Why Elizabeth Warren Makes Bankers So Uneasy, and So Quiet (BusinessWeek)

The rollback of financial regulation is stalled. Income inequality is a campaign issue. Americans are still angry about the financial crisis. Things aren’t shaping up the way the big banks expected, and an important reason is one laser-focused senator from Massachusetts.

Let’s assume that when he woke up on the morning of Dec. 12, Michael Corbat, CEO of Citigroup, was feeling pretty good. The day before, the House of Representatives had passed a bill that would save his bank and others lots of money and headaches.

The trouble was, Elizabeth Warren, the senior senator from Massachusetts, was getting ready to speak on the Senate floor. She had his bank on her mind.

What Warren wanted to talk about was an item tucked into page 615 of a 1,603-page spending package: the repeal of section 716 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Known as the swaps push-out rule, section 716 required banks to set up separate subsidiaries, not backed by the government, to trade certain derivatives. If the rule stood, it would generate huge administrative costs for the big banks.

Citi had fought hard on this. The bank’s lobbyists had worked on lawmakers and helped draft language for the repeal. Getting it into a big spending package Congress was sure to pass was a coup. In the ongoing wars between Wall Street and the forces of government regulation, this repeal was a big win for the banks.

“Today I am coming to the floor not to talk about Democrats or Republicans,” Warren began her speech, “but to talk about a third group that also wields tremendous power in Washington—Citigroup.” With that, Warren turned Citi into exactly the kind of villain so many people suspect lurks in the backrooms of the Capitol. In one particularly striking moment, she connected nine top government officials—including Treasury Secretary Jacob J. Lew—directly to the megabank. She invoked Teddy Roosevelt, her favorite trust-busting president, who took on the big corporations of his day.

“There is a lot of talk coming from Citigroup about how Dodd-Frank isn’t perfect,” Warren continued. “So let me say this to anyone who is listening at Citi. I agree with you, Dodd-Frank isn’t perfect.” She paused, then spoke very slowly and emphatically: “It should have broken you into pieces.”

Warren didn’t succeed in blocking the bill. It passed the Senate the next day, and on Dec. 16, President Barack Obama signed it into law. But her clash with Citi generated the kind of headlines no bank wants to see these days. “Why Citi May Soon Regret Its Big Victory on Capitol Hill,” one from American Bankerread. Warren’s speech got half a million YouTube hits. A few days later, protesters showed up outside Citi’s New York headquarters, holding placards that said things like “Break Up the Big Banks.”

Starting with December’s showdown with Citi, Warren, 65, has been on a tear,Bloomberg Markets reports in its June 2015 issue. Only two years into her term as senator, she has the kind of clout and attention it takes most lawmakers decades—or a presidential run—to build. Her stance as watchdog over the financial industry helped her win a Senate seat. Now, she’s harnessing that into something bigger and more powerful.

In January, Warren’s protests effectively blocked Obama from appointing Antonio Weiss, a banker at Lazard, to the No. 3 position at the Treasury Department. In February, she took on Federal Reserve Chair Janet Yellen,calling out the central banker for the conduct of Scott Alvarez, the Fed’s top lawyer, who criticized the swaps push-out rule in a speech. For months, she’s been attacking the Trans-Pacific Partnership, a treaty intended to regulate trade between North America and Asian countries outside of China. The White House wants the agreement badly; Warren casts it as a giveaway to multinational corporations.

Now, as the 2016 run for the White House begins, this could be a very hot campaign season for Wall Street. Warren, who declined to be interviewed for this story, is not running for president—although an army of supporters, including a corps of Hollywood celebrities, is clamoring for her to do so. But her impact on the race is already evident. There are frequent references to a Warren wing of the Democratic party and to the need to appeal to it. Hillary Clinton, the Democratic front-runner, is openly courting her. “Elizabeth Warren never lets us forget that the work of taming Wall Street’s irresponsible risk taking and reforming our financial system is far from finished,” Clinton wrote for Timemagazine’s 100 Most Influential People issue in April.

