Barclays to face off against US over 'craptacular' loans

A Barclays bank office is seen at Canary Wharf in London, Britain on May 19, 2015.
A Barclays bank office is seen at Canary Wharf in London, Britain on May 19, 2015.PHOTO: REUTERS

WASHINGTON (BLOOMBERG) - 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 (Dec 23) 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 lawyer known for his aggressive defense of clients including Lt Col. Oliver North.

Barclays is one of a handful of European lenders, including Deutsche Bank, 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 US$46 billion (S$66.68 billion) from six US financial institutions thus far.

Barclays executives tried to draw the line at US$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.

The British bank repeatedly deceived investors about the quality of more than US$31 billion in loans backing the securities that were sold between 2005 and 2007, the Justice Department said in a complaint filed on 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 (S$4.45 billion) for investigations and litigation since the start of 2014.