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Goldman Sachs to Pay Billions in Fines Related to the Financial Crisis, but Nobody’s Going to Jail

Back in 2006, the financial titan Goldman Sachs was preparing to sell a bundle of housing loans it had purchased from the mortgage giant Countrywide. After a Goldman analyst wrote an optimistic assessment of Countrywide’s mortgage stock, a company due diligence officer responded with a cryptic email, apparently dissenting from the analyst’s view. “If they only knew. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .” he wrote — with 34 ellipses.

What those ellipsis may have been referring to is the fact that Countrywide business model relied upon issuing mortgages to buyers who couldn’t afford them, and then selling those mortgages as high-quality investments — a practice that helped precipitate the 2008 financial crisis.

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Leading up to the crisis, Goldman Sachs bought up these questionable mortgages and sold them to investors, marketing them as a sound financial product even as its own internal assessments raised concerns. The US Justice Department highlighted that internal Goldman Sachs email on Monday, as it announced a $5.1 billion settlement stemming from Goldman’s conduct in the lead up to the financial crisis. The announcement does not include any criminal charges against Goldman executives — rather it asks the firm to pay the equivalent of 70 percent of its quarterly revenue in fines.

The Justice Department characterized the deal as a victory.

“Today’s settlement is another example of the department’s resolve to hold accountable those whose illegal conduct resulted in the financial crisis of 2008,” Benjamin Mizer, the head of the Civil Division at the Department of Justice, said in a statement. “This settlement demonstrates the pervasiveness of the banking industry’s fraudulent practices.”

Related: Is the Government Pursuit of Wall Street Criminals Too Little Too Late?

The bank will pay out a $2.385 billion civil penalty, and set aside another $1.8 billion to pay for direct relief for homeowners who were impacted by the mortgage crisis.

“We are pleased to put these legacy matters behind us,” a Goldman spokesman said in a statement. “Since the financial crisis, we have taken significant steps to strengthen our culture, reinforce our commitment to our clients, and ensure our governance processes are robust.”

In the complaints released Monday, the Department of Justice accused Goldman of misleading its own investors as to the strength of its mortgage-backed securities it was selling between 2005-2007. In 2006, for example, Goldman purchased a package of mortgages from a company called New Century Mortgage Corporation. Goldman’s own employees reviewed the loans and flagged them for “extremely aggressive underwriting” practices — meaning New Century’s employees were selling mortgages to buyers who couldn’t afford them, using shoddy documentations, and dubious financial models.
Internally, Goldman then took a close look at a third of those New Century Loans, to see if they were truly healthy investments. It decided to drop a full quarter of them, because they lacked key documents or listed incomes of borrowers that suggested the loans would go into default. The firm then stopped its internal review process, and sold the remaining 75 percent of the New Century loans to investors without saying anything about the problems it had encountered.

The DOJ identified this behavior as a violation of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) — a key financial regulation that sets out a 10 year statute of limitations for fraud. “One of our leading financial institutions that it did not live up to the representations it made to investors about the products it was selling,” said US Attorney Benjamin B. Wagner, explaining Mondays settlement.

The Department of Justice, however declined to name a single individual at Goldman Sachs responsible for the misconduct. That’s despite a new policy directive issued in September, 2015 that declared the DOJ would make “individual accountability” a centerpiece of its financial crime investigations. That policy, enshrined in a memo written by Deputy Attorney General Sally Yates, seemed to direct the DOJ against large financial settlements, and towards individual prosecutions. “In the short term certain cases against individuals will not provide as robust of a monetary return,” Yates wrote, while advising DOJ staffers that “pursuing individual action will result in significant long term deterrence.”

Related: How Eric Holder’s Corporate Law Firm Is Turning Into a ‘Shadow Justice Department’

The DOJ still reserves the option to pursue individual action against Goldman executives, but no such case has yet been made public.

So far, other major financial financial institutions have paid out big fines, but financial executives have managed to evade punishment. While JPMorgan Chase paid $13.3 billion in 2013, Bank of America paid $16.6 billion in 2014, and Citi paid a $7 billion settlement in 2014 — no major executives of any of these financial institutions have faced a criminal investigation.

Bartlett Naylor, a former chief of investigations for the US Senate Banking Committee, says that today’s Goldman Settlement seems to suggest the Yates memo hasn’t shifted the DOJ’s strategy. “It’s disappointing that no individuals seem to be identified in this investigation,” Naylor, who now works for as the Financial Policy Advocate for Public Citizen, said. “We were led to believe from the Yates memo, that we would not see settlements without names identified.”