Barclays’ refusal to settle with the DoJ: a challenge to the U.S. enforcement regime?
16 Jan 2017

At the end of last year, Barclays announced that it would not settle with the U.S. Department of Justice over allegations that the bank mis-sold residential mortgage backed securities (“RMBS”) in the run-up to the 2008 financial crisis.

In its Complaint, the DoJ alleges that Barclays sold bonds to investors substantiated by mortgages that brokers knew stood a very low chance of being repaid.

Barclays is the first major lender to fail to settle with U.S. authorities in the RMBS scandal. JP Morgan, Bank of America, Morgan Stanley, Deutsche Bank and others have all settled already, for sums ranging from $2–7 billion. Barclays themselves have settled a number of other malpractice cases, such as LIBOR and foreign exchange rate fixing, paying out hundreds of millions of dollars. The bank’s refusal to kowtow on this occasion reflects its renewed confidence three years on from LIBOR, and suggests a degree of frustration on the part of shareholders and executives at ever-increasing regulatory penalties.

The move was undoubtedly ill-received by the DoJ, which, along with other U.S. enforcement agencies, has been keen to settle as many cases as possible before the change of administration (and its own leadership) on January 20th. It responded by suing Barclays and two ex-employees for fraud.

Do Barclays’ actions represent a challenge to the increasingly vigorous policing of big banks by U.S. authorities, or are they simply a quibble over figures?

According to a Barclays spokesperson, decidedly the latter. The size of settlement sought is not specified in the legal filings, but reports suggest the bank is prepared to pay up to $2 billion while the DoJ may be looking for more than double that.

In a press statement Barclays spoke of its ‘obligation to our shareholders, customers, clients, and employees to defend ourselves against unreasonable allegations and demands.’ Elaborating on this, a spokesperson told KYC360 that the gap between what Barclays were willing to pay and what was being asked was so large that refusing to settle was the most sensible option for shareholders. Additionally, though stressing that it is not a major factor, Barclays pointed to the uncertainty surrounding the new U.S. administration and its approach to financial regulation, which could work to the bank’s advantage.

The DoJ have some compelling evidence against Barclays including quotes from bankers in charge of RMBS deals. But the language is far less salacious than that of the notorious LIBOR texts and emails, and Barclays point out that the bank’s own interests were aligned with those of the investors who bought the bonds. Moreover, Barclays underwrote a significantly lower value of mortgage backed securities than banks that have already settled with the DoJ and argue that the settlement sought is disproportionate.

In all likelihood, as in the Dark Pools dispute with the U.S. Securities and Exchange Commission settled last year, Barclays will pay up once it has offered its defence and secured a reduced penalty. The episode is not a major setback for U.S. authorities in their efforts to make banks pay for malpractice. However, if the gamble pays off for Barclays, it may boost the confidence of other banks to stand up to enforcers and negotiate lower fines in future.

Amos Wittenberg, Editor, KYC360

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