Even with Warren's plainspokenness, the battle over financial reform involves a host of complex and confusing options. Should Congress break up big banks? Regulate toxic deals like credit-default swaps? Expand the power of the Federal Reserve? Warren is well aware that politicians from both parties, whatever their differences, are eager to vote for a bill that they can tout as having reined in Wall Street. "They're going to call this reform, no matter what," she says. The question is: Will it do any good?
To make sense of what needs to happen, Warren distilled for Rolling Stone the three-part litmus test she uses to determine whether a proposed reform will actually protect consumers and ensure that we're rebuilding the economy on a solid foundation rather than erecting another house of cards. Think of them as Warren's Rules for Reform:
Give the Little Guy a Fighting Chance
For Warren, a strong, independent consumer-protection agency is at the heart of any meaningful financial reform. If a cholesterol medicine carried a one-in-five risk of causing a heart attack, it would never get approval from the FDA. But a subprime mortgage that carries the same risk of ending in foreclosure, she points out, can be sold without any warning label. Such predatory products – running the gamut from payday loans to reverse mortgages – juice corporate profits by exploiting consumers who play by the rules, only to discover that the bank can change their interest rate without warning.
Warren's relentless focus on consumer protection has earned her honest criticism on Capitol Hill, even from her admirers. Sen. Ted Kaufman, a Democrat from Delaware, worries that the contentious debate over the CFPA will distract Congress from the larger question of how to rein in big banks. "If we don't do something about too-big-to-fail and we go through a crisis like this again," he says, "the cost to consumers is going to be extraordinary – even if we have a consumer-protection agency."
But Warren believes such criticism misses the point: Creating a safe and transparent marketplace for borrowers will ultimately protect Wall Street and the entire economy. The agency would have the power to police the kind of predatory lending – subprime mortgages being the key example – that not only drove individual borrowers into ruin, but became "toxic assets" as they were sliced, diced and securitized by banks looking for lucrative new instruments. "This whole economy failed one bad mortgage at a time," Warren says. "The raw material that fed into the crisis was bad consumer financial products. If nobody can sell mortgage-backed securities based on trillions of dollars of unpayable instruments, there's a lot less risk in the overall system."
As Warren envisions it, the CFPA would streamline government by consolidating regulatory authority now spread among seven bureaucracies – including the Office of the Comptroller of the Currency, which is run by a former bank lobbyist. The new agency would police everything from car loans to home mortgages, ensuring that borrowers understand the costs and risks of a financial product before signing on the bottom line. In 1980, Warren points out, the average credit-card agreement fit on a single page. Today, it is more than 30 pages of incomprehensible legalese. "The maze of fine print and undisclosed practices," she says, makes signing up for a Visa card "like putting your head in a lion's mouth and hoping he isn't hungry." The CFPA would make choosing a credit card or mortgage a straightforward decision, based on the best available terms. Informed speculators would still be able to flip a house, but the agency would stop predatory lenders from refinancing a grandmother out of her home with a defective loan.
Much of the debate surrounding the agency has centered on where it should be housed. Warren is agnostic about location, as long as the agency hews to a four-point checklist: Is the agency headed by a presidential appointee? Does it have independent budget authority so it can't be zeroed out by a hostile Congress? Can it make and enforce its own rules? And does its scope
cover the full range of financial products?
In the end, Warren is confident that she can hold the line on these criteria to ensure that the new agency doesn't degenerate into a regulatory mush. "We'll have something strong here," she vows, "or we'll have nothing at all."
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