Why a Harvard Professor is Overseeing the Bailout

The stereotypical image of Harvard law school is of a crowded lecture hall dominated by a crusty, intimidating professor—think Professor Kingsfield from "The Paper Chase"—sparring with students over grand constitutional questions. But on a snowy February evening in a basement classroom, the scene could hardly be more different. Just nine students sit around a small table, staring at PowerPoint charts while their professor, Elizabeth Warren, offers bubbly praise and gentle critique. No one cites Supreme Court cases. These students don't even want to practice law—they aspire to be law-school professors, so Warren is teaching them to produce the wonky journal articles upon which academic careers are built. "You have the right insight, but you're not milking your data," Warren tells one student, suggesting a different statistical technique. There's no time to waste: final papers are due in three weeks.

When it comes to ushering students into the ivory tower, there are few better guides than Warren, one of the nation's leading bankruptcy scholars. For three decades she's devoted herself to the same grind on which these students are about to embark: churning out treatises that are rarely read outside of law libraries. But in the last few months, her work has been anything but obscure. In November, Sen. Harry Reid appointed her to head the Congressional Oversight Panel, the group that's critiquing the government's bank bailout and advising legislators on how to reform the financial system. For years Warren has been an outspoken critic of banks, and in this new job she's got her best chance yet to see her views turned into law. That's a prospect that pains financial lobbyists, who basically despise her.

To do that, she'll need to learn to navigate politically—a set of skills she admits isn't her strong suit. But if politics is partly about grabbing a megaphone, her first few months have been successful. She's become a frequent presence on cable news shows, and her reports have lambasted the Bush administration's handling of the early days of the crisis. "The idea that we could save the banks and not save the American family just isn't right," she said after releasing her group's first report.

Warren seems an unlikely advocate for working-class debtors. She and her second husband, also a tenured Harvard professor, live a few blocks off the Square in a restored 1875 Victorian home that was worth $2 million before the real-estate bust. But her roots are far from the Ivy League. Warren, 59, was born in Oklahoma a decade after depression and drought led to the exodus described in Steinbeck's "The Grapes of Wrath." "I worried about money from the time I was a little kid," she says, recalling how, when she was sick, her mother would weigh her temperature against the amount the family owed the doctor before deciding whether to take her in. But for a debating scholarship, she'd have had little chance of attending college. Married at 19, she completed college and attended Rutgers Law; soon after she graduated, the school asked her to teach in its new night program. At 26, she was younger than many of her students.

Over the next 20 years Warren was an academic migrant, teaching at Texas, Michigan and Penn before arriving at Harvard in 1995, propelled by groundbreaking research on America's bankruptcy system. Her early studies analyzed just how destitute people filing for bankruptcy really were—countering the notion of well-off people declaring themselves broke just to shirk bills. Her later work identified the three primary factors—divorce, job loss and medical debts—that fuel most bankruptcies. Former student Katherine Porter, now a law professor at the University of Iowa, recalls her first day in Warren's class, in which the professor described why she finds bankruptcy so fascinating: "It's about the other side of capitalism, which is really good at rewarding the winners, but doesn't tell us what to do about the losers."

Over time, Warren began to see herself less as a dispassionate analyst and more as an advocate. By 2003 she'd enlisted her daughter, a former McKinsey consultant, to coauthor "The Two-Income Trap," a mass-market book largely focused on how dual-income couples were stretching too far to buy houses. The book struck a nerve, and Warren began appearing on talk shows —including an interview on "Dr. Phil" that led her to rethink her life's work.

On the show, a struggling family described how they'd taken out a second mortgage to consolidate their debts. Then Dr. Phil turned to Warren. "Suddenly the bright lights are in my face," she recalls. "I said, 'Dr. Phil, when a family is in financial trouble, putting a second mortgage on the house is about the worst possible move'," because it puts them at risk for foreclosure. "Afterward I thought, I've been doing scholarly work for more than 20 years, and I may have just done more good in the last 90 seconds than I ever accomplished with anything else I wrote," she says. "I began to think that instead of writing one more thing to impress other academics or to reassure myself that I'm a serious scholar, I should [focus] on the question of change, of real impact, of how to be helpful."

That's why, when Senator Reid asked her last fall to chair the new board overseeing the bank bailout, she didn't hesitate. On a typical morning, Warren sits center stage in a Senate hearing room. As C-Span cameras roll, she calmly urges a Nobel Prize–winning economist to cut to the chase of his prepared testimony. During a January hearing, Warren asks Yale economist Robert Shiller what regulations might have prevented the financial collapse. Shiller responds by praising the regulatory idea Warren has been advocating. Up on the dais, she can't help but smile.

Warren's big idea is to create a Financial Product Safety Commission modeled after the Consumer Product Safety Commission, which ensures the safety of small appliances and toys; such an agency would have kept the poorly designed mortgages that caused the credit crisis off the market entirely. "This crisis started with the cheating of American families, and [solving it] has to begin there, too," she says. It's just one of the ideas she's promoting in her new role. Each month, her committee's reports create controversy. For February's missive, the panel hired an outside investment firm whose analysis concluded that the Treasury Department had overpaid by one third for the ownership stakes it took in big banks last fall. In a report released last week, the panel explored how, in previous financial crises, liquidating insolvent banks and sacking their managers led to a quicker, cleaner resolution of the mess.

Some of her ideas have sharp critics. "A credit card is not an exploding toaster," says Todd Zywicki, a law professor at George Mason University, because unlike faulty consumer products, complicated loans are actually suitable for some borrowers. Zywicki says Warren's views are extreme because she views every lender as exploitative and every borrower as a hapless victim. Financial-industry lobbyists are even more critical, slamming her for shoddy scholarship and radical ideas (though they decline to do so publicly). Critics also question just how much influence her committee will have. "It has no authority, it doesn't have any enforcement power, it [only] makes suggestions—it's a pulpit at best," says one lobbyist.

Still, her ideas are gaining traction. In March, Sen. Dick Durbin introduced legislation to create a Financial Product Safety Commission along the lines Warren has suggested. And Barney Frank, chairman of the House Financial Services Committee, says Warren's views will be influential as Congress works to rewrite financial regulation. "Elizabeth is a great countervailing pressure in offsetting the temptation of the people running the [bailout] to focus entirely on the financial community," Frank told NEWSWEEK. "I'll be consulting her."

For all her energy, Warren admits the politics of her new gig are confusing. And despite the headlines she's generated, she's really not sure how much legislators will listen to her panel. Sitting in her quiet Harvard office late one evening, surrounded by bookshelves, one gets the sense she might be happier to stay right here, churning out journal articles and helping apprentice scholars perfect their PowerPoints. But she sees the months ahead as a fertile period, much like the era in the 1930s that produced the SEC and the FDIC. "We go through long periods of our history and we make only small changes at the margin, but there are other moments that are a point of inflection," she says. "We need to learn the lessons of this crisis." For her part, Warren intends to make the most of this teachable moment.

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