Risk & Compliance

U.S. Sues Barclays Over $30B in Toxic RMBS

Due diligence vendors described some of the loans underlying the securities as having the “distinct aroma of default.”
Matthew HellerDecember 22, 2016
U.S. Sues Barclays Over $30B in Toxic RMBS

Federal prosecutors on Thursday charged Barclays Bank with deceiving investors into acquiring more than $30 billion in mortgage securities that were backed by loans it knew were defective.

The Department of Justice filed a civil complaint against the bank after talks about a possible settlement broke down. It said Barclays’ offerings of 36 residential mortgage-backed securities between 2005 and 2007 proved to be “catastrophic failures,” with more than half of the underlying loans defaulting.

According to the complaint, Barclays “systematically and intentionally misrepresented key characteristics” of the loans, causing investors to lose “many billions of dollars, with hundreds of millions more in losses projected during the remaining life of the deals.”

The suit also named two former Barclays executives — Paul K. Menefee, lead banker on its subprime residential mortgage-backed securities; and John T. Carroll, lead trader for subprime loan acquisitions — as defendants.

“Barclays and its employees repeatedly misled investors and kept to themselves critical information about the loans in the deals,” Robert L. Capers, the U.S. Attorney in Brooklyn, N.Y., said in a news release. “Time and again, they knowingly chose to put investors at risk of harm in pursuit of additional profits.”

Barclays’ due diligence vendors allegedly described some of the securitized loans as “craptacular” and others as having the “distinct aroma of default,” while Menifee himself allegedly observed that one loan pool was “about as bad as it can be.”

As The Wall Street Journal reports, many of the banks caught up in mortgage meltdown have reached settlements over their RMBS sales. But Barclays reportedly bridled at the big payout the government was seeking.

The bank “was prepared to settle for a total of roughly $2 billion, including customer redress,” The Financial Times said, citing two people briefed on the matter. “But the DoJ pushed for something closer to the $5 billion settlements that both Deutsche Bank and Credit Suisse were thought to be close to agreeing.”

Barclays said the claims by the Justice Department were “disconnected from the facts” and it will “vigorously defend the complaint and seek its dismissal at the earliest opportunity.”

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