Washington - The
US Justice Department sued Barclays 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, Credit Suisse Group, UBS
Group and Royal Bank of Scotland Group, that have yet to settle long-running US
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 centre of an Obama administration initiative to recoup
investor losses on the securities. The US has extracted more than $46 billion
from 6 US financial institutions thus far, and on Friday Deutsche Bank 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.
Read also: Deutsche Bank to settle US probe for $7.2bn
“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.
-With assistance from Zeke Faux, Michael J.
Moore and Andrew Harris.
BLOOMBERG