I spent 20 years as a financial news reporter, and I appreciate a good bank heist. And nobody is better at this business of making money under whichever circumstances than Goldman Sachs; this, from the newsletter by my former colleague Matt Levine of Bloomberg News, is just priceless:
In the years leading up to the 2008 financial crisis, Goldman Sachs Group Inc. did some bad mortgage stuff. It bought risky mortgages from mortgage lenders, packaged them into mortgage-backed securities, understated the risks of those loans and the shoddiness of the underwriting in the offering documents for the securities, and sold them to investors. When the loans went bad, the investors lost money. This was a popular activity among a lot of banks in those years, and they all got in a lot of trouble for it.
The obvious first-order victims of this behavior were the investors who bought the mortgage-backed securities based on the banks’ misrepresentations. The specific thing that Goldman (and other banks) got in trouble for was lying about the quality of the mortgages that it sold to investors, for its “conduct in the packaging, securitization, marketing, sale and issuance of residential mortgage-backed securities.”
But there were second-order victims. The entire global economy was brought down by the failure of the U.S. mortgage machine, for one thing. Also the homeowners who got those risky mortgage loans often ended up losing their homes when they couldn’t pay.
So when Goldman (and the other banks) got in trouble for packaging bad mortgage securities, and they had to pay giant piles of money to settle the charges, there was a widespread view that it would not be seemly to hand that money over to hedge funds and insurance companies and German banks and other mortgage investors, while the people with the mortgages kept losing their homes. So a big chunk of each bank’s settlement, including Goldman’s, was earmarked for “consumer relief.” The idea, loosely, was that some of the victims of Goldman’s mortgage conduct were regular people who got bad mortgages, and so some of Goldman’s penance should be, basically, forgiving their mortgages.
Which sounds fine in a very abstract way, until you realize that Goldman never made mortgages. It just packaged and resold other lenders’ mortgages. Nobody owed Goldman a monthly payment and was worried about foreclosure. So Goldman couldn’t just call up its hardest-hit borrowers and say “you know what, don’t bother paying your mortgage this month, we’ll pay it, as part of our court-ordered penance,” because it had no hard-hit borrowers.
At the time, in 2016, when the Justice Department announced that Goldman would pay “$1.8 billion in the form of relief to aid consumers harmed by its unlawful conduct,” and would “provide loan modifications, including loan forgiveness and forbearance, to distressed and underwater homeowners throughout the country,” I wondered—well, which homeowners? “It is unclear exactly how Goldman’s consumer relief will be doled out and to whom,” reported the New York Times. It was a mysterious settlement.
And then a year later, Liz Hoffman and Serena Ng at the Wall Street Journal found the answer, and it is at the same time obvious and completely wild. The answer is that Goldman would buy mortgages—largely from Fannie Mae and Freddie Mac—to forgive them. Fannie and Freddie are the government-sponsored giants of the mortgage business, and they have lots of delinquent mortgages, mortgages that the homeowner can’t pay back. Fannie and Freddie are not in the business of threatening and cajoling delinquent homeowners—it is kind of a bad look—so they auction these mortgages off to buyers who are willing to have a go at squeezing money out of them.
You could imagine Goldman buying the loans at auction and calling up the homeowners and saying “hi, this is Goldman Sachs, we paid off your mortgage for you, have a nice day.” It could buy $1.8 billion face amount of mortgages for, say, $900 million, forgive them all, and claim $1.8 billion of consumer relief at a cost of only $900 million.
