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In a hearing last week in Sacramento, California, we found out the following:

A firm hired by Wall Street to analyze mortgages given to borrowers with poor credit, which were then packaged and sold to investors during the boom years, revealed that as much as 28 percent of those loans failed to meet basic underwriting standards -- and Wall Street knew all along.

Worse, when the firm flagged those loans for potential issues, Wall Street banks ignored its recommendation nearly half the time and likely purchased those loans anyway -- selling them to unwitting investors who were never told that the biggest home loan due diligence firm in the country had found potential defects in these mortgages.

Perhaps this sounds like old news, but it does add some ammunition to the cases being brought against the largest Wall Street firms that clearly knew they were selling crappy mortgage packages to the unsuspecting general public:

The revelations give a better picture of what many have likely known for years: Wall Street firms knew they were buying lead yet passed it off as gold to investors who had no knowledge of the alchemy behind the scenes. But it also has real-world implications: the data released Thursday could bolster pension funds and other investors in their pursuit to force Wall Street banks to take back the bogus mortgages they peddled. An untold number of lawsuits have been filed in the wake of the subprime mortgage crisis and subsequent housing market collapse. Thus far, Wall Street has been winning that battle.

"This should have a phenomenal effect legally, both in terms of the ability of investors to force put-backs and to sue for fraud," said Joshua Rosner, managing director at independent research consultancy Graham Fisher & Co.

Original buyers of these securities could sue for fraud; distressed investors, who buy assets on the cheap, could force issuers to take back the mortgages and swallow the losses.

"I don't think people are really thinking about this," Rosner said. "This is not just errors and omissions -- this appears to be fraud, especially if there is evidence to demonstrate that they went back and used the due diligence reports to justify paying lower prices for the loans, and did not inform the investors of that. This appears to be a massive fraud perpetrated on the investing public on a scale never before seen."

Will anything come of it? It remains to be seen whether politics gets in the way:

New York Attorney General Andrew Cuomo, who's running for governor, reportedly launched an investigation and granted Clayton [the company testifying in Sacramento last week] immunity in exchange for information on what Wall Street knew and when, according to press reports in January 2008

Let's see what happens after the November elections when New York state gets a new Attorney General.

[Follow up: Gretchen Morgenson at the NY Times reported on this story in today's paper, finally giving it national exposure]

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