Goldman Posts Bail for Subprime Crimes

This post first appeared on Minyanville

File this in the "too little, too late" category.

Goldman Sachs (GS) is being forced to pony up $60 million as part of a settlement with the Massachusetts attorney general, who was investigating the firm's role in predatory subprime lending in its state. Under the terms of the agreement, Goldman agreed to reduce principal by as much as 30% for first liens and up to 50% on second-lien mortgages it holds directly, or those being serviced by Litton Loan Servicing Inc., of which it is part owner.

The settlement will help around 700 residents of Massachusetts, and according to the New York Times, is the first settlement involving Wall Street's role in subprime lending.

Goldman isn't the first lender do be punished for perceived wrongdoings during the mortgage boom. Countrywide, whose operations were purchased by Bank of America (BAC) last year, had to pay more than $8 billion as part of a settlement with California, Illinois, and Florida over its predatory lending practices. Washington Mutual (JPM) and Wells Fargo (WFC), other big issuers of subprime loans, are contending with legal battles of their own.

And while much ire is being directed at the banks handing out the loans -- especially Goldman -- the Massachusetts settlement is a scantly punitive slap on the wrist.

For Goldman Sachs -- a firm that received more than $10 billion in payouts from soured bets placed with American International Group (AIG) -- $60 million is the change that's leftover when the company empties out its laundry-room lint catcher; a mere rounding error on a balance sheet made up of hundreds of billions of dollars of assets and liabilities.

The agreement is yet more evidence that regulators, besieged by their inability to control the lending institutions it was their charge to keep tabs on, are now resorting to cheap public-relations ploys under the guise of legal culpability to prove their worth.

If Massachusetts really wanted to make a statement about Goldman's role in the subprime crisis -- which was not insignificant, given it was not only a packager of securities but a lender to subprime-mortgage firms of all shapes and sizes -- it would decry Goldman's attempt to get off so easy.

It's a little like catching a bank robber, and so abhorred at his amoral actions, you ask to borrow a couple bucks in bus fare, send him on his way, then laud your crime-fighting and prosecutorial prowess.

Those truly at fault for our financial crisis will likely never be brought to justice, partly because culpability must be spread across so many disjointed actors - big and small fries alike. The important task for regulators and lawmakers now -- and one w they seem destined to fumble -- is ensuring the system is built on a stronger foundation moving forward.

This doesn't mean overzealous restrictions on a bank's each and every expenditure. It doesn't mean capping interest rates and loan terms so banks hand out credit cards to only the most credit-worthy borrowers, leaving a huge swath of the population without proper banking services. Nor does this entail trashing the currency to reinflate our way out of a mess caused by dollar debasement and too much access to credit.

The right solutions require not just good planning, but political will to spurn the Washington political machine and its desire to usurp the power of the free market for the benefit of an ever-shrinking group of the privileged, well-connected elite.