That is not what happened. Instead, Goldman would buy the loans at a discount and call up the homeowners to try to work out a deal. Ideally the homeowners would agree to pay Goldman (1) something less than the full amount they owed but (2) something more than Goldman had paid Fannie Mae for the delinquent mortgages, meaning that Goldman could make a profit by restructuring the loans. I wrote about it at the time:
The naive way to think about “consumer relief” is like, a bank lends a person $100, and the person runs into difficulty repaying, and the bank says “well okay we’ll call it $80,” and the person repays $80, and the bank has lost $20. “Consumer relief” is a relief to the consumers, and a cost to the bank. But that’s not quite how the cash flows go here. “Goldman has paid between 50 and 90 cents on the dollar for the loans … with an eye toward restructuring them by reducing interest rates, lengthening the term of the loan, or forgiving some of the debt outright.” But if you buy a loan for 50 cents on the dollar, you can afford to forgive 40 percent of it and still make money. The “loan workout process can take one to two years, and buyers can make between five and 15 cents on the dollar above what they originally paid.”
Those are just the normal economics of the loan-modification market. But for Goldman the calculation is a bit different: If it buys a $100 loan for $50, writes off $40 of principal, and resells it for $60, it doesn’t just make $10 in profit, it also digs itself out from $40 of consumer-relief liability to the government. That’s apparently why it buys such a large share of Fannie Mae’s delinquent loans: “Because Goldman is getting credit toward fulfilling the terms of its settlement, it can afford to pay more.”
The wild result of this is that Goldman’s consumer relief could be profitable. For Goldman. Its $1.8 billion penalty could, for instance, consist of buying $4 billion face amount of mortgages for $2 billion and negotiating with the homeowners to get paid back $2.2 billion. In that hypothetical, as far as mortgage-settlement accounting goes, Goldman has paid $1.8 billion of consumer relief; as far as profit-and-loss accounting goes, Goldman has made $200 million of profit.
But it doesn’t always work as smoothly as that in practice. Sometimes Goldman and the homeowner can’t come to an agreement about how much the homeowner will pay back, or they will come to an agreement and the homeowner still can’t pay. Then what happens?
On Friday, Matthew Goldstein at the New York Times wrote the—again obvious, again wild— next chapter of this story:
While Goldman has reworked loans to make it possible for thousands of homeowners to avoid foreclosure, it has also taken back more than 10,000 homes — properties it has started to sell to help offset the cost of the assistance it provides, a review of data shows. …
Of the 30,000 loans Goldman bought, the monitor’s report said, the bank had modified 7,800 mortgages and erased an average of $103,000 in debt owed on them. In some cases, the report said, Goldman has gotten repeat credits for “multiple modifications of the same loan.”
But the bank has also foreclosed on more than 10,000 of the delinquent mortgages, and has resold thousands of homes so far, at an average price of $170,000, according to Attom Data.
The basic outline is:
- Goldman defrauded some institutional investors in mortgage-backed securities.
- As punishment, the government ordered Goldman to go out and help some struggling homeowners.
- As a result, Goldman foreclosed on 10,000 of them.
Ten thousand people lost their homes to Goldman Sachs, which would never have happened if the government had not ordered Goldman Sachs to help those people. (To be fair, they would have lost their homes to someone else; “a significant number were almost certain to end in foreclosure,” and “nearly a quarter of the mortgages sold by Fannie and Freddie were for vacant and abandoned homes.” “Goldman said it had foreclosed on 10 percent fewer mortgages than other investors that had bought mortgages from Fannie and Freddie.”)
You could be mad at Goldman about this but I think that misses the point. Goldman is giving people mortgage relief—it is forgiving hundreds of millions of dollars of mortgages—and there’s not much it can do with mortgages on abandoned homes other than foreclose. The real point is that the notion of “consumer relief” in the big mortgage settlements was always sort of muddle-headed, and in Goldman’s settlement it was always, from the very beginning, completely incomprehensible, and now here are the incomprehensible results. The consumer-relief penalty led to 10,000 foreclosures and also could be profitable for Goldman.
There is a story of the 2008 financial crisis that heavily stresses the complexity of mortgage securitization, the layers of abstract financialization between the people buying the houses and the people who owned their mortgages, the interlocking system that no one person could possibly comprehend or desire. I just want to suggest that you could tell the same story about the response to the crisis, that the punishment here is about as complex and indirect and financialized as the crime.