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Dayen writes: "So let's say you're a high-profile freshman senator walking into this den of inertia, and you want to make your large following proud and advance your agenda, but you're in no position to do that legislatively? How do you, Elizabeth Warren, find your way through this minefield ... ?"

Massachusetts Sen. Elizabeth Warren (photo: Eric Thayer/Reuters)
Massachusetts Sen. Elizabeth Warren (photo: Eric Thayer/Reuters)

Elizabeth Warren's Secret

By David Dayen, Salon

29 August 13


The senator tells Salon how one senator can wield tremendous power - and (kind of) addresses those '16 rumors

t's been well-documented that the 113th Congress specializes in getting nothing consequential done. While the nation's supply of named post offices is apparently well-stocked, anything more critical has generally stalled out, with little hope to break the gridlock.

So let's say you're a high-profile freshman senator walking into this den of inertia, and you want to make your large following proud and advance your agenda, but you're in no position to do that legislatively? How do you, Elizabeth Warren, find your way through this minefield, and even chalk up successes?

"It's all about learning to use the new tools," Warren told Salon in an interview this week. "In the Senate, there are more tools in the toolbox than are obvious." Warren, now the senior senator from Massachusetts (Ed Markey, with a 37-year congressional career, is the junior member), has employed those more unconventional tools effectively, doing her part to both change the conversation around the financial industry inside and outside Washington, and change the sharpness of the regulatory response to financial misdeeds.

Warren sits on the Senate Banking Committee, which has marked up all of two bills so far this year (she played a role in both, passing an amendment to a national insurance licensing bill and working closely with the committee leadership on reforming the Federal Housing Administration). But she has really shone in oversight hearings, where she has gained a reputation for offering uncomfortable questions to regulatory officials about their lack of prosecuting criminal activity on Wall Street. "Too big to fail has become too big for trial," she said at a hearing in February. "How big do the biggest banks have to get before we consider breaking them up?" she asked Treasury Secretary Jack Lew in May. And she's used the bully pulpit outside the hearing room, too, schooling CNBC anchors so badly on the history of financial regulation that the network forced the clip to be removed from YouTube.

This creates a consequence for the regulators for lax enforcement. Nobody wants to end up on the business end of an Elizabeth Warren viral video, and the hope is that the prodding will spur the regulators into action, or at least keep them alert. "There's a lot that banking regulators can do to make the system safer without Congress passing any new laws," Warren told Salon. "But only if they do their jobs. It's about accountability in both directions. The largest financial institutions should be held accountable, and so should the regulators."

She added, "They are not there to serve the banks, they are there to serve the public. I'm reminded of that when we have public hearings. I try to ask questions that the public wants to hear."

This extends beyond the occasional badgering of witnesses ("I beg your pardon," said Warren when I termed it that way, though she misunderstood, as I have a great affection for badgering). In one of her first major actions, Warren opened an investigation into the Independent Foreclosure Review, which was supposed to review every foreclosure from 2009-2010 for errors, but ended up so botched (the banks picked their own reviewers) that regulators shut it down and gave wronged homeowners a seemingly random amount of cash compensation, typically around $300. Warren demanded information on how the aborted reviews were conducted, what they found and how regulators arrived at the final penalties. After a series of embarrassing hearings on the subject, last month Federal Reserve chairman Ben Bernanke promised the release of some details, though none have yet come out.

Other agencies have come to expect Warren's queries. Just yesterday, she asked the Justice Department about why it settled with five large banks who submitted fraudulent mortgage insurance claims to the FHA for $225 million, when based on the number of claims made public in a government report, the damages could have been as high as $37 billion. That comes out to a settlement for 0.6 percent of potential damages.

Warren has had more luck with the Securities and Exchange Commission, which she previously criticized for generating settlements with giant financial institutions on securities fraud and other violations without making the guilty party admit wrongdoing. Corporations can't stand this because they expose themselves to future litigation, could suffer reputational risk and even lose their banking licenses. But putting this price on misconduct could have a tremendous deterrent effect (in addition, fines in cases where the defendant admits wrongdoing are not tax deductible).

The Massachusetts senator used both hearings and a series of letters to new SEC chairwoman Mary Jo White to question the policy. This has borne fruit: White announced a new settlement policy that will require admissions of guilt in more cases. "I'm very optimistic about the direction Mary Jo White is taking the SEC," Warren said. "She didn't make a generalized 'we're going to get tough' statement, she identified a class of cases in which the agency would take a different position, with harsher consequences for companies that don't cooperate."

