I want to highlight this response by Yves Smith to Third Way’s prescriptive policy proposal as to how to respond to Ibanez and move forward to a ‘solution’ on the foreclosure crisis. This is some truly dangerous, insidious stuff and it would be poisonous for any Democrat elected official or Democratic spokesperson to further it. Unfortunately, that’s exactly the audience that Third Way appeals to: Democratic insiders and elected officials. When I worked on Mark Begich’s Senate campaign in Alaska, we regularly received every policy update and suggested communications package from Third Way, on issues from crime to smut on the internet. The pipeline from Third Way into Democratic politics is wide and what they put out moves fast.

It isn’t shocking that Third Way would put out a proposal in response to fraudclosure, nor is it surprising that the proposal largely consists of measures that amount to another massive, taxpayer-funded bailout for Too Big To Fail banks. Smith goes through the plan and dismantles it with ease. Her whole post should be read, but here are a few key portions:

The big difference between the original and the new, improved version of the bailout model is that the payouts to the banks were at least in part visible the first time around. This is an effort yet again to spare the banks any pain, not only at the cost of the rule of law but also of investor rights.

This proposal guts state control of their own real estate law when the Supreme Court has repeatedly found that “dirt law” is not a Federal matter. It strips homeowners of their right to their day in court to preserve their contractual rights, namely, that only the proven mortgagee, and not a gangster, or in this case, bankster, can take possession of their home.

This sort of protection is fundamental to the operation of capitalism, so it’s astonishing to see neoliberals so willing to throw it under the bus to preserve the balance sheets of the TBTF banks. Readers may recall how we came to have this sort of legal protection in the first place. England learned the hard way in the 17th century what happens with low documentation requirements: abuse of court procedures, perjury and corruption become the norm. Parliament enacted the 1677 Statute of Fraudsto establish higher standards for contracts, such as witnessing by a third party, to stop the widespread theft of property that was underway.

The memo completely ignores the harm to investors from the bank mistakes and lacks any provisions for damage to investors to be remedied. Moreover, denying borrower rights removes their leverage to obtain deep principal mortgage modifications, which for viable borrowers produces lower losses than costly foreclosures and sales of distressed property. Thus this shredding of contractual protections in mortgages not only hurts borrowers but also harms investors.

So to save the banks from their own, colossal abuses of contracts that they devised, the Third Way document advocates Congressional intervention into well established, well functioning state law. This is a case where these matters can and should be left to the courts and ultimately state AGs to coordinate the template of a more broadbased solution.

But this proposal is this memo is a direct result of the banks losing in court and the fear that they will continue to lose. The Massachusetts Supreme Judicial Court Ibanez decision is clearly the trigger for the release of this plan. The SJC said its decision was merely articulating well established law. Consistent application of these principles will mean more losses for the banks. This memo is clearly an attempt to stop this as soon as possible. The real message of this document is clear: we can’t permit justice to prevail if it will hurt bank profits and balance sheets.

Smith goes on to look at  how Third Way is proposing homeowners and tax payers give TBTF banks trillions of dollars in exchange for nothing:

Is there any other instance where an entire set of parties to a broad class of contract have gotten a free waiver for their own enormous, costly, and purely elective errors? The normal arrangement is that to obtain a waiver or a change in contract terms that has economic value, consideration must be paid. Remember the JP Morgan purchase of Bear: the reason the price went from $2 per share to $10 was that JPM had made a drafting error that left it exposed to more risk than it had bargained for and it needed to reopen the deal.

But I see no proposal here to have borrowers receive compensation from servicers and trustees for having their rights compromised. Aha, that’s the reason for all the expatiating about the Ibanez decision being bad for borrowers. They should give a major concession for free because it’s really good for them! Stockholm syndrome in action!

If the Third Way types were truly concerned about protecting homeowners rather than banks, they’d at the very least give homeowners something in return for the rights they are being asked to sacrifice, such as allowing courts to write down mortgages to current market value in bankruptcy (a well established practice for virtually every other type of secured lending).

This is what the transfer of wealth from working Americans to the top 1% looks like.

Additionally, Third Way’s plan seems guaranteed to create massive upheaval and uncertainty in the housing markets, due to the fact that if it were implemented, it would face constitutional challenges in every state in the nation.

An ironic aspect of this proposal is that it is depicted as a way to reduce uncertainty. In fact, any Congressional intervention into well-settled state based real estate law is very likely to generate Constitutional challenges, particularly since Federal bank regulators have acknowledged that state law still applies to securitization assets. That in turn will increase, not reduce, uncertainty, and put the real estate market in an greater pall than it is now.

Third Way wants to make sure the Too Big To Fail banks, which seem almost, if not entirely, insolvent,  never have to pay for the gambles they have taken in the housing market. This move does two things: it creates a massive moral hazard and it preserves systemic risk, making it nearly certain that the TBTF banks will use another opportunity to blow up our economy. I would hope that as a result of these consequences, no Democrat or Republican will take Third Way’s suggestion seriously.