Appeals Court Revives Mortgage Class Action Suit Against Goldman

The 2nd U.S. Circuit Court of Appeals in New York recently revived a class action suit filed against Goldman Sachs (NYSE:GS) by various investors alleging that the global investment bank had misled them about the risks involved in its mortgage-backed security offerings. ^[1] In what seems to be more than a mere coincidence, the decision to revive the 2008 lawsuit which was laid to rest in 2010 came within days of Citigroup’s (NYSE:C) announcement that it has settled a similar lawsuit with investors for $590 million (see Citigroup’s $590 Million Settlement Points At More To Follow). Moreover, the appeals court’s decision will make things worse for the country’s biggest banks including Bank of America (NYSE:BAC) and JPMorgan (NYSE:JPM) as it allows investors to sue the banks over securities in which they did not invest themselves – making the banks liable to compensate a wider range of investors than those they are already dealing with.

We have a $122 price estimate for Goldman Sachs, which is at a premium of less than 10% to the current market price.

The Number, And Size, Of Mortgage-Related Lawsuits Will Blow Up Soon

In a bid to mitigate a large part of their losses during the global economic recession, individual and institutional investors have been knocking on court doors blaming large banks of selling them products linked to mortgages without revealing the complete set of risks involved in the underlying portfolio. And for quite a few of them this ploy has been successful, gauging from the large number of settlements between the banks and investors in recent years.

The new ruling by the appeals court strengthens disgruntled investors by allowing them to join hands in larger numbers in their claims against the banks over mis-sold mortgage-backed securities. Banks are already jostling with a long list of lawsuits related to the unshackled creation and sales of mortgage-linked securities pre-2008, and this new development only bodes more ill for the sector.

And Poses A Real Threat to Goldman’s Value

Goldman has burnt its hands more than once for its role in selling mortgage-backed securities worth billions in the run up of the 2008 economic recession. It settled with the SEC for a whopping $550 million in 2010 over its involvement in the Abacus mortgage misgivings, and is facing similar multi-million dollar lawsuits from Allstate and Sealink Funding among others. With almost all lawsuits alleging the same charges, Goldman could potentially lose billions over coming months if any wrong-doing is established as a part of even one of the lawsuits.

This would in-turn severely impact Goldman’s estimated value. We include Goldman’s litigation charges as a part of its unallocated corporate costs as shown in the chart above. You can see how an increase in these costs would reduce our price estimate by making changes to this chart.

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1. Goldman must face mortgage debt claims – 2nd Circuit, Thomson Reuters, Sept 6 2012 [↩]