Justice Suit Against Barclays Shows Again What Caused the Crash
Dec. 23, 2016 (EIRNS)—The Department of Justice’s initiation yesterday of a suit against Barclays bank, for mortgage securities fraud, provides evidence again that investment bank/shadow bank practices and "culture" led to the 2008 financial crash. Spokesmen against restoring the Glass-Steagall Act, from the American Enterprise Institute to President Obama, have frequently claimed that "lending by banks" (i.e., unrepayable mortgages) caused the crash, and that therefore Glass-Steagall would not have prevented it.
Barclays alone of the biggest international banks refused to settle with the DoJ on fines for mortgage securities fraud. Thus the 200-page lawsuit filed yesterday in Federal Court in Brooklyn, New York. It charges the British bank
"deceived investors about the quality of loans underlying tens of billions of dollars of mortgage securities between 2005 and 2007, and engaged in a fraudulent scheme to sell tens of billions of dollars of residential mortgage-backed securities (RMBS), in which it repeatedly deceived investors about the characteristics of the loans backing those trusts."
The suit also said that the bank systematically and intentionally misrepresented key characteristics of the loans.
Did Barclays make these badly underwritten loans? For the most part, no. Acting as an investment bank, it securitized them, defrauding en masse the investors who bought the securities. It
"repeatedly deceived investors about the quality of more than $31 billion in loans backing the securities that were sold between 2005 and 2007,"
the Justice Department said.
And critically, Barclays as a "universal bank" combining commercial deposit-and-lending activity with securities and derivatives transactions of all types, used its deposit base in part to create the "raw material" for the fraudulent securitization which triggered the crash.
Now quoting from a Bloomberg News Dec. 22 article on the suit, "Barclays extended billions of dollars in financing to lenders that the bank knew were originating loans without regard to the ability of the borrowers to repay them, the government alleges. This pump-priming activity contributed to the housing bubble and to the ensuing crash, whose effects devastated the world economy in the financial crisis of 2008."
As made clear in a number of analyses of that crash, most widely in the book and movie The Big Short, the investment bank activity of the big Wall Street and London banks created and demanded the millions of bad mortgage loans which were the fodder for their fraudulent securities operations.