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Eleven Years Later, Barclays to Pay $2 Billion Penalty Over Mortgage Bonds

Investors lost billions of dollars after Barclays misled them about the quality of the loans backing residential mortgage securities from 2005 to 2007, the Department of Justice alleged.

Barclays has agreed to pay $2 billion in civil penalties to settle allegations of fraud tied to the sale of residential mortgage-backed securities in the run-up to the 2008 financial crisis, according to the U.S. Department of Justice. 

The U.S. government alleged that investors lost billions of dollars after Barclays misled them about the quality of mortgage loans backing 36 RMBS deals sold by the bank from 2005 to 2007, the DOJ said in a statement Thursday. More than half of the $31 billion of mortgages securitized in the deals defaulted.

The DOJ alleged that Barclays "systematically and intentionally misrepresented key characteristics of the loans" in the RMBS sales. The borrowers were "significantly less creditworthy than Barclays represented," with their loans defaulting at "exceptionally high rates" early on in the deals, the DOJ said.

Two former Barclays executives named in the government's complaint – Paul Menefee, who was the head banker for subprime RMBS products, and John Carroll, who served as head trader for subprime loan acquisitions – agreed to pay a combined $2 million in civil penalties to dismiss the claims against them, according to the 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," Richard Donoghue, U.S. Attorney for the Eastern District of New York, said in the DOJ's statement.

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Widespread defaults on subprime mortgage loans led to the 2008 financial crisis and the worst recession in the U.S. since the Great Depression.

Laura Wertheimer, inspector general of the Federal Housing Finance Agency Office of the Inspector General, said in the statement that the settlement "holds accountable those who waste, steal, or abuse funds in connection with FHFA or any of the entities it regulates."

The defendants dispute the allegations of fraud and there has been no trial or judicial finding of fact on the matter, according to the DOJ.

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