Nearly a decade since the start of the subprime mortgage crisis, and with Washington poised to undergo the greatest political shift in generations, it seems as good a time as ever for federal prosecutors to file charges against Barclays Plc and two bank executives for peddling tens of billions of dollars in shoddy pre-crisis debt products.
According to the 192-page lawsuit, filed in a New York district court Thursday, Barclays securitized at least $31 billion in mortgage securities that ended up being “catastrophic failures.” According to the complaint:
More than half of the underlying loans defaulted, causing investors in those deals to lose many billions of dollars, with hundreds of millions more in losses projected during the remaining life of the deals. Even many investors in the AAA-rated tranches of these securitizations, which were rated as safe as investments in U.S. Treasury bonds, have suffered or are projected to suffer significant losses.
In publicly-filed offering documents, in other deal transaction documents, and in direct communications with investors and rating agencies, Barclays systematically and intentionally misrepresented key characteristics of the loans it included in the Subject Deals.
Barclays' due diligence knew they were dealing with damaged goods, prosecutors allege, and they used some evocative language to convey the point. “Vendors described some of these securitized loans as ‘craptacular,’ others as ‘scariest collateral,’ and others as having the ‘distinct aroma of default,’” the complaint says.
Paul Menefee, the Barclays banker who led loan securitizations during the 2005-2007 span the lawsuit covers, evidently agreed. One pool of loans was “about as bad as it can be,” he said, according to the lawsuit. Another “scares the sh*t out of me,” Menefee allegedly wrote. He even threw some shade at Wells Fargo, years before that sort of thing was in vogue: “We have to eat their sh*t loans,” he said, according to prosecutors.
As America lurches into 2017, all of this has a vintage, even quaint feel to it. For one thing, today's bankers would never express those sorts of visceral doubts about products about to be offloaded onto unsuspecting customers over email. That's what Snapchat is for.
The case is U.S. vs. Barclays, New York Eastern District Court, case 1:16-cv-07057-KAM-RLM.