By Jill Treanor
Department of Justice accuses bank of using loans from other mortgage lenders as basis of bonds it was selling
Barclays is refusing to settle with the US Department of Justice over allegations it deliberately sold mortgage bonds to investors that it knew contained “craptacular loans”.
The DoJ’s legal filing outlines an array of colourful descriptions of the types of mortgages that it alleges were used by Barclays to package up in bonds – known as residential mortgage bond securities – which could be sold on to investors.
It accuses Barclays of selling investors RMBS “backed by loans it knew were made to borrowers who were not creditworthy and which were supported by house appraisals it knew were inflated”.
The DoJ said Barclays was not lending to customers itself but using loans from mortgage lenders Fremont, New Century, WMC, Countrywide, and IndyMac as the basis of the bonds it was selling.
To support its case the DoJ published conversations between bankers which it claimed proved they knew they were selling poor investments. They included:
• One Barclays banker in charge of reviewing the deals observed that one loan pool was “about as bad as it can be”.
• On another occasion, the same banker said this “scares the shit out of me”. He also remarked about a package of loans from Wells Fargo that “we have to eat their shit loans”.
• A Barclays salesperson described “the deluge of Fremont garbage being put out there”, the DoJ said.
Barclays, becoming the first major lender to fail to reach a settlement with the DoJ, said it rejected the claims made in the complaint. “Barclays considers that the claims made in the complaint are disconnected from the facts. We have an obligation to our shareholders, customers, clients, and employees to defend ourselves against unreasonable allegations and demands. Barclays will vigorously defend the complaint and seek its dismissal at the earliest opportunity,” the bank said.
The filings do not contain any clues about the size of the settlement that the DoJ was hoping to reach with Barclays, although the bank is thought to have been prepared to pay up to $2bn (£1.6bn). There are reports the DoJ wanted double that amount.
The DoJ said one of the companies conducting analysis for the bank, Valuation Stream, referred to “craptacular loans” that sellers such as New Century were originating to keep up loan production as the application volume began to decline.
The language used by bankers has been exposed in the past, notably in 2012 when the bank was the first major lender to be fined for rigging Libor. Then, the City regulator published email exchanges in which Barclays staff were offered bottles of Bollinger champagne as payment for favours, or their names printed in “golden letters”. Other exchanges involved emails in which traders remarked “always happy to help,” “for you, anything,” or “done … for you big boy,” after submitting rates that were incorrect.