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packaging of mortgage securities

Bloomberg.com
Goldman to Pay $60 Million in Subprime Settlement
By Kathleen M. Howley and Christine Harper

May 11 (Bloomberg) — Goldman Sachs Group Inc. agreed to pay about $60 million to settle a Massachusetts investigation into the packaging of mortgage securities at the root of the collapse of the U.S. housing market.

The agreement calls for the bank to pay about $50 million to compensate homeowners and the rest to the state, Massachusetts Attorney General Martha Coakley said today at a news conference in Boston. The deal will also allow for some loan principal reductions. Goldman Sachs directly holds 714 Massachusetts mortgages, she said.

The bundling of the riskiest type of mortgages into securities turned the U.S. housing slump into a global recession as foreclosures deflated bond values and toppled Wall Street firms such as Lehman Brothers Holdings Inc. The Massachusetts attorney general has investigated Fremont Investment & Loan, now defunct, and H&R Block Inc., owner of Option One Mortgage Corp., for making the types of mortgages that Goldman securitized.

“There’s no dispute that Goldman Sachs and other securitizers have been involved intricately in this whole process by which loans were made to homeowners and as we have argued, in many instances, destined to fail,” Coakley said.

Coakley said her investigation is ongoing and that Goldman Sachs wasn’t asked to admit wrongdoing.

Principal Reduction

“Goldman Sachs is pleased to have resolved this matter,” said Michael DuVally, a spokesman for the firm in New York. He declined to comment further.

For the “thousands” of homeowners in Massachusetts whose mortgages are serviced by Goldman Sachs’s Litton Loan Servicing LP division, Goldman will help refinance or modify the terms of qualified loans, Coakley said. For homeowners with mortgages held by Goldman entities, the bank agreed to reduce the principal of first mortgages by up to 25 to 30 percent and second mortgages by 50 percent or more, she said.

Goldman Sachs’ mortgage business is part of its fixed-income, currencies and commodities unit, the largest source of revenue for the firm. The division produced a record $16.2 billion in revenue in 2007 and helped the securities firm set a Wall Street pay record. Chief Executive Officer Lloyd Blankfein was awarded $68.5 million in pay for 2007 and each of his two co-presidents also received more than $65 million that year.

Last year none of the top executives received a bonus. The unit’s sales fell to $3.7 billion in 2008 as the company wrote down the value of leveraged loans and mortgage-related debt.

The $60 million settlement was about one and a half day’s revenue for Goldman Sachs’s fixed-income, currencies and commodities division in 2006, when it made $14.3 billion and about one and one-third day’s revenue in 2007.

Credit Default Swaps

Goldman Sachs, the world’s largest securities firm before it became a bank holding company last year, used the ABX Index and credit default swaps to hedge its subprime holdings, Chief Accounting Officer Sarah Smith wrote in an Oct. 30, 2007, letter to the Securities and Exchange Commission made public Jan. 14, 2008.

“During most of 2007 we maintained a net short subprime position with the use of derivatives and therefore stood to benefit from declining prices in the mortgage market,” she wrote.

U.S. home prices have tumbled 24 percent since reaching an all-time high in July 2006. The median price of a previously owned home was $175,200 in March, down from $230,300, according to the National Association of Realtors, based in Chicago.

Securitization

The securitization of subprime mortgages fueled investor demand for the risky loans and boosted house prices as more buyers competed for properties. As a result, the market share of subprime mortgages as a percentage of all home loans went from 7 percent in 2001, the start of the real estate boom, to 20 percent in 2006.

The collapse of the subprime market in 2007 caused at least $1.4 trillion of asset writedowns and credit losses at companies such as Citigroup Inc. and Bank of America Corp. Fallout from bad mortgages toppled Lehman Brothers in September as well as the chief executive officers at Citigroup Inc., Merrill Lynch & Co. and UBS AG.

Goldman Sachs said in a January regulatory filing it has received requests for information from various government agencies on its securitization of subprime mortgages. The bank is a defendant in a class action suit sought brought by Cleveland in connection with its role bundling mortgages, the company said.

“Goldman Sachs & Co. and its affiliates are cooperating with the requests,” the filing stated, without mentioning the Massachusetts investigation.

Goldman Sachs fell $1.29 to $138.30 at 2:50 p.m. in New York Stock Exchange composite trading. The shares are up 65 percent this year through May 8.

To contact the reporters on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net; Christine Harper in New York at charper@bloomberg.net.

http://www.mortgage-solutions-911.com/bloomberg2009.htm

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October 21, 2009 - Posted by | News

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