Last Week's Other Big Bank Settlement Also Shifts Burden to Taxpayers

Overshadowed by the larger Bank of America settlement announced last week, the $1.2 billion settlement deal between Goldman Sachs and the Federal Housing Finance Agency (FHFA) announced late on Friday also allows settlement payments to be written off as a tax deduction. For Goldman Sachs, the tax write-off will likely be worth $420 million. In 2010, a similar $550 million Securities and Exchange Commission settlement with Goldman Sachs for mortgage misdeeds specifically prohibit writing off the settlement as an ordinary business expense.

"The SEC closed the door on Goldman Sachs' settlement tax write-offs in 2010. Now the FHFA has left that door wide open, handing the bank an unacknowledged giveback from American taxpayers," said Michelle Surka at the U.S. Public Interest Research Group.

In 2010, Goldman Sachs also signed a settlement to resolve charges the bank had made fraudulent claims to investors about subprime mortgage products. The SEC specified in that $550 million settlement that Goldman Sachs "shall not claim, assert, or apply for a tax deduction or tax credit with regard to any federal, state or local tax." By preventing the bank from writing off the settlement, the SEC ultimately saved taxpayers $192 million.

Friday's settlement lacked such taxpayer protections. Goldman Sachs agreed to repurchase $3.15 billion worth of mortgage products that it had originally sold without properly disclosing their risks to Fannie Mae and Freddie Mac, the two government-controlled agencies that are under the conservatorship of the FHFA. The difference between the estimated value of these soured mortgages and the repurchase price Goldman is paying is $1.2 billion. Goldman Sachs will likely write off that $1.2 billion as an ordinary business expense and receive a $420 million tax windfall.

Earlier this month, the bipartisan Truth in Settlements Act (S.1898) passed through Senate committee without opposition. The legislation, which has a bipartisan counterpart in the House (H.R.2434), would require federal agencies to disclose the tax deductibility of future settlements and would require corporations to disclose when they deduct those settlements.

"We need to believe in a regulatory system that works, and to do that, we need to believe that bad actors will be held appropriately accountable," said Scott Klinger of the Center for Effective Government. "The Truth in Settlements Act is a good first step toward ensuring that fines and penalties truly deter bad corporate behavior," he added.

FHFA's press release did not disclose that Goldman Sachs' settlement costs would be tax deductible.

"For every dollar that Goldman Sachs receives in tax benefits from this settlement, it's a dollar that can't be used to pay down the national debt, improve government programs, or hold down tax rates," said Surka.

Friday's Goldman Sachs settlements with the FHFA can be read here and here. The 2010 SEC settlement agreement with Goldman Sachs can be read here.

You can also read U.S. PIRG's report on tax write-offs in settlements here: "Subsidizing Bad Behavior: How Corporate Legal Settlements for Harming the Public Become Lucrative Tax Write-Offs."

U.S. PIRG has created a fact sheet on Wall Street settlement tax deductions.