From The Market Ticker (Karl Denninger)

Anecdotal report thus far….

On the forum there is a report of a number of merchants dropping credit card processing entirely due to rampant (and bogus) chargebacks.

Does anyone remember my Tickers on “Is The Government a Felon or a Cop” posts?

Go read ’em again.

One of the more recent had this to say:

If the people cannot find justice within the government’s apparatus, are they to sit quietly and ask “Please Sir, may I have another (beating, rape, robbery, take your pick)?”

Or should we expect that at some point – perhaps not now, but perhaps not far down the road either, the people will have had enough.  They will rise and take care of these matters in their own way – and there won’t be much in the way of a “fair trial.”  I’ve yet to see boiled rope or guillotine blade futures listed by the CME, but is this sort of redress for grievances really that far in our future?

It appears that the breakdown of the implied social agreement is beginning to accelerate.

We have people who have lived in their homes for two years now without making a mortgage payment.  Banks are refusing to foreclose because it would force them to write off their losses – they are thus lying about their credit quality by enabling people to live in the house literally for free – claiming to be “well-capitalized” while at the same time hiding huge losses in the form of loans they’re refusing to foreclose on.

We have banksters and lobbyists who claimed that the world would end if they had to “mark to the market” – in other words, they demanded legislative permission to lie.  They got it, then used their so-called “healthy balance sheets” to pay enormous bonuses to the very same people who peddled these trash-ridden securities to the masses.

The people have had it.  They’re fighting back with the same tools the banksters use:

  • They’re refusing to pay their mortgages, knowing full well that the banks cannot foreclose on all of the loans without recognizing the losses and rendering themselves insolvent.

  • They are filing chargebacks against merchants, whether valid or not, as a means of playing ‘extend and pretend’ on a personal level.  Even if they lose, for a while they don’t have to pay (but the merchant does, and has to contest the refused payment.)

I’m sure there’s more coming.

Listen up Washington.  You knew back in 2004 that these “mortgage products” were fraudulent.  The FBI told you so.  In 2006 and 2007 you had studies by private credit analysts and HUD that found that only one “ALT-A” loan in ten had an accurately-stated income.

None of this was disclosed to the buyers of these securities and as a consequence they took monstrous losses – losses that are not done with being taken.

Instead of forcing those who made the bad loans to eat them and prosecuting the wrongdoing involved the government has done the exact opposite – it has rewarded the wrong-doing by bailing out the firms involved instead of forcing them through bankruptcy and closing them down.  The people who got hosed by buying securities without disclosure that the loans in them were rife with fraud have been given no effective means of recourse.

The people of this nation have watched millions of jobs evaporate before their eyes while their fraudulently-overinflated house price deflates back toward a reasonable level.  The government has tried to stop that too, but not by compensating those robbed for the pervasive fraud (or even by locking up those who did the deeds) but rather by slight-of-hand “tax credits” that amount to stealing money out of your wallet only to give it back to you and call it “assistance”!

The people have discerned that if the banksters cannot foreclose lest they be forced to recognize their losses (especially on second liens such as HELOCs that are worth nothing when behind an underwater first) they literally have a gun to the bank’s head and thus have no need to pay their mortgage – the bank can’t kick them out and foreclose, as to do so forces both price discovery on the house and a mark to the market on the (now-extinguished) loan – neither of which the bank can afford.

Citizens are apparently are also figuring out that if it was perfectly ok for banks to lie about their financial condition and sell securities without being honest then it’s perfectly ok for them to be dishonest too and screw everyone they can manage to in any way they’re able – such as by filing chargebacks against merchants.

This is precisely the sort of risk I warned about, and it appears that we are indeed rapidly running out of time for Washington DC to do the right thing.

President Obama, Attorney General Holder and The FBI: You must start empaneling Grand Juries NOW and begin to bring cases before them regarding the rampant fraud in our securities and lending markets over the last twenty years, along with demanding answers – and accountability – from people like Sheila Bair who had the ability to force corrective action at the big banks or even break them up.

There is a critical point beyond which no loan will be “money good” and that time, in the consumer space, appears to be fast approaching.