Barclays to face off against US

Published Dec 23, 2016

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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

 

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