"Commissioner White is showing some real spirit," Warren added. "She has come in and made it clear that it's a new day in town."

Just this week, hedge fund manager Philip Falcone admitted wrongdoing in a settlement over improper use of funds at Harbinger Capital, the first individual to do so since White announced the new policy. While Falcone didn't admit to liability on specific violations of law, Warren called it a "step in the right direction," and an indication that "the SEC is a watchdog that's starting to show some teeth."

So while critics call Warren's verbal jabs mere showboating, combined with her persistence they have had a tangible impact, both exposing some bank-friendly regulators and spurring others to better alternatives. "Those who criticize her for being all talk and no achievements don't understand the Senate," said Jeff Connaughton, a former chief of staff to Sen. Ted Kaufman who wrote an appreciation of Warren earlier this year. "I think she and others have made regulators think twice about how kid glove treatment of the banks will look in a harsh Senate spotlight."

Warren has also done plenty of unsung work in her freshman year. She actually has the highest attendance at Banking Committee proceedings so far this year, making 27 out of 35 hearings and executive sessions, more than chairman Tim Johnson or ranking member Mike Crapo. And in hearings, she almost always stays from start to finish, learning from her fellow members' questioning and often tailoring hers to cover a different subject area. "I learn a lot from those hearings," Warren said. "Not everyone is engaged, but there's a core of people really interested in the issues and really driving them."

The freshman senator named her Banking Committee colleagues Sherrod Brown and Jeff Merkley as part of this core group. (She even had nice words to say for Republican Bob Corker, whom she has worked with on the future of Fannie Mae and Freddie Mac "since before I was a senator.") Another reformer, Carl Levin, has made a habit of using his Permanent Subcommittee on Investigations to delve into issues of financial crimes, most recently with the "London Whale" trade by JPMorgan Chase. Levin's report was instrumental in the criminal indictments of two ex-traders at the bank for hiding losses and lying to regulators and investors. "Progress on the London Whale and admit or deny has come because of three or four determined senators and despite two captured committees," argued Jeff Connaughton.

The increased scrutiny has a cumulative effect. When one regulatory agency like the SEC changes its policy, it provokes other agencies to consider toughening theirs. When one senator points the way toward more provocative questioning of the broken regulatory response to a tsunami of financial crimes, other senators want in on the act. "She has elevated 'the game' of other senators," said Bartlett Naylor of Public Citizen. "No longer can her peers survive a committee hearing on a one-minute staff briefing before asking a question written for them, if it might be at odds with one of her positions."

Warren is hoping such momentum-building will play out in her first banking legislation, which would reinstate the Depression-era "Glass-Steagall" protections separating commercial banking (like taking deposits and making loans) from investment banking (like trading derivatives and other Wall Street casino gambling pursuits). Critics allege that the Glass-Steagall repeal had nothing to do with the financial crisis. But in a system where those duties are separated, Warren believes, regulators would have an easier time at their jobs. "They wouldn't have to develop expertise in multiple lines of business," she said. "The SEC can oversee the non-bank institutions, and bank regulators could focus on the safety of banks." While all big legislation faces a long road in a divided Washington, Warren partnered with Republican John McCain, Democrat Maria Cantwell and Independent Angus King on the Glass-Steagall bill to raise its profile, using an outside-inside approach. "We're two freshmen and two members not on the Banking Committee," Warren said, "and we got together to make this a more urgent issue."

Regardless of the eventual outcome of that bill, Warren has learned that a senator has power if he or she knows how to wield it. As for how else she can make an impact, Jeff Connaughton has a suggestion. "Run for president."

I asked if she had any reaction to that kind of buzz. The senator had a pat response. "No!"

Hello Senator, where are you today?


I'm headed to Hanscom Air Force Base to talk about cybersecurity, and no, you can't know about it! Seriously, this is something in the military budget, one of the areas where we should spend more money not less, and this is why the sequester drives me crazy because across the board cutting is mindless. On the military budget, instead of thinking about whether there should be cuts where needs are not so great, and investing in things like cybersecurity, we're just cutting across the board. It's crazy.

So what do you want to talk about?

I thought we'd talk about banking. Obviously you're in a different role in the Senate than when you ran the Congressional Oversight Panel or were standing up the Consumer Financial Protection Bureau. How have you been able to use your perch in the Senate to advance your agenda? How have you adapted?

