If you saw your Barclays (LON:BARC) stock take a gentle dive during the month of December, look for the culprit in none other than the United States Government. The US Department of Justice has sued European bank Barclays, after the company refused to make a settlement for alleged wrongdoing in the events that led up to the 2008 global financial meltdown.
For those in need of a memory jog, the Great Recession was largely the result of the failure of loan-backed mortgage securities. Mortgages loans were previously considered a bedrock of stability, as homeowners tended to pay their loans back in order to stay in their houses. But when loans were issued to thousands of people who hadn’t the capability to pay back their loans, half of the mortgage backed securities market collapsed, throwing the whole financial world into chaos.
The US is alleging that Barclays knowingly contributed to the disaster.
It is unknown just how much the Justice Department is trying to extract from Barclays. The suit doesn’t look good for a bank that is also involved in the ppi claims scandal, the selling of unwanted Payment protection insurance to thousands of, you guessed it, mortgage loan borrowers (and other borrowers as well). It’s not going to sink Barclays, and the two former executives identified in the suit, but it’s more egg on the face for a financial institution that has recently been the object of mistrust, for consumers, investors, and governments alike.
Legal precedent does not bode well for the outcome of this case, at least as it pertains to Barclays. JPMorgan Chase & Co (NYSE:JPM) and Bank of America (NYSE:BAC) have both made financial restitution for their part in the mortgage backed securities debacle. Deutsche Bank (DE:DBKGn) and Credit Suisse (SIX:CSGN) are also in settlement talks, likely made all the more urgent at the news that the Justice Department sued when they did not get their way with Barclays.
The suit alleges that Barclays knowingly defrauded investors in deals involving tens of billions of dollars in securities. Individual mortgage holders were similarly defrauded, both in their ability to repay their home loan and in the value of the home itself, many of which were greatly inflated. US Attorney General Loretta Lynch has spoken forcefully on the subject, a tone that many saw as largely absent from government/banking quarrels in the months immediately following the financial crash.
Barclays responded by saying that the allegations were “Disconnected from the facts”, and reaffirming their commitment to their shareholders as they fought the allegations. Barclays’ stock fell 1.8% in the day following the news, just before Christmas.
Barclays has allocated $3.1 Billion for settling this and other legal challenges, like the PPI claims scandal, though it is not clear how much will eventually be tied up in the battle with the US Justice Department. Industry analysts indicate that expenditures of more than $1.5 Billion could have serious immediate impact on Barclays’ capital ratio and share value. Barclays investors are following the situation closely, and we’ll let you know what we find out as the situation develops.