Why Barclays CEO Staley Opted for War When Dimon Chose Surrender

  • Barclays said to balk at $5 billion penalty for mortgage bonds
  • JPMorgan chief took conciliatory stance in 2013 negotiations

When the U.S. was seeking a record-breaking payment from JPMorgan Chase & Co. for the sale of toxic mortgage-backed securities three years ago, Jamie Dimon went to Washington to sit down with Eric Holder, then the attorney general. Dimon, normally an outspoken critic of regulatory overreach, sought to make peace.

“I didn’t go pounding the table,” the JPMorgan chief executive officer recalled later in a Bloomberg Television interview. “I said, Eric, I’m here to surrender. You’re my judge and my jury. I have no choice.” A month later, the two sides reached a $13 billion settlement.

Jes Staley

Photographer: Jasper Juinen/Bloomberg

Jes Staley, Dimon’s former deputy, is taking a more combative approach at Barclays Plc. The U.S. sued the London-based bank on Thursday after the Barclays CEO decided to hold the line in settlement negotiations.

Prosecutors allege that Barclays repeatedly deceived investors while selling $31 billion of mortgage-backed securities a decade ago, before the housing bubble popped. The bank rejected the government’s accusations in a statement, calling them “disconnected from the facts.”

Profit Erased

The threat of a multibillion-dollar settlement has hung over Staley’s head since he took over as CEO of Barclays last year, overshadowing his efforts to shrink the bank and refocus on its core markets in the U.K. and U.S. Over the past five years, almost all of its profit has been erased by 20 billion pounds ($24.5 billion) of misconduct charges.

The talks with the U.S. went poorly from the start. The first penalty proposed by prosecutors was so high the bank viewed it as a negotiating tactic, according to a person with knowledge of the matter, who wouldn’t disclose the number.

The bank argued the fine should be proportional to its market share in mortgage-backed securities during the housing bubble, two other people familiar with the lender’s position said. By that logic, Barclays would pay far less than JPMorgan.

The government said those metrics didn’t measure wrongdoing. It reduced its demand to about $5 billion, but Barclays refused to pay more than about $2 billion, according to one of the people familiar with the negotiations. Staley made the decision that bridging the gap would be impossible, the person said.

Diamond Lesson

Staley, 59, spent more than three decades at JPMorgan and was once seen as a candidate to succeed Dimon. He may have drawn a lesson from what happened to former Barclays CEO Robert Diamond, who cooperated with regulatory investigations into the rigging of benchmark interest rates in 2012. The bank was the first to settle and was praised for its cooperation. But Diamond was forced to resign amid a public outcry.

After Barclays negotiated a fine for the next international banking scandal -- rigging currency trading -- John McFarlane, the firm’s chairman, said the lender didn’t get credit for making changes.

“We paid one of the highest amounts in penalties of the banks who settled with the government, even though the offense was the same, even though we are by some measures one-half the size of other banks that settled, and even though we received acknowledgment for our cultural changes,” he wrote in a letter to shareholders in March.

In that letter, McFarlane said he was frustrated that the penalties were undermining the bank’s efforts to transform itself, a goal regulators support. “The societal costs of excessive penalties is very real,” he wrote.

‘Fraudulent Intent’

A May appeals court ruling against the U.S. in a case involving Bank of America Corp. may have given Barclays hope it will prevail in court. In that case, a panel threw out a judgment of almost $1.3 billion against the U.S. lender for selling defective mortgage loans, ruling the government hadn’t shown “fraudulent intent.” Lawyers for Barclays brought up that decision in settlement talks, two of the people said. They also argued that of the 36 securitizations identified by prosecutors as problematic, the bank itself was an investor in 31 of them.

Dimon was in a different position when he was negotiating in 2013. President Barack Obama’s administration was facing criticism that it had let the banks that caused the financial crisis off the hook. Now Staley may be betting the Justice Department will bend as it tries to finish prosecutions from that era, or that he can get a better deal after Donald Trump takes office.

JPMorgan’s $13 billion settlement amounted to 61 percent of its profit for the previous year. Barclays barely broke even over the past two years because of restructuring and litigation costs combined with a slow trading environment.

“Maybe they’re stringing along because they just don’t have the earnings power to pay a huge fine right now,” said David Hendler, founder of Viola Risk Advisors, a credit analysis firm. “This way they get some breathing room.”

Barclays has hired an additional law firm, Williams & Connolly, to represent it in court. The bank may argue that under the law the U.S. is using, the penalty should be based only on bonds sold to federally insured financial institutions, two of the people said. Only a small percentage of Barclays customers met that description, they said.

‘Really Painful’

Of course, Dimon didn’t think the government’s case against JPMorgan was fair either. A few months before his bank’s mortgage settlement, he told analysts that sometimes the government is wrong when it comes after a company. After the case was resolved, Dimon said the bank paid a “premium” to settle to avoid having his lieutenants drawn into depositions and his company “demeaned” in the media.

“It’s really, really painful,” Dimon told analysts in December 2013. “It’s very hard to go to court in some of these matters if you’re a bank, and I don’t want to threaten the health of my company ever.”

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