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Goldman (GS) May Face Civil Lawsuit Over RMBS Violations

      

zacks.com | February 25, 2015

By Zacks Equity Research

Legal issues surrounding residential mortgage-backed securities (RMBS) continue to trouble the Wall Street banking giants. The Goldman Sachs Group, Inc. (GS - Analyst Report) revealed in its latest annual filing, the probability of facing a civil lawsuit as a regulatory probe has “preliminarily concluded” that the company has violated federal law regarding its underwriting, securitization and sale of RMBS.

Legal issues surrounding residential mortgage-backed securities (RMBS) continue to trouble the Wall Street banking giants. The Goldman Sachs Group, Inc. (GS - Analyst Report) revealed in its latest annual filing, the probability of facing a civil lawsuit as a regulatory probe has “preliminarily concluded” that the company has violated federal law regarding its underwriting, securitization and sale of RMBS.

Goldman mentioned that as part of the RMBS Working Group investigation, in Dec 2014, it has received a letter from the U.S. Attorney for the Eastern District of California which indicated the possible civil action. The company also stated that it was offered an opportunity to respond to the conclusion.

Notably, Goldman has been persistently receiving requests for information and subpoenas as part of probes by several authorities including the U.S. Department of Justice, other members of the RMBS Working Group and several federal, state and local regulators in connection with its mortgage-related activities, including securitization, sales and servicing. Currently the company is cooperating with the regulators and authorities.

Also, Goldman stated that it is being investigated about its risk management and controls, trading activities and communications with respect to the establishment of benchmark rates including currency rates and ISDAFIX benchmark rates.

Notably, Goldman has raised the top end of its estimated range for potential legal losses to $3.0 billion from $2.5 billion. However, it noted that the estimated amount for the reasonably possible legal loss does not include potential claims stemming from the ongoing mortgage bond investigations.

Another Wall Street giant, Morgan Stanley (MS - Analyst Report), facing investigation over its originations and sale of faulty mortgage back securities in the pre-crisis period, is in settlement talks with the Department of Justice.

The Department of Justice have claimed billions of dollars in settlement charges from the major U.S. banks like JPMorgan Chase & Co. (JPM - Analyst Report). Citigroup Inc. (C - Analyst Report) and Bank of America in the mortgage-backed securities probe. Though any probable resolution with Goldman and Morgan Stanley might not result in huge settlement amounts, we believe the amounts will be substantial enough to impact their financials to some extent.

Currently, Goldman carries a Zacks Rank #3 (Hold).

 

Back to February 2015 Archive

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