Another big sign of the collapsing con: The Feds sue the big banks.

I've written many times that during the collapse phase of any con you will start to see the biggest participants begin to turn on each other, rat each other out, etc.  All the players are dirty and are trying to curry favor with the rapidly awakening patsies by screwing their fellow partners in crime, hoping that by so doing the wrath of the people will pass them by.  Today we see more evidence of this unfolding as the Federal Housing Finance Agency filed a $196 Billion lawsuit against the largest US banks for selling them toxic, worthless MBS (Mortgage Backed Securities).

So let me get this straight.  After enabling the banks to operate fraudulently and then turning a blind eye on the practice for years, the feds are now suddenly concerned that they might have taken on fraudulent paper from the banks?  What a crock!  The feds knew just what was going on the whole time but they hoped to hide the losses until the economy picked up again at which time they hoped to be able to dump the houses on greater fools and thus not have to admit the losses.  But awakening sheeple means less patsies to fleece; suckers who still have any money left that they can be conned out of are getting much harder to come by.  The FHFA knows that the losses are real and they will never be recouped.  The lawsuit is prima facie evidence of this.  If there were even a snowball's chance in Hell of ever recouping the losses via MBS sales into a healthier housing market then no lawsuits would ever be filed because the con men would retain hope that they could skate out the back door with all the loot without ever even being accused of criminal activity.  But the lawsuit means that all the details will now come public.  The hopes of sweeping it away quietly are now gone.

And so we move into the finger pointing blame game phase of the collapse.  One important thing to realize about this phase is that with new, damning evidence coming to light (as it certainly will during a court case) even the most skeptical onlookers will have to admit that the whole con was loaded to the gills with willful fraud from day one.  Fraud was not the exception but rather the norm.  And much of the fraud occurred not in spite of government meddling in the housing markets but rather as a direct result of the government's involvement.   

The government actually created situations where you almost had to be a saint not to take fraudulent advantage of it.  The government was in fraud promotion mode because that's what it needed to do in order to increase the outstanding debt.  This was required lest the government treasury debt Ponzi itself be exposed as fraud. Higher amounts of credit effectively increased the money supply which increased asset prices which increased taxation.  In addition, government debt is often measured vs. GDP.  The artificial pumping up of asset prices artificially pump up the GDP so that the debt:GDP numbers don't look so scary.  Government hacks like Bernanke know this just as well as I do.  None of this was accidental.  All of it was required in order to have bigger government and more control over the people.

As the news of this filters out, the growing realization that fraud has been rampant will likely undermine even further the confidence that the slowest learning among us still retain regarding honesty and truth in government.  Importantly, when people lose confidence in their government, they lose confidence in the fiat currency controlled by said government.  If the people start to see the equivalent of running legal gun battles between the moneymen and their cronies in government then confidence can take a huge swoon from its already abysmally low sentiment level.

One more thing: this lawsuit is effectively a government admission that there is at least $196 Billion worth of housing losses currently held by government.  In other words, the market price of these government-owned homes is at least that much below the value of the loans that government has made on them.  Nobody would be filing lawsuits if the mortgage payments were still being made on these places.  The government would just claim that it intended to carry them to maturity.  The lawsuit thus likely covers $196 Billion of shadow inventory that moneymen have been keeping off of the market (I believe this is just the tip of the Iceberg).  Once the admission of loss is formal, expect these properties to come to market at firesale prices because there will no longer be any reason to keep mum about them or to lie about their phony balance sheet valuations.  This has significant potential to kick the legs out from under an already weak housing market.  Time will tell.