm’s announcement. Non-compensation expenses for Q4 2015 were $4.14 billion, which was a 64 percent increase from the year-ago quarter and a 68 percent leap from Q3—again due to higher net provisions for mortgage-related litigation and regulatory matters. In both cases, the increases were partially offset by lower depreciation and amortization expenses.

U.S. Senator Elizabeth Warren (D-Massachusetts) blasted the settlement, calling it a “farce” on her Facebook page earlier this week [5].

“In the 2008 financial crisis, we lost trillions in wealth and millions of people lost their homes and their jobs because of Wall Street recklessness,” Warren wrote. “Today, Goldman Sachs announced it will pay $5.1 billion for its role in precipitating the economic collapse by misleading investors about the quality of the junk mortgage securities they peddled. Seven years later. No admission of guilt. No individuals are going to jail. A payment that’s barely a fraction of the billions investors lost— and the trillions our economy lost—because of this fraud. And over half of it could be tax deductible! That’s not justice – it’s a white flag of surrender.”

Click here [3] to see Goldman Sachs' entire Q4 and full year 2015 earnings statement.