Warren is a problem the financial industry didn’t expect to have right now. With the Republicans in control of Congress, this should be the time for Wall Street to soften regulators and their rules. The financial crisis is over, the housing market is recovering, and the economy is stable. A year ago, the sense of urgency about keeping a close watch over the financial industry seemed to be subsiding. Not anymore. Warren has re-sounded the alarm.

...

“More than any of the senators, she is making Wall Street nervous,” says Dick Durbin, a Democratic senator from Illinois and a fellow financial reformer. This spring, news broke that bank executives had told Democrats they were unhappy about the anti–Wall Street rhetoric coming from Warren and others. In some conversations, executives reportedly suggested they might withhold donations. Warren used the news as an opportunity to remind the public once again how banks wield power in Washington. “The big banks have issued a threat, and it’s up to us to fight back,” she promptly e-mailed supporters, asking for donations.

Barney Frank, the former congressman from Massachusetts and co-author of the Dodd-Frank legislation, says Warren has protected the ­act. “She can raise hell and make clear to people they will pay a political price if they try to attack it,” says Frank. In particular, he says, Warren has helped make modifying Dodd-Frank politically untenable for Democrats, without some of whom Republicans can’t hope to roll back the law. “I think it is safe until 2016,” Frank says.

“A Republican Senate would not take up Wall Street deregulation now,” says Dennis Kelleher, president and CEO of Better Markets, a watchdog organization that monitors Wall Street’s influence in Washington. “Nobody wants to be seen as siding with the big Wall Street banks.”

Not even the big banks. Executives at Citigroup, JPMorgan, Goldman Sachs, Bank of America, and other financial institutions declined to be interviewed for this story. Even the head of the Securities Industry and Financial Markets Association, or SIFMA, a lobbying group for the securities industry, wouldn’t discuss Warren publicly. “It would be foolish for financial institutions to get into a head-to-head with Senator Warren,” says Tony Fratto, a former Treasury official who is now a partner at the public-affairs consulting firm Hamilton Place Strategies. “It’s exactly what she wants, and it’s a debate you can’t win.”

Bloomberg Markets

Dodd-Frank has transformed Wall Street. The law created hundreds of new rules, which are enforced by more than a dozen regulatory agencies. One of them is the Consumer Financial Protection Bureau, first envisioned by Warren while she was still a law professor at Harvard University. It’s tougher to get up to no good these days. It’s also tougher to make a buck.

Higher capital requirements and compliance costs are reshaping the industry. Banks are shedding operations that under the new rules are no longer worth the trouble. They’ve laid off thousands of traders, analysts, investment bankers, and support staff.

At the same time, they’re hiring armies of compliance officers. “It affects almost everything we do,” Lloyd Blankfein, CEO of Goldman Sachs, told Bloomberg in January. “I can’t think about our technology spend without thinking of the number of heads I have to hire to build the systems to comply with the new regulatory reporting functions.”

“The United States is at risk of losing its status as the world’s capital markets leader,” Daniel Gallagher, a commissioner at the Securities and Exchange Commission, said in a speech in January. “I see it everywhere: Rather than thinking creatively about ways to promote capital formation, legislators and regulators are layering on law after law, regulation after regulation­—strangling entrepreneurs, their enterprises, and, of course, their employees and customers. We are not even resting on our laurels; we are actively throwing those laurels on a bonfire.”

Still, at this point, executives from the big banks tell Bloomberg they want the Dodd-Frank wars to be over; they’re digesting the new rules, and the costs, and trying to get back to making money.

For Warren, the fight is definitely not over. In April, in a speech titled “The Unfinished Business of Financial Reform,” she laid out how she hopes to move her agenda forward. Among other things, she called for the breakup of the big banks; they are still too big to fail, she said, and bailing them out of the next crisis would cost billions. And she wants jail time for managers who violate the law. “It’s time to stop recidivism in financial crimes and to end the ‘slap on the wrist’ culture that exists at the Justice Department and the SEC,” Warren said.

An important part of her legislative agenda is the 21st Century Glass-Steagall Act, which she and three co-sponsors introduced in 2013. The bill is a modern version of the 1933 law that split commercial and investment banks. (The original Glass-Steagall was effectively repealed in 1999.) So far, 21st Century Glass-Steagall hasn’t gained traction on Capitol Hill, but for Wall Street, this will be one to watch.