Immediately after the election, we identified some areas that the banking industry needs to track to see what changes are coming in the era of Obama 2.0. The No. 1 topic: incoming Senator Elizabeth Warren of Massachusetts. As we asked then, “Will she seek, and get, a spot on the Senate Banking Committee?” Well, we have the answers: She did, and she did.
So what happens now?
For a junior senator who’s yet to spend a day in the Senate, Ms. Warren’s presence has stirred up strong emotions already. Even before the committee appointment, her election was tagged as a “crushing defeat for big banks.” That’s true in a literal sense—the industry at large contributed heavily to her opponent, incumbent Sen. Scott Brown, who she trounced at the polls.
The reasons for the wariness towards Sen.-elect Warren are well documented. She’s been a strident critic of the larger institutions, even advocating a modern-day version of Glass-Stegall, the 1933 legislation that curtailed the mingling of commercial banks and securities firms. The report she developed for the nation’s 50 state Attorneys General in 2011 alleged that many large banks had avoided regulatory mandates when servicing certain home loans. (The banks eventually settled with the government for more than $25 billion.) And of course, she was behind the creation of the Consumer Financial Protection Bureau (CFPB), the watchdog agency strongly opposed by many conservatives.
Ironically, it was resistance to her suggested appointment as head of the agency that led to her run for the Senate. Many feared that as director of the newly empowered CFPB, she would have too much power. As a senator with a seat on the Banking Committee, she might have more.
Of course, the concern may be premature. By all accounts, Sen.-elect Warren is more sober academic than hippie radical. She taught law at several universities before joining Harvard Law School, where she specialized in bankruptcy law. Throughout her career she has written extensively about the U.S. economy, and her legislative credentials are hard to dispute. She chaired the congressional panel empowered to supervise TARP (Troubled Asset Relief Program), the bailout program initiated during the Bush administration. She became a Special Advisor to Treasury Secretary Tim Geithner and also served as Assistant to the President.
So is the industry wrong to be worried?
She clearly has a strong point of view—her impassioned defense of tax fairness, captured on video, served as a foundation for President Obama’s own “you didn’t build that” campaign theme. From her perch in the Senate, she potentially has the clout to drive the changes she has long advocated.
However, the reality is more complicated. The U.S. Senate has long been known as the world’s most deliberative body, which is a nice way of saying it takes a long time to do anything. The institution’s bipartisan reputation for seniority, hierarchy and patronage is well-earned, and as a junior senator she will have to work the system before she can overhaul it. Even former First Lady Hillary Clinton had to play by the rules when she got in.
Observers point to a freshman senator from Illinois named Barack Obama as an example of someone who broke through, but he was clearly the exception. In fact, he serves as a potential template for Sen.-elect Warren’s own path to power—many have speculated that she has a White House run in her future. Consequently, she will be under constant scrutiny, with every public utterance parsed for meaning. For a variety of reasons, she is categorically not in a position to drive through major change in a hurry.
Still, the industry would do well to build bridges, if not to her then at least to her constituency. She won the election decisively, with strong support for the reforms she wants to make, and she will likely have White House support when she does make a move.
Bottom line: Working with her when she’s a junior Senator will be a lot easier than working against her if she becomes president.