Elizabeth Warren

It’s a little weird, isn’t it, that Rolling Stone is the publication doing the most relevant coverage of the financial crisis, much as a certain late-night comedy show is doing the best news coverage?

Today, says Warren, the fortunes of Wall Street and the fortunes of Main Street have become disastrously oppositional. Despite profiting from taxpayer bailouts, Wall Street has only made life more miserable for those scraping by in what she calls the “real economy.” Banks are refusing to modify mortgages for the hard-strapped homeowners they deceived, and now they’re even bilking credit-worthy borrowers with arbitrary interest-rate hikes. Worse, Warren says, bankers like Jamie Dimon of JP Morgan Chase have testified before Congress that we should expect cycles of boom and bust to recur every five to seven years. “What pisses me off – I didn’t say that – what makes me so angry is that the financial collapse was not a natural phenomenon like a hurricane or a drought,” she says. “It was the consequence of a series of deliberate regulatory choices. That Jamie Dimon has figured out how to make a profit off of that may make him willing to tolerate booms and busts – but for the rest of us, the consequences are catastrophic.”

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:

RULE ONE
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.”

Go read the rest.