Photographer: Luke MacGregor/Bloomberg

Barclays and U.S. Renew Talks Over Toxic Mortgages Lawsuit

Updated on
  • DOJ sued last year after negotiations failed over penalty size
  • Barclays was said to be willing to pay no more than $2 billion

Barclays Plc and the U.S. Justice Department, engaged in a legal battle over the suspected fraudulent sale of mortgage securities a decade ago, have revived discussions about reaching an out-of-court settlement, according to people with knowledge of the situation.

The Justice Department has responded in recent weeks to requests from the London-based bank to reopen negotiations, said the people, who asked not to be identified speaking about a confidential process. If successful, the lender would avoid a protracted trial and remove a major misconduct issue weighing on its share price.

Read more on Barclays third quarter results

The Justice Department sued Barclays for fraud in December, in the waning days of the Obama administration, after the bank refused to pay the amount the government sought in negotiations. At the time, people familiar with situation said Barclays was willing to pay no more than $2 billion to settle the civil matter, while the Justice Department was seeking a far higher penalty.

“It’s encouraging to see that the DOJ appears to be back in business regarding the discussion of settlements,” said Edward Firth, an analyst at Keefe, Bruyette & Woods. Piers Brown, an analyst at Macquarie Ltd., echoed his sentiment and said $1.5 billion would be a “reasonable number” for Barclays to pay.

First Lawsuit

The lawsuit was the government’s first against a bank over the sale of toxic mortgage bonds that helped spur the financial crisis. Other lenders negotiated settlements worth tens of billions of dollars in penalties overall rather than risk drawn-out litigation and possible trials. Deutsche Bank AG accepted a $7.2 billion agreement to resolve its RMBS investigation in December, the same month talks with Barclays collapsed.

The Justice Department and Barclays declined to comment.

By prompting the Justice Department to sue, Barclays may have been betting it would fare better with enforcement officials appointed by President Donald Trump, analysts and legal experts have said, an approach that could be vindicated if Barclays re-enters negotiations.

Barclays asked a federal judge in Brooklyn to dismiss the case this month. The government opposed the request, saying the suit should proceed because its case leaves little doubt that Barclays perpetrated “a massive and coordinated fraud” resulting in billions of dollars in losses to investors. Mortgage-bond probes are still pending into HSBC Holdings Plc, UBS Group AG and Royal Bank of Scotland Group Plc.

Swift Resolution

Barclays’s renewed discussions are “positive also for RBS, who might now be able to make a far larger settlement before results are published in next year,” KBW’s Firth said. 

“Certainly dialogue has picked up with the DOJ over the last quarter or so,” RBS Chief Financial Officer Ewen Stevenson said Friday, with the bank’s CEO adding they’re “optimistic” of settling this fiscal year. Some analysts have estimated RBS may have to pay more than $8 billion to put the case behind them.

The Justice Department’s outreach is only preliminary and no settlement figure has been provided, the people with knowledge of the matter said. Barclays is keen to settle the allegations as soon as possible to give investors clarity on its capital position, doubts over which have contributed to an 18 percent decline in the stock this year. The bank’s shares were battered on Thursday after it reported a 31 percent decline in trading revenue.

“Investors would like to see a swift resolution to the DOJ matters so as to remove an overhang from the shares,” said Joseph Dickerson, an analyst at Jefferies Group LLC.


Barclays 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 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.

The bank has said it rejects the government’s accusations and has called them “disconnected from the facts.” It has said it has “an obligation to our shareholders, customers, clients and employees to defend ourselves against unreasonable allegations and demands.”

The lender is also under scrutiny in the U.K. The Serious Fraud Office charged the bank with conspiracy to commit fraud during its 2008 capital raising from Qatar, and Chief Executive Officer Jes Staley is under investigation by the Financial Conduct Authority, suspected of repeated attempts to unmask a whistle-blower.

Read more about Staley and FCA probe

Barclays has retained the law firm Williams & Connolly, whose top lawyer Brendan Sullivan Jr. is known in Washington for relishing courtroom showdowns. The bank’s longtime outside law firm, Sullivan & Cromwell, is also working on the case.

— With assistance by Patricia Hurtado, and Tom Schoenberg

    Quotes from this Article
    Before it's here, it's on the Bloomberg Terminal.