Barclays Is Trying to Cap U.S. Mortgage Penalty at $2 Billion

  • Bank said to retain lawyers for possible court fight with DOJ
  • U.S. aims to wrap up investigations over crisis-era loans

Barclays Plc is trying to draw a line at $2 billion in penalties to settle a U.S. investigation into its sale of mortgage securities after it received an opening offer that it considered too high, according to a person with knowledge of the situation.

The Justice Department’s starting point for negotiations wasn’t disclosed but was less than the $14 billion initially presented by the government to Deutsche Bank AG in its talks with the U.S. over similar allegations, two people with knowledge of the matter said. The size of the potential penalty has since been reduced in the Barclays negotiations, one of the people said.

Still, London-based Barclays is intent on whittling down the payment further, to no more than $2 billion and less if possible, to resolve the matter, and has retained lawyers to potentially fight the Justice Department in court, the person said.

“This story is based on ill-informed speculation and contains material inaccuracies,” Stephen Doherty, a Barclays spokesman, said by e-mail, declining requests to elaborate.

Asked about the status of the U.S. investigation on an earnings call with reporters on Thursday, Barclays Chief Executive Officer Jes Staley said, “We are in discussions with the Department of Justice, and we really shouldn’t be saying much beyond that.”

The settlement talks are part of the U.S. government’s push to hold firms accountable for packaging and selling toxic subprime mortgage bonds that fueled the 2008 financial crisis. While the talks are fluid and there’s no formal deadline to reach an agreement, Barclays and several other European banks are among the last to negotiate potential settlements with the Obama administration.

Mark Abueg, a Justice Department spokesman, declined to comment.

For a Bloomberg Intelligence primer on Barclays Plc, click here.

It’s unclear to what extent the bank’s position on the size of the penalty is a negotiating strategy. The U.S. mortgage investigation is one of the largest remaining misconduct issues hanging over Barclays, which has already settled cases related to manipulation of currency trades and benchmark interest rates.

Barclays, which has a market value of about 32 billion pounds ($39 billion), hasn’t said in regulatory filings whether it has set aside specific reserves to cover the costs of any U.S. action linked to mortgage securities.

Depending on its final size, the Barclays penalty could reduce the bank’s capital buffers. The bank’s common equity Tier 1 ratio, the key measure of financial strength, was 11.6 percent at the end of September. Regulators have required lenders on both sides of the Atlantic to build up their buffers against losses since the 2008 crisis. Barclays’s capital level is above the 9.5 percent regulatory target for the U.K. industry.

Settled Cases

Authorities have assessed penalties totaling $46 billion from other firms for their roles in the creation of the securities. Morgan Stanley agreed to a $2.6 billion penalty in February, and Goldman Sachs Group Inc. settled for $5.1 billion in April. Those settlements established a rough range for where the outstanding penalties were expected to fall as recently as this summer, a person familiar with the matter told Bloomberg News at the time.

Deutsche Bank shares and its riskiest bonds dropped the most since the Brexit vote last month after it disclosed that the Justice Department was seeking $14 billion from the German lender. The bank has said it won’t pay nearly that much and had set aside 5.5 billion euros ($6 billion) for all of its litigation-related costs.

Barclays’s investment bank created mortgage-related securities worth $39 billion and had underwriting exposure of $34 billion for other private-label securities between 2005 and 2008, according to company filings. In July, the bank said it had been cooperating with investigations by the Justice Department and U.S. Securities and Exchange Commission.

Weighing a Deal

In deciding whether or not to accept a settlement offer from the Justice Department, bank executives generally weigh the size of any financial penalty against the need to put government investigations behind them. In many cases, banks prefer to resolve investigations quickly and are willing to pay a premium to get a deal done. In rare cases, when bank executives believe that the Justice Department is being unfair, either by asking for too much money or claiming misconduct where they believe none exists, they may break off settlement negotiations and go to court.

Six European banks -- including HSBC Holdings Plc, Credit Suisse Group AG, Royal Bank of Scotland Group Plc and UBS Group AG -- sold almost $80 billion of securities that have been subject to U.S. Federal Housing Finance Agency complaints, according to data compiled by Bloomberg Intelligence. Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. have also entered into settlements over the probe.

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