Barclays has agreed a $2bn (£1.4bn) settlement with the US justice department over the sale of mortgage-backed securities in the lead-up to the 2008 financial crisis.
The settlement follows a three-year investigation into allegations that the bank caused billions of dollars of losses to investors by “engaging in a fraudulent scheme” to sell Residential Mortgage-Backed Securities (RMBS) between 2005 and 2007.
The British bank was said to have misled investors about the quality of the mortgage loans backing those deals.
The justice department alleged violations of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, based on postal, wire and bank fraud as well as other misconduct.
Two former Barclays executives have also reached a settlement. Paul Menefee, who served as the lead banker of its subprime RMBS securitisation unit, and John Carroll, who worked as the head trader for subprime loan acquisitions, will pay a total of $2m.
Richard Donoghue, US attorney for the eastern district of New York, said: “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.
“The substantial penalty Barclays and its executives have agreed to pay is an important step in recognising the harm that was caused to the national economy and to investors in RMBS.”
The fine is less than City analysts had expected and less than the penalties paid by other foreign banks facing similar claims. In December 2016 Credit Suisse paid $5.3bn as a settlement and to consumers. Deutsche Bank settled at $7.2bn a month later. At the time Barclays said it would not settle and the justice department launched legal proceedings.
The department’s complaint involved 36 residential mortgage-backed security deals, which made $31bn of subprime and Alt-A loans tradable on the market.
The department alleged that the borrowers whose loans backed those deals were “significantly less trustworthy” than Barclays made them out to be. In addition, the mortgaged properties were “systemically worth less” than what had been presented to investors.
Ultimately more than half of those loans defaulted.
Barclays said the settlement resolved “all actual and potential civil claims” by the justice department relating to securitisation, underwriting and sale of mortgage-backed securities in the period 2005-2007.
Jes Staley, its chief executive – who was not at the bank at the time of the RMBS sales – said: “I am pleased that we have been able to reach a fair and proportionate settlement with the Department of Justice.”
The settlement comes nearly a month after Barclays confirmed a loss of nearly £2bn last year, after a string of hefty charges, including a £900m hit from Donald Trump’s corporate tax changes and £127m from the collapse of the outsourcing and construction firm Carillion. It also racked up £2.5bn of losses from the sale of Barclays Africa.
Pre-tax profits rose 10% to £5.3bn for 2017, but the bank reported an after-tax loss of £1.9bn. It made a profit of £1.6bn in 2016.
Staley said: “The completion of our restructuring in 2017, and putting significant legacy matters like this one behind us, mean 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.”
As a result, Barclays still intended to pay a dividend of 6.5p for 2018, he added. Barclays shares edged down after the announcement.