Goldman Mortgage Settlement Is Much Less Than Meets the Eye

On Monday, State and federal officials said that Goldman Sachs Group Inc GS had agreed to pay $5.06 billion to settle accusations of the bank misleading bond investors during the financial crisis. However, as it is quite common in contracts, it’s all about the fine print.

A closer look into the clauses of the agreement reveals certain provisions that allow the company to pay much less (possibly up to $1 billion less) than the publicized figure. “And that is before the tax benefits of the deal are included,” the New York Times’ Nathaniel Popper explained.

So, how exactly will Goldman get to pay so much less than what the DoJ said it would pay?

The keys here are government incentives and tax credits. For instance, the company agreed to spend $240 million on affordable housing; however, in return, the government will provide it with large tax credits. This will result in Goldman paying $72 million or less, after the tax credits are deducted. Take a look at a chart explaining this, here.

In fact, for every dollar Goldman spends on consumer relief, it could get about $0.35 in tax savings. Even further, for every dollar it allocates to affordable housing developments, it will get a credit of at least $3.25 toward the aforementioned $240 million – if it pays early, it will get an extra 15 percent credit.

Of course, Goldman is not the only bank that received these kinds of benefits; however, Popper noted, the company “appears to have negotiated an even sweeter deal on certain points.” A Justice Department official explained that the difference stemmed in the degree and nature of the wrongdoing of which each bank was accused.

However, Better Markets’ Dennis Kelleher has a different view. “They appear to have grossly inflated the settlement amount for P.R. purposes to mislead the public, while in the fine print, enabling Goldman Sachs to pay 50 to 75 percent less,” he concluded.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.