Elizabeth Warren’s Long Game Against Wall Street

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She's doing more than you think. Photo: Drew Angerer/Getty Images

Yesterday, Senator Elizabeth Warren undertook a big act of financial rabble-rousing, by introducing a bill that would reinstate key provisions of the 1933 Glass-Steagall Act that were repealed in 1999. The new bill would essentially force big bank holding companies like Citigroup and Bank of America to split in half — commercial banking on one side, investment banking on the other — and hypothetically make the entire banking system safer and less crisis-prone by (a) shrinking banks, and (b) reducing the amount of risky stuff that goes on at the commercial banks where normal people keep their savings accounts. She's calling this bill the "21st Century Glass-Steagall Act" and promoting it using the slogan "Banking should be boring."

The bill, which Warren has already said won't get support from the Senate Banking committee, is the second piece of legislation Warren has sponsored since taking office that has virtually no chance of passing. In May, she introduced the Student Loan Fairness Act, which for one year would bring student loan interest rates down to the rates the Federal Reserve charges banks. That bill was called "embarrassingly bad" by the Brookings Institution, and the new one isn't faring much better among policy wonks.

So, with two largely symbolic bills in seven months in office, the question must be asked: What is Elizabeth Warren really doing here?

One theory, held by most of the Wall Streeters I've spoken with about Senator Warren, is that she's simply playing for attention. They see her grandiose bills and made-for-YouTube tirades against financial excess and lax regulation as shallow populism, designed to garner reelection, solicit donations, and boost her reputation as a badass. Even one ex-financier I spoke to recently said he thought Warren was doing "showy stuff," not meant to make it into actual law.

The second theory, also held by some conservatives and financial-industry lobbyists I've spoken to, is a variation on the first and posits that Senator Warren is basically the Steve Stockman of the left — a principled true-believer whose refusal to abide by the horse-trading, pragmatic legislative process leaves her with a bunch of unsupportable, silly-sounding bills. In this theory, getting attention isn't the goal, but it often looks that way.

But there's a third theory. It's the one that acknowledges that Senator Warren is, pound-for-pound, one of the smartest and savviest legislators in Congress, and imputes to her a far more complicated motive than simple attention-seeking or "gesture politics."

It's the long-game theory.

This theory says that Senator Warren isn't trying to change individual laws, so much as move the entire political discussion of the financial sector to a different rhetorical arena and force other legislators to join her there. In this theory, Warren's anti-bank bills and activism aren't meant mainly for her constituents in Massachusetts, for the Internet audience, or even for Wall Street. They're directed to her fellow legislators. And their message is simple: On issues involving Wall Street, the center isn't where you think it is.

Wall Street, and finance generally, is one of the issues where the views of Congress have traditionally differed sharply from the views of the masses. Most surveys show that a vast majority of Americans support tougher regulation on banks; yet, because the financial sector's campaign contributions and lobbyists have an outsize impact on Congress, the debate about how to rein in Wall Street excess has taken place on the financial sector's turf. On Main Street, around 60 percent of people think Wall Street banks are too big and should be broken up. But to find that position in Washington, you've typically had to look to the leftmost fringes.

Now Senator Warren, along with other pro-regulation legislators like Sherrod Brown and David Vitter, are shifting the center. The Brown-Vitter bill, which would have basically broken up banks by imposing tougher capital requirements on large financial institutions, won a nonbinding 99–0 vote in the Senate and was taken seriously by legislators in both parties. (Brown-Vitter did considerably less well when it came to getting actual, binding support.) For her 21st Century Glass-Steagall bill, Senator Warren has brought aboard co-sponsor Senator John McCain — a truly amazing about-face, given that McCain not only voted for the original Gramm-Leach-Bliley Act that repealed the original Glass-Steagal, but hired that bill's lead sponsor, Phil Gramm, as a senior economic adviser for his 2008 presidential run.

Senator Warren's regulatory push hasn't changed Wall Street yet. Most financial regulations that take actual effect are written by agencies like the CFTC and the SEC. And in those agencies, debates about how Wall Street should be regulated still take place in fairly small windows. (Commissioners might disagree about how to regulate, say, overseas derivatives trading, but nobody in the CFTC is proposing outlawing certain kinds of derivatives entirely.)

But it's entirely possible that Senator Warren is proposing reforms she knows have no chance of passage, simply to widen the boundaries of debate. This is a basic tenet of negotiation. If you want a 20 percent raise, you ask for a 40 percent raise. But this isn't traditionally how the game over financial regulations has been played. By loudly advocating for policies that are outside the narrow confines of traditional political acceptability, she's expanding what political theorists call the Overton window and forcing other politicians to consider more moderate views that would have seemed fringe several years ago.

The new Glass-Steagall bill doesn't make a tremendous amount of sense. As Senator Warren herself told Andrew Ross Sorkin last year, repealing Glass-Steagall wouldn't have prevented the financial crisis or stopped the $6 billion London Whale trading losses at JPMorgan Chase. Bear Stearns and Lehman Brothers were both investment banks with no commercial banks attached to them, and their activities wouldn't have been prevented under the original Glass-Steagall. Neither would the activities of AIG, Fannie Mae, or Freddie Mac. And, as Matt Levine notes, the primary drivers of the financial crisis — mortgage lending and the use of derivatives like credit default swaps — were both permissible under the old Glass-Steagall regime.

If Senator Warren herself is willing to admit that reinstating Glass-Steagall's bank-separation provisions wouldn't have prevented the financial crisis, she must have another motive for introducing it. And I suspect it's more complicated than grandstanding or staying true to principles.

The truth is that many senators don't know what capital ratios or rate swaps are, never mind being able to write legislation around them. And in the same way that Wall Street's informational advantage gives it an automatic edge over ordinary investors, Warren's knowledge of the financial markets gives her automatic authority in Congress. Even if she's a freshman senator, her knowledge has allowed her to coalition-build like a veteran. And that ability — not a single bill or years of Internet fame — is what could make her quest to reform Wall Street successful.

Bankers and their lobbyists shouldn't be worried that Senator Warren's new Glass-Steagall legislation will pass. It won't. And passing is largely beside the point. The more interesting achievement is that she's managed to bring ideas like these into the realm of political acceptability and get support from both sides of the aisle for them. Warren's "make banking boring" campaign may look silly to finance-world cynics, but it's entirely possible that she's engineering a new political consensus that will do much more damage to Wall Street in the long term than simply breaking up a few banks.