It's Banks vs. Families, Who Will Come Out on Top? Q&A With Elizabeth Warren

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Elizabeth Warren is Main Street's woman in Washington. A professor at Harvard Law School, she's researched the travails of the consumer credit market and the hidden bankruptcy epidemic for over 25 years. Not satisfied with merely publishing academic research, she leaped at an invitation from Senator Harry Reid to take a more public role in reforming the financial system after the credit crisis: She's now the chairwoman of the Congressional Oversight Panel, the group charged with overseeing the bank bailouts.

I caught up with Elizabeth Warren at a table outside the Senate Office Building cafeteria, a few hours after she finished grilling Citibank CEO Vikram Pandit at a typically contentious hearing. With new financial reform legislation imminent—"You're talking to me in the 4th quarter of the basketball game," she said—Warren spoke frankly to Fast Company about her hopes, fears, and frustrations.

FC: You said it's the 4th quarter of the basketball game—what's the score?

EW: The economy has been pulled back from the abyss, and Secretary Paulson, Secretary Geithner, both presidential administrations and Congress deserve credit for that. They saved the life of the patient.

That said, the Treasury demonstrated that it was much better at shoveling hundreds of billions of direct grants and guarantees at the largest financial institutions than it was at protecting the real economy. The largest institutions were "too big to fail," but the foreclosure crisis and small business credit slowdown have been "too hard to solve."

FC: I was really struck by your interview last fall with Adam Davidson on NPR's Planet Money. (The shouting match drew hundreds of blog comments.) He seemed to suggest that protecting the real economy, as opposed to bailing out Wall Street, was some kind of marginal issue or a personal issue of yours. What do you think about that?

EW: I think the worldview that America begins and ends with its largest financial institutions is not only wrong— it is dangerously wrong. Businesses are not America, and America does not exist to serve big institutions. America is about families. People who get up every day and earn their salary to pay their bills and try to make it one day to the next.

I am a bit stunned that, in the depth of the financial crisis, anyone is saying that the focus should be on the Wall Street banks.

FC: And yet it does seem sometimes that the business and economics news focuses on the fact that big banks are turning a profit again, or the stock market is back above 10,000, to the exclusion of foreclosures and unemployment and bankruptcies affecting Main Street.

EW: There's a larger point here about diversity of views. Are you familiar with The Wisdom of Crowds? The underlying insight is that a crowd must be drawn from different points of view to make good decisions. That's how it is that 1,000 people can guess with such accuracy the number of jellybeans in the glass jar. We were actually talking about this at lunch today: If all the people who are providing the input have the same worldview, then errors are built into the system. And those errors are not small. They are seismic errors.

You want the person who has a unique interest in defending the collapsing system as the person to oversee the bailout? That's astonishing!

FC: So let's leap into your role as an advocate for financial reform. The Senate's version of the financial reform bill already passed in the House and is due in the Senate any day now. Senator Dodd has been signaling potential compromises, like housing the Consumer Financial Protection Agency within the Federal Reserve instead of as an independent agency. Paul Krugman said in his column recently that unlike with health care reform, where progressives ought to grit their teeth and pass it, the time has come to actually stand up and say, this so-called financial reform isn't worth supporting. Understanding that final details aren't out yet, can you imagine a situation in which you'd say the same?

EW: Of course. There are already seven agencies in Washington that own a piece of the consumer financial protection apparatus. This is the worst of all possible worlds: a bloated, ineffective, unaccountable bureaucracy.

We need to merge those bureaucracies into a single, streamlined, accountable regulator with autonomy and teeth. If we fall short of that, we will just be recreating one more bureaucracy so that we can all congratulate ourselves that we did something for the American people when the reality is otherwise. That would be a terrible thing.

FC: What kind of assurances have you gotten from the Obama administration about their commitment to real reform?

EW: President Obama has been clear from the beginning that he supports a strong, independent consumer agency. He has put a lot of energy behind it. He has had events at the White House, has spoken about it in public town meetings, and even made the ultimate commitment—talked about it on Leno.

FC: I understand that at one point you pursued an entrepreneurial path to reform the consumer financial products market.

EW: The short version is that I studied the economics of the middle class and I began to see that credit products were becoming increasingly dangerous. Families didn't know how much they were spending on credit and comparison among the products was practically impossible because of all the incomprehensible fine print. It wasn't the products that were priced the best that survived. Instead, the ones that were most loaded with tricks and traps provided the most revenue.

So I thought at first that my academic research will be enough. I will publish a law review article and surely the world will change—that didn't happen. So I wrote a couple of popular books about it—The Two Income Trap and All Your Worth. But it still didn't change the world.

The PEW Charitable Trust then got in touch with me and asked what ideas I was working on. And I told them: I'd like to build a private, market-based solution. I want to build an Underwriter's Laboratory to certify credit cards.

The whole idea behind the current model is, "I will hold something shiny in front of your eye, 3.9% financing, and the way I'm going to make money is on tricks and traps that I've buried in the fine print: $29 there, $49 there, triple interest rate, double cycle billing, over and over and over ... ."

So the idea was to take an independent group that will say here's a clean, clear industry credit card. It was called the Clean Card. So Pew said, we love this. They took me out to San Francisco to meet with the head of a very fancy bank consulting group. We put together a proposal and many of the executives we met with just loved it.

They loved it at the first meeting and at the second meeting. It was almost as if you could see the CEOs thinking, "I'll have my picture on the cover of Business Week for transforming this market."
They were saying, "We want to be part of this! We want to be the first movers, we want to be America's Credit Card." Then we come back for the 3rd meeting after the numbers guys have taken a closer look, and they say, "We can't do this." As one VP put it, if people really understood how much a credit card cost, they wouldn't use it and the bank would lose too much market share.

And one of the issuers took me aside and said, "We get that our business model is unsustainable over the long haul, but no one of us can jump first. We all have to move together. If we all move together, we'll be fine competitively, but if one of us moves and we lose market share, then the ones who issue the dirty cards will control this market." So it was literally on the plane on the way home from the meeting with the issuer that I realized how broken the market is and started thinking about a new agency in Washington.

FC: Ok, so you've concluded that the market is broken. Now you've come to DC and are working in the midst of biggest credit crisis the country's ever seen. What are you going to do if we finish out this crisis and still the market's not fixed?

EW: If America can't come out of the crisis and repair the broken consumer credit market, then this government really is broken. The lobbying over this bill is enormous, and it's all on one side. It's one thing when insurance companies are on one side and doctors on the other. This one is exclusively big Wall Street banks who have a tremendous amount of money to spend on this to protect their revenue stream.

FC: So even though you can call Vikram Pandit on the carpet and get him to answer a few questions, his lobbying staff is hard at work behind the scenes to make sure nothing changes.

EW: The money is all on one side and the votes are all on the other. So, that's what we'll find out. It's banks vs. families. And we'll see who comes out on top.

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