Lurid Subprime Scams Unveiled in Long-Running Fraud Trial
By Matt Taibbi POSTED: December 12, 4:20 PM ET
Household International, which was acquired by HSBC in 2002, was implicated in a major fraud case. Scott Eells/Bloomberg via Getty Images
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 idiotic 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.
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.
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.
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.
But the Household pitch would be to describe this as a loan that, because you're paying less interest overall, was "like" paying a lower interest rate on a long-term loan, when in fact the customer usually ended up paying a shorter loan at a far higher rate. As predatory schemes go, it's a pretty slick pitch.
"It's actually sort of ingenious. I wouldn't have thought of it," says Dan Drosman of the San Diego-based Robbins Geller Rudman & Dowd, the firm that served as lead counsel for the plaintiffs for the last 11 years.
Household scammed customers in many different ways. They concealed prepayment penalties, offered phony "discount points," and used a variety of techniques to increase the amount of money borrowed against customers' homes. The latter mechanism had the effect of lowering the equity people had in their houses, making it difficult and in some cases impossible for people to refinance with other companies once they realized that they'd stepped into a deadly trap with Household (literally so: Household called their sales pitch the "trap sale").
All of which brings us to a remarkable series of training videos. The following set of clips was put together way back in 2001 by one of the executives of Household, a creature named Dennis Hueman. In it, this hollow-eyed, suburban-Skeletor-looking sales-creep talks about how to snare people into falling for Household's dirty loan schemes.
If anyone ever again gives tries to argue to you that homeowners caused the 2008 crash, just shove these videos under that person's nose. They pretty much sum up the entire subprime era.
In this first clip, Hueman, who was in charge of the entire Southwest division of Household, tries to get his sales staff in the selling mood by telling them a folksy story. He compares the process of getting customers locked into predatory deals like the EZ Pay "bimonthly payment" scam to fishing, telling a story about going lake fishing with his seven-year-old.
His son, he says, dutifully casts his reel out into the water and lets the bobber float, waiting for a bite. But then, about a minute into this clip, Hueman describes his son yanking the rod back fiercely – "he thought he was on Field and Stream" – as soon as he sees the bobber move.
Of course, when the overanxious boy reels the line in, the hook is empty and even his bait has been washed away. Punchline: Hueman's son is a shitty salesman!
Father Hueman sagely explains: when fishing, it's much better to be patient:
Now, good fisherpeople know, if you're gonna go out and fish, you've gotta take and put the bait on your hook, and you've got to cast it out there. Now that bobber's going to go down once. When it goes down once, you say, I'm just fine with that, I'm going to be patient . . . You wait until the bobber goes all the way under, all the way under, and the line is nice and firm, and that fisher-person will take and bring in that fish.
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