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Barclays wins its DOJ gamble with $2 billion mortgage settlement

Barclays agreed to pay $2 billion to settle a probe into how it sold the sort of mortgage bonds that fueled the financial crisis, securing a penalty less than half of what U.S. authorities originally demanded.

The British lender was the only bank to push back against the size of the settlement demanded by the Justice Department, prompting the prosecutor to file a lawsuit in the waning days of the Obama administration in 2016. The DOJ wanted a fine of about $5 billion, but the bank refused to pay any more than $2 billion, Bloomberg news reported in 2016.

"The settlement came at the bottom end of expectations and much sooner than expected," said Ian Gordon, an analyst at Investec, who called it a "clear positive" and a "very happy Easter" for the bank. The shares erased a drop of almost 1% after the news, closing 0.2% higher.

Barclays CEO Jes Staley's gamble to face down the DOJ paid off. Big banks typically negotiate a settlement rather than risk a protracted and reputation-damaging courtroom showdown with U.S. lawyers. While Mr. Staley chose to fight, J.P. Morgan Chase CEO Jamie Dimon said he "had no choice" but to "surrender," agreeing to pay $13 billion to settle similar accusations.

The settlement brings Barclays closer to resolving its litany of crisis-era misconduct, which has hung over the struggling lender for more than a decade. Litigation settlements and fines — including punishments for rigging interest rates and currency markets and bilking U.K. customers on insurance they didn't need — have wiped out more than 15 billion ($21 billion) of earnings in the past six years, Chairman John McFarlane said last month.

"Putting significant legacy matters like this one behind us means Barclays is well positioned to produce stronger earnings going forward, and to start returning a greater proportion of those earnings to our shareholders," Mr. Staley said in a statement, calling the settlement "fair and proportionate."

Fellow British lender Royal Bank of Scotland Group is still awaiting a settlement with the DOJ before the U.K. government can sell off its 70% stake in the firm. The bank's leader, Ross McEwan, has told investors he is hoping to settle the probe this year. Edward Firth, an analyst at Keefe, Bruyette and Woods in London, called RBS the "poster child" for the RMBS scandal, estimating that bank's settlement will reach $9 billion.

Barclays and its CEO aren't out of the woods yet. Mr. Staley is awaiting the outcome of a U.K. Financial Conduct Authority probe that could determine his future at the lender after he repeatedly attempted to unmask a whistle-blower. Additionally, the U.K.'s Serious Fraud Office has charged the firm over its fundraising from the Middle East at the height of the financial crisis. Barclays has said it intends to defend itself in court on those charges as well.

The DOJ suit was also unusual in targeting two former executives at the bank, Paul Menefee and John Carroll, who also settled Thursday and agreed to pay $2 million to resolve claims without admitting wrongdoing.

"The actions of Barclays and the two individual defendants resulted in enormous losses to the investors who purchased the residential mortgage-backed securities backed by defective loans," Laura Wertheimer, the inspector general for the Federal Housing Finance Agency, said in a statement. "Today's settlement holds accountable those who waste, steal or abuse funds in connection with FHFA or any of the entities it regulates."

Mr. Menefee, who was the head banker on Barclays's subprime RMBS securitizations, "has always maintained that the government's FIRREA lawsuit against him was baseless," his lawyers said in a statement, referring to the statute under which the case was brought. "Solely to put this matter behind him, Mr. Menefee has agreed to a settlement in which he has not admitted any wrongdoing."

Mr. Carroll is pleased the government "relented in its efforts to prove wrongdoing where none exists," lawyer Glen McGorty said in an emailed statement.

The U.S. probe targeted 36 RMBS deals involving $31 billion worth of loans, more than half of which defaulted. The Justice Department claimed that borrowers whose loans backed subprime mortgage deals were significantly less creditworthy than Barclays represented. The bank denied the allegations.