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Lurid Subprime Scams Unveiled in Long-Running Fraud Trial

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Lost amid the hoopla over JP Morgan Chase's record-setting $13 billion settlement this fall was news of another monster court resolution -- a $2.46 billion judgment, the largest ever awarded after trial in a securities fraud class action case, handed down in October against a HSBC acquisition called Household International.

It's an old case, with the trial completed way back in 2009 and the fraud in question having all taken place between 1997 and 2002. But it has crucial ramifications for the present, for one key reason:

The evidence uncovered in the Household suit should put to lie once and for all the oft-repeated myth -- spread by many of America's most notable dumb people, from Rush Limbaugh to New York City Mayor-unelect Mike Bloomberg -- that the financial crisis was caused by the government "forcing" banks to lend to poor people.

In reality, of course, the subprime bubble exploded because financial companies and banks were in a mad rush to get as many iffy borrowers into loans as quickly as possible -- and not because they were forced to, but because they made assloads of money doing so.

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Nowhere was that more in evidence than in this case, Lawrence E. Jaffe Pension Plan v. Household International, Inc., et al., where a major trafficker in subprime and "alternative" mortgage products schemed in every conceivable way to get low-income, high-risk borrowers into as many dangerous mortgages and refinance deals as they could.

Thankfully, the principals in this case left behind a treasure trove of amazingly disgusting videos and internal memoranda showing in graphic detail an elaborate, company-wide plan to herd unsuspecting high-risk borrowers into bad loans. We can share some of that evidence here, with particular emphasis on the firm's "training videos," and I can pretty much guarantee that some readers may actually vomit with rage when they watch them.

Some background: The suit against Household International, a major home-loan purveyor that earned $75 billion from loan securitizations in 1999-2002 (and which was swallowed up by HSBC in 2002) originally began as a stock fraud case. Among other things, Household was disguising the toxicity and instability of its loans using a wide assortment of improper accounting schemes, which in an Enronesque touch were used to argue to the markets and to potential stockholders that Household was putting up record sales numbers.

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These accounting tricks included a preposterous technique called "re-aging," in which company bean-counters would declare delinquent loans to be no longer delinquent, by magically resetting the clock on the borrower's payment history under certain conditions (thereby "re-aging" the delinquency).

Using this and other sordid bookmaking techniques, they could then claim that they had more well-performing loans than they really did. This tricked shareholders into believing that the company's loan portfolio was stronger than it was.

Way back in 2002, numerous major investors in Household, including several pension funds, sued the company for violations of securities laws. The plaintiffs back then could have had no idea they would spend 11 years in court, and that their case would end up uncovering evidence of behavior that would play a key role in inflating a worldwide speculative bubble in the mid-2000s, and crashing the U.S. economy in 2008.

A Chicago jury ruled against the firm in May 2009, and the award was announced a little over six weeks ago this year. It got a little press attention, but a lot of the most damning evidence hasn't made it into the media, and some of it is stuff that really needs to be seen to be believed.

Just to give one example, Household had a particularly disgusting scam going -- they called it the "EZ Pay Plan."

In it, customers were urged to junk their old (and presumably safe) mortgages and switch to a new Household Refinance plan that would be both more expensive and more dangerous, using a little sleight of hand. Among other things, they told customers they could save money and reduce their interest rate by switching from a monthly payment plan to a biweekly payment plan.

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There were two things going on here. One -- and this is so sleazy it's almost funny -- by getting customers to make payments biweekly instead of monthly, they would essentially box borrowers into making an extra payment every year (remember, there are 52 weeks in a year).

The other is that the company was using word games to try to tell people they would be paying lower rates, when in fact they would not be.

Typically what that involved was getting them into loans that not only demanded more payments every year, but also paid off much earlier (say, in 18 years instead of 30), forcing the borrower to come up with a lot more money a lot sooner. Naturally, because the customer is paying off his or her loan faster, he or she ends up paying less interest overall.

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Matt Taibbi is an investigative reporter for Rolling Stone magazine

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