Barclays settles subprime fraud case on ‘fair’ terms, pays $2 billion in penalty

More than a decade after the subprime crisis wreaked havoc across the global financial system, skeletons are still tumbling out of the closet. After having learned lessons the hard way, the financial system is yet to fully recover from the crisis that exploded after Lehman Brothers collapsed following mass defaulting of high-risk mortgage loans.

When the fiscal mayhem softened and the crisis-stricken banks started recovering after a series of bail-outs, the ghosts of their financial mismanagement came alive in the form of penalties. It all started when BNP Paribas froze various funds with subprime exposure in August 2007.

It is estimated that the U.S. government collected around $150 billion in penalties from various financing services firms for engaging in fraudulent mortgage transactions that ultimately snowballed into a systemic financial catastrophe, and the amount is still going up.

The latest to be pulled by the Justice Department, for shady deals during the crisis era, is London-based investment banking firm Barclays (BCS), by slapping a whopping $2 billion penalty.

In the last year alone, three European banks were brought to book for mis-selling securities – Deutsche Bank (DB), Credit Suisse (CS) and Royal Bank of Scotland (RBS) –  which together paid fines of nearly $20 billion. After being charged with money laundering and interest rate manipulation, Bank of America (BAC) coughed up $56 billion, the biggest penalty in the subprime issue so far.

The department in its order said Barclays defrauded investors of a huge amount, from 2005 to 2007, by issuing illegitimate mortgage-backed securities and misinforming them about the quality of the loans involved.

Barclays stock slipped notably following the news but recovered in the afternoon and closed the day with a 0.5% gain

Though Barclays agreed to pay the fine, it did not admit liability to the charges. The bank had dismissed the allegations and refused to pay up when the department first imposed the penalty two years ago.

However, the bank is relieved to have settled the issue on reasonable terms. Meanwhile, two former executives of Barclays paid a combined $2 million in fine to the Justice Department, for their alleged role in the sale of the toxic bonds.

Barclays stock slipped notably following the news but recovered in the afternoon and closed the day with a 0.5% gain.