It's all about learning to use new tools. In the Senate, there are more tools in the toolbox than are obvious. That's what I like about this. For example, there's a lot that banking regulators could do to make the system safer. They could make the system a lot stronger without Congress passing any new law. But only if they do their jobs. The Banking Committee has oversight over those agencies. And so I think encouraging the regulators to do their jobs is a way to have an important impact on the banking system.

Yes, I've noticed your role is as much about badgering regulators as badgering banks.

I beg your pardon! I would use words like "encourage."

Fair enough.

But you know, it's about accountability in both directions. The largest financial institutions should be held accountable, and so should the regulators. They are not there to serve the banks, they're there to serve the public. I'm reminded of that when we have public hearings. I try to ask questions that the public wants to hear.

And do you feel like you've been successful in, shall we say, encouraging the banks to be more forceful in their regulatory oversight? It seems that the SEC has changed some of their policies as a result of your encouragement.

Well, I am very optimistic about the direction Mary Jo White is taking the SEC. She has come in and made it clear that it's a new day in town. She expects her agency to take an aggressive stance against those who break the law, and against those who don't cooperate in investigations. This is part of what gave me more hope, Commissioner White didn't make a generalized "we're going to get tough" statement. She identified a class of cases in which the SEC would take a different position. And she made it clear in that announcement that companies that don't cooperate with SEC will face different consequences. In other words, there will be harsher consequences if the SEC uncovers wrongdoing. So now, there's a price, not only for doing wrong but for hiding it. I'm very glad to see that. Commissioner White is showing some real spirit.

Indeed, just yesterday the SEC forced Philip Falcone to admit wrongdoing, but he did not admit liability for a specific rule or law. Is that satisfactory to you?

It's another step in the right direction. The SEC is a watchdog that's starting to show its teeth.

That's good, but I don't think I could begin to list all the criminality revealed in the financial industry just since you came into office. Is this industry at some level just too big to regulate or even detail to the public? And how do you create new structures for regulation to make meaningful oversight possible?

I want to be careful, because there are two separate points to make. By saying that I don't have to change law to make impact, I don't mean there aren't laws that could be changed. Because there are. The point is that we should be using every tool in the toolbox. The answer to your more specific question is yes and no. Changes in the structure would definitely make the financial system safer and make regulation easier, my bill on restoring Glass-Steagall is the perfect example. If commercial banks are split off from non-banking activity, the whole banking system would be safer. But also, regulators could specialize in what they do best. They wouldn't have to develop expertise in multiple lines of business. The SEC can oversee the non-bank institutions. If they're systemically important financial institutions, there are other mechanisms for oversight. But bank regulators could focus on the safety of banks. And that's simpler and more effective.

You say legislation is another tool. You've been active on the Banking Committee, in fact your office tells me you have the best attendance record there. But is the fact that there have only been two markups in eight months, does that show any reticence on the part of the committee to significant reforms?

I don't think so. Statutory change takes some lead time to get people talking about the idea, working on specific legislation. There are a lot of pieces to it. A couple big pieces we know are coming up. GSE [government-sponsored entities Fannie Mae and Freddie Mac] reform, FHA. Those are pressing problems. So it's not as if the committee is not dealing with significant issues, they are. But it's important to keep pushing. That's why Sen. McCain and I pushed forward on Glass-Steagall now, to get it back into the conversation. Sen. McCain wanted to be part of it, he and Sen. Cantwell tried to push this a few years ago. On Glass-Steagall, with Sen. King and myself, you have two freshmen, and with Sens. McCain and Cantwell, two members not on the Banking Committee. The four of us got together to make it a more urgent issue. We're trying to work together to move it up on the agenda.

How do you like working on the committee?

I like it. You mentioned attendance; not only do I go to the banking hearings, I stay. I'm very interested in the questions other senators ask. They often ask smart and thoughtful questions. I learn a lot from those hearings. I try to talk with senators afterwards, to ask follow-ups or get more information. And I often change what I'm going to ask because someone else has asked it. I feel good about the way it works in that committee. People there are interested in the issues. It shows up in questions they ask, the conversations we have in the hallways. It's a good group. Not everyone is engaged. But there's a core really engaged in issues and really driving. Sherrod Brown, for example, doing a hearing on commodities and what's happening around bank holding companies having powerful influence on the price of aluminum. What it means to the economy. I was very impressed by his work on that. Jeff Merkley, always very thoughtful. Sen. Corker, I've been talking to him about GSE reform since before I became a senator. So a lot of people on the committee are smart, they dig into the issues, and they care.

And any comment on the 2016 buzz for you?

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