Barclays to Face Off Against U.S. Over ‘Craptacular’ Loans

  • U.S. sues over defaults on billions in securitized mortgages
  • Investors were deceived about risk of securities, DOJ says

Barclays Sued Over Residential Mortgage-Backed Securities

The U.S. Justice Department sued Barclays Plc for fraud over its sale of mortgage bonds after the bank balked at paying the amount the government sought in settlement negotiations.

The lawsuit announced on Thursday is rare for big banks, which typically negotiate a settlement with the government rather than risk drawn-out litigation and a possible trial. The breakdown in talks suggests that the bank is willing to take its chances with incoming enforcement officials in the Trump administration. The bank has lined up a law firm whose top lawyer is known for his aggressive defense of clients, including Lt. Col. Oliver North.

Barclays is one of a handful of European lenders, including HSBC Holdings Plc, Credit Suisse Group AG, UBS Group AG and Royal Bank of Scotland Group Plc, that have yet to settle long-running U.S. probes into their sale of mortgage bonds ahead of the financial crisis. The Barclays lawsuit marks the first time the Justice Department has sued one of the banks at the center of an Obama administration initiative to recoup investor losses on the securities. The U.S. has extracted more than $46 billion from six U.S. financial institutions thus far, and on Friday Deutsche Bank AG said it reached a $7.2 billion agreement to resolve the investigation into its mortgage bond dealings.

Drawing the Line

Barclays executives tried to draw the line at $2 billion in penalties to settle with the government, which made an opening offer it deemed too high, a person familiar with the situation told Bloomberg in October. The Justice Department’s starting point for negotiations wasn’t disclosed.

“Barclays jeopardized billions of dollars of wealth through practices that were plainly irresponsible and dishonest,” Attorney General Loretta Lynch said in a written statement. “We are sending a clear message that the Department of Justice will not tolerate the defrauding of investors and the American people.”

Barclays rejected the government’s accusations.

“Barclays considers that the claims made in the complaint are disconnected from the facts,” it said in a statement. “We have an obligation to our shareholders, customers, clients and employees to defend ourselves against unreasonable allegations and demands.”

The other banks under investigation declined to comment on the Barclays suit, even as they negotiate over how much they’ll pay to resolve their own mortgage-securities probes.

‘Craptacular’ Loans

The British bank repeatedly deceived investors about the quality of more than $31 billion in loans backing the securities that were sold between 2005 and 2007, the Justice Department said in a complaint filed Thursday in federal court in Brooklyn. More than half of the underlying loans defaulted, the government said, causing billions of dollars in losses for investors. Consultants who reviewed the loans called them “craptacular” and said they bore the “distinct aroma of default,” according to the complaint.

Barclays extended billions of dollars in financing to lenders that the bank knew were originating loans without regard to the ability of the borrowers to repay them, the government alleges.

“This pump-priming activity contributed to the housing bubble and to the ensuing crash, whose effects devastated the world economy in the financial crisis of 2008,” the lawsuit alleges.

Even before the election of Donald Trump to the presidency, the bank had hired an outside law firm as a signal that it wouldn’t budge on the penalty figure. That law firm is Williams & Connolly, a person familiar with the matter said. Brendan Sullivan Jr., the firm’s top lawyer, is known in Washington for relishing courtroom combat.

Sullivan’s spirited defense of Oliver North in the 1980s during the Iran-Contra hearings and subsequent criminal trial established him as a fighter. More recently, Sullivan was vindicated when a federal judge determined that prosecutors had unfairly withheld evidence that would have helped the case against former Senator Ted Stevens of Alaska. Charges against Stevens, who died in a plane crash in 2010, were dismissed by the judge.

Barclays has set aside 2.5 billion pounds ($3.1 billion) for investigations and litigation since the start of 2014.

The case is U.S. v. Barclays Capital Inc., 16-7057, U.S. District Court for the Eastern District of New York (Brooklyn).

— With assistance by Andrew M Harris, Michael J Moore, and Zeke Faux

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE