NEW YORK (IFR) - A multi-year investigation by US regulators into the role that big banks played in creating toxic mortgage securities nearly a decade ago is now drawing to a close.
Royal Bank of Scotland this week settled with the US in relation to claims that it packaged and sold shoddy mortgage loans as securities in the run-up to the financial crisis.
The agreement requires RBS to pay $4.9 billion to end the Department of Justice-led examination of the role that the bank and its employees played in a mortgage industry run amok.
RBS’s own chief US credit officer was quoted as calling mortgages earmarked for its bond deals “total f***ing garbage” (the asterisks are the DOJ’s) in a 20-page statement of facts released with the settlement.
When a friend emailed RBS’s head trader to ask if his parents imagined raising a son who would “destroy the housing market in the richest nation on the planet”, the trader responded: “I take exception to the word ‘destroy’. I am more comfortable with ‘severely damage’.”
But those comments are only a taste of what could have been made public.
More details about the RBS probe were initially slated to be released via a more than 100-page statement of facts, according to an officer with direct knowledge of discussions. But over the course of three months of negotiations with RBS, the officer said the size of the final document was cut down.
And more importantly, the officer also said the RBS settlement likely brings to an end efforts started by the Obama administration to hold individuals to account - via criminal cases - for wrongdoing in the mortgage bond mess.
In 2015, then Deputy Attorney General Sally Yates issued what become known as the “Yates Memo”, which called on the DOJ to step up its focus on individuals in its investigations of wrongdoing at corporations.
But the Trump administration’s efforts to roll back crisis-era regulations have cast a shadow over those efforts.
No individuals at RBS were identified by name as part of the probe, nor were names included in the final statement of facts.
RBS said it disputed US claims, without going into detail.
The RBS settlement relates to residential mortgage bond deals created between 2005 and 2008.
Prior to the crash, RBS was the third-largest underwriter of US residential mortgage bonds by balance. It was topped only by Lehman Brothers and Bear Stearns, both of which collapsed in 2008 under the weight, in large part, of their toxic mortgage holdings.
The RBS probe is part of a six-year investigation into a dozen major banks that turned trillions of dollars worth of US home loans into bonds before the financial crisis.
The Obama administration in 2012 set up the Residential Mortgage Backed Securities Working Group, a state and federal task force, to bring accountability to the market after billions of dollars in bonds soured and millions lost their homes.
Most of the banks that dominated the market prior to its implosion have settled claims brought by the task force, with those banks agreeing to pay more than $60 billion in fines and other remedies.
Bank of America Merrill Lynch agreed to the largest payout to date - $16.65 billion.
Barclays recently settled for US$2bn and two of its bankers paid a combined US$2m in exchange for claims against them being dismissed.
After RBS, only UBS and Nomura are left in settlement talks with the US, the officer said.
The DOJ said in a statement to IFR that it is committed to holding financial institutions accountable for their misdeeds in the 2008 financial crisis.
“We will continue this work, including through the Task Force on Market Integrity and Consumer Fraud announced last month,” a DOJ spokesman said.
Reporting by Joy Wiltermuth; Editing by Jack Doran and Matthew Davies