There's nothing in the ripple system to stop evil gateways.

Suppose I have various lines of trust with other people and organizations, including with Pirate's gateway. I have "deposited" $50 with Pirate. In return I have an IOU from Pirate valued at $50.

At some point, I start to feel uneasy about Pirate, so I remove the trust that I extended to Pirate. Am I correct that the $50 owed to me by Pirate then automatically becomes $50 owed to me by others, specifically those whom I trust and who in turn trust Pirate themselves (and who have not "maxed out" their Pirate balance)?

Then when Pirate defaults, I try to collect from those people. Not surprisingly, they don't feel like paying me and they default too. It could turn ugly fast. Those who are quick to spot the scam will modify their lines of trust fast enough to ensure that everyone else is stuck with the worthless Pirate IOUs.

Or am I missing something here?