By Devlin Barrett

The Justice Department's mortgage lawsuit against Barclays runs nearly 200 pages, and many of the most serious accusations come from internal calls among employees that were recorded and later reviewed by federal investigators.

The suit filed Thursday seeks to paint Barclays as a bank where executives knew the underlying mortgages behind their securities were bad, and repeatedly found ways to securitize them and misrepresent the quality of those loans to investors.

Barclaysrejected the claims in the complaint, saying in a statement it considers the allegations "disconnected from the facts."

The allegations contained in the lawsuit include:

-- In a June 28, 2007, call between Barclays executive Paul Menefee and a trader at the bank, Mr. Menefee allegedly bemoaned that some investors were starting to notice the number of bad loans in the securities, and press for better quality control, the lawsuit claims.

"I just don't think we're able to hide as much as we were last year, jam things in, you know, bob and weave and hope for the best. And I think those days are behind," he allegedly said.

Barclays allegedly knew one of the mortgage originators who supplied new loans to securitize, New Century, was going under, and initially resisted taking any more loans from them before giving in, according to the suit.

-- Mr. Menefee and John Carroll, Barclays' head subprime trader, observed in 2007 that "the f***ing place is on fire," and "save an act of God I think these guys are going to BK (bankruptcy) as quickly as you can imagine," the lawsuit says.

The two initially resisted buying any more New Century collateral, but ended up doing so after being told a more senior bank executive wanted Barclays to purchase a new pool of loans to maintain the bank's longstanding relationship with New Century, according to the lawsuit.

Mr. Menefee's lawyer called the complaint "a misguided attempt" to blame his client and others for losses incurred by sophisticated institutional investors.

Mr. Carroll's lawyer didn't immediately respond to requests for comment.

-- The lawsuit repeatedly tries to show that Messrs. Menefee and Carroll were well aware of how toxic the underlying mortgages were.

In one alleged conversation, Mr. Menefee said, "you have to know 90% of the reason something like this would default is because of fraud," and claimed he could prove all the delinquent loans were fraudulent, the lawsuit said.

-- The government also charges that bank executives knowingly dumped bad loans onto unwitting investors, rationalizing it by saying that doing so would save the bank money.

Mr. Carroll allegedly instructed Mr. Menefee to include millions of dollars in defaulted loans in products by arguing doing so would save the bank $1 million, even if it increased the likelihood investors would end up taking the loss.

Barclays was "willing to take it on the chin from [an investor] because we did the right thing for the firm by securitizing as many loans" as possible," Mr. Menefee allegedly said. Mr. Carroll allegedly responded "if we pull [the defaulted loans] out of the deal, we take on 100% of the risk; we've sold 97% of the risk in the deal. Just leave them in," the lawsuit claims.

-- The case says the bank allowed bad loans to go into securities because they "needed to keep the originators happy, so that they could do business with them and so that they would continue to supply Barclays with mortgages to securitize." The bank and its executives "frequently bowed to originator pressure to limit the number of loans they kicked out during due diligence."

Even when due diligence checks flagged loans as unworthy of securitization, bank executives would "waive in" many such loans to the pool, the lawsuit charges.

Barclays and its employees, the government charged, "securitized in the subject deals more than 6,000 loans, worth over $1 billion, that they reviewed in credit/compliance due diligence and learned had material defects."

Write to Devlin Barrett at devlin.barrett@wsj.com

(END) Dow Jones Newswires

December 22, 2016 19:08 ET (00:08 GMT)

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