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Barclays agrees to pay $2 billion to settle crisis-era RMBS fraud charges

Two subprime mortgage bond traders also fined $2 million

Barclays Capital will pay $2 billion to the federal government to settle charges brought against the bank by the Department of Justice, which accused the company of fraudulent conduct involving the sale of residential mortgage-backed securities in the run-up to the housing crisis.

Back in 2016, the DOJ sued Barclays for allegedly misleading investors about the quality of the underlying subprime and Alt-A mortgages in $31 billion in mortgage bonds, which, as the DOJ put it, “proved to be catastrophic failures.”

According to the DOJ, more than half of the underlying loans defaulted, causing investors to lose billions of dollars.

The lawsuit came after a three-year investigation into Barclays’ pre-crisis mortgage activities. The RMBS deals in question were issued between 2005 and 2007.

In its lawsuit, the DOJ accused Barclays of violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, based on mail fraud, wire fraud, bank fraud and other misconduct. 

Now, just over 15 months later, Barclays is choosing to settle the DOJ’s lawsuit and will pay a fine of $2 billion.

Additionally, two former Barclays executives who oversaw various parts of the subprime mortgage securitization channel were also fined.

According to the DOJ, Paul Menefee, who served as Barclays’ head banker on its subprime RMBS securitizations, and John Carroll, who served as Barclays’ head trader for subprime loan acquisitions, will pay a combined fine of $2 million to dismiss the claims against them.

The DOJ lawsuit alleged that Barclays “systematically and intentionally” misrepresented key characteristics of the loans that were included in the RMBS deals in both public offering documents and in direct communications with investors and ratings agencies.

According to the DOJ, the borrowers whose loans made up the deals were “significantly less creditworthy” than Barclays told investors they were, and these loans defaulted at “exceptionally high rates” early in the life of the deals.

Additionally, the complaint alleged that the underlying properties were “systematically” worth less than what Barclays represented to investors. 

The DOJ claimed that Barclays was aware, and ignored, the deteriorating underwriting standards of the lenders who originated the mortgages in question, which included now-failed lenders New Century Financial, Countrywide, IndyMac, and Fremont General.

According to the DOJ, Barclays “knew that such companies were routinely originating fraudulent loans, including ‘stated documentation’ loans rife with misrepresentations.”

The DOJ claimed that those lenders “pushed to have Barclays buy as many of their shoddy loans as possible in order to shift the risk of default from the originators onto Barclays’ RMBS investors.”

Despite allegedly knowing what was really going on, Barclays was a “willing and active participant” in the scheme in order to maximize its profits on the RMBS deals.

“Indeed, in its relentless pursuit of new loans to feed its securitization machine, and in its active collaboration with originators to maximize loan volume, Barclays not only acquired and securitized billions of dollars of loans it knew had material defects, but it also extended billions of dollars in financing to lenders it knew were originating loans without regard to the ability of the borrowers to repay them (including, in many cases, loans that were fraudulent),” the DOJ claimed in its lawsuit.

The DOJ also claimed that Barclays ignored the advice of its due diligence vendors, if it had due diligence performed at all.

From the DOJ’s lawsuit:

These vendors described some of these securitized loans as “craptacular,” others as “scariest collateral,” and others as having the “distinct aroma of default.”

The lawsuit also detailed the alleged conduct of Menefee and others involved in the sales process.

Again, from the DOJ’s lawsuit:

Menefee, the head Barclays banker in charge of due diligence on the subprime deals, observed that one loan pool was “about as bad as it can be” and another “scares the sh*t out of me.” He complained about a Wells Fargo pool that “we have to eat their sh*t loans.” Meanwhile, a Barclays salesperson described “the deluge of Fremont garbage being put out there.”

Despite Barclays settling the charges, the DOJ notes that these are allegations only, which Barclays disputes.

“This settlement reflects the ongoing commitment of the Department of Justice, and this Office, to hold banks and other entities and individuals accountable for their fraudulent conduct,” Richard Donoghue, U.S. Attorney for the Eastern District of New York, said in a statement. “The substantial penalty Barclays and its executives have agreed to pay is an important step in recognizing the harm that was caused to the national economy and to investors in RMBS.”

In a statement, Barclays said that this settlement resolves all actual and potential civil claims by the DOJ relating to the company’s securitization, underwriting and sale of mortgage bonds from 2005-2007.

“I am pleased that we have been able to reach a fair and proportionate settlement with the Department of Justice. It has been a priority for this management team from the start to resolve these historic issues in a timely and appropriate manner wherever possible,” Barclays CEO Jes Staley said.

“The completion of our restructuring in 2017, and putting significant legacy matters like this one behind us, means Barclays is well positioned to produce stronger earnings going forward, and to start returning a greater proportion of those earnings to our shareholders over time,” Staley said.

In a statement provided to HousingWire, a Barclays spokesperson added: “Barclays is pleased to have reached a resolution of this matter with the Department of Justice and in doing so put a significant legacy issue behind us.”

The settlement is the second RMBS-related settlement Barclays reached with a federal agency in the last year.

Last May, Barclays agreed to a $16.5 million settlement with the Securities and Exchange Commission stemming from allegations that the company did not properly supervise two of its former mortgage bond traders who allegedly lied to and overcharged clients.

That conduct allegedly took place between June 2009 and December 2012.

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