Barclays pays $2 billion (less than what DOJ initially sought) to settle mortgage fraud claims; conduct occurred around time of arena naming-rights agreement
The United States has reached agreement with Barclays Capital, Inc. and several of its affiliates (together, Barclays) to settle a civil action filed in December 2016 in which the United States sought civil penalties for alleged conduct related to Barclays’ underwriting and issuance of residential mortgage-backed securities (RMBS) between 2005 and 2007. Barclays will pay the United States two billion dollars ($2,000,000,000) in civil penalties in exchange for dismissal of the Amended Complaint.
Following a three-year investigation, the complaint in the action, United States v. Barclays Capital, Inc., alleged that Barclays caused billions of dollars in losses to investors by engaging in a fraudulent scheme to sell 36 RMBS deals, and that it misled investors about the quality of the mortgage loans backing those deals. It alleged violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), based on mail fraud, wire fraud, bank fraud, and other misconduct.What happened:
Agreement has also been reached with the two former Barclays executives who were named as defendants in the suit: Paul K. Menefee, of Austin, Texas, who served as Barclays’ head banker on its subprime RMBS securitizations, and John T. Carroll, of Port Washington, New York, who served as Barclays’ head trader for subprime loan acquisitions. In exchange for dismissal of the claims against them, Menefee and Carroll agree to pay the United States the combined sum of two million dollars ($2,000,000) in civil penalties.
The scheme alleged in the complaint involved 36 RMBS deals in which over $31 billion worth of subprime and Alt-A mortgage loans were securitized, more than half of which loans defaulted. The complaint alleged that in publicly filed offering documents and in direct communications with investors and rating agencies, Barclays systematically and intentionally misrepresented key characteristics of the loans it included in these RMBS deals. In general, the borrowers whose loans backed these deals were significantly less creditworthy than Barclays represented, and these loans defaulted at exceptionally high rates early in the life of the deals. In addition, as alleged in the complaint, the mortgaged properties were systematically worth less than what Barclays represented to investors. These are allegations only, which the Defendants dispute, and there has been no trial or adjudication or judicial finding of any issue of fact or law.Note that this is a civil claim, not a criminal admission of guilt, which Barclays made in 2015, leading to my 9/24/15 argument in City & State, Opinion: When Barclays admitted a felony, it should have lost the Brooklyn arena.
When did this happen?
According to the settlement agreement:
The Complaint alleges that between December 1, 2005, and December 31, 2007 (the “Relevant Period”), Barclays engaged in violations of predicate offenses under FIRREA when it sponsored, issued, underwrote, managed, or offered 36 residential mortgage-backed securities (“RMBS”), which are identified in Table 1 annexed to the Complaint. The Complaint asserts claims for civil penalties under FIRREA against Barclays as to all 36 of these securitizations (“the Subject Deals”).Keep in mind that the Barclays Center naming rights agreement was announced in January 2007, just during the period noted above.
Did Barclays get a deal?
Though $2 billion seems like a lot of money, Bloomberg wrote 3/29/18, Barclays Wins Its DOJ Gamble With $2 Billion Mortgage Settlement:
The British lender was the only bank to push back against the size of the settlement demanded by the Justice Department, prompting the prosecutor to file a lawsuit in the waning days of the Obama administration in 2016. The DOJ wanted a fine of about $5 billion, but the bank refused to pay any more than $2 billion, Bloomberg news reported in 2016.JPMorgan Chase, noted the article, paid $13 billion to settle similar accusations. The entire investigation, according to Bloomberg, "targeted 36 RMBS deals involving $31 billion worth of loans, more than half of which defaulted."
The Guardian's Nils Pratley agreed with the analysis above, arguing 3/29/18, Barclays boss Jes Staley’s handling of US fraud case was correct:
But resistance was not futile, which is the critical point. The sums are everything. Nobody will ever confirm figures, but it was widely reported that Barclays was offered a settlement at about $5bn in 2016. If so, chief executive Jes Staley’s threat to take the case to court was justified. The figure has more than halved.Pratley noted that Barclays’ share price remained stable.
Why, though, settle at all? Didn’t Staley argue at the time that the DoJ’s case was “disconnected from the facts”? Yes, he did, but you can’t blame Barclays for deciding at this point that it’s better to swallow some financial pain for the sake of certainty. Going the distance with the DoJ would be perilous.