Elizabeth Warren is far from a household name, but that could change quickly, given her debut on the big screen this week in Michael Moore's...

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WASHINGTON — Elizabeth Warren is far from a household name, but that could change quickly, given her debut on the big screen this week in Michael Moore’s scathing assessment of the government’s handling of the banking crisis.

The Harvard professor chairs the bipartisan Congressional Oversight Panel, which evaluates how effectively financial institutions are using $700 billion in federal money through the Troubled Assets Relief Program (TARP).

Warren emerges as one of the heroines of “Capitalism: A Love Story” when she bluntly tells the lefty filmmaker that she doesn’t know where the taxpayers’ money has gone because the government attached no strings to the TARP money.

In fact, she has told anyone who will listen that the money used to rescue the banks had no paper trail once it left the Treasury. “We have a system that originally put more than $200 billion into the financial institutions, basically saying, ‘Just take it,’ ” she said in an interview.

Passionate and engaging, Warren has long been a fearless advocate for the middle class. She has been embraced by the left-wing blogosphere for challenging economic policymakers and has become a thorn in the side of the bankers and credit-card companies, which, she insists, should be better regulated.

Interview excerpts:

Q: There’s a wonderful moment in “Capitalism” when he asks you where the $700 billion is, and you look at him and you say, “I don’t know.” So the question is: Why don’t you know?

A: Well, we don’t know where the $700 billion is because the system was initially designed to make sure that we didn’t know.

When Secretary (Henry) Paulson first put this money out into the banks, he didn’t ask “what are you going to do with it?” He didn’t put any restrictions on it. He didn’t put any tabs on where it was going to go; in other words, he didn’t ask. And if you don’t ask, no one tells. We have a system that originally put more than $200 billion into the financial institutions, basically saying, “Just take it.”

Q: And that money is gone. You have not been able to track where that money is?

A: We don’t know where the money went from the financial institutions.

The big conversation at the time was that the credit markets are frozen; if we put money into the financial institutions, they will start lending it because that’s what they do when they receive money. And we tend to have forgotten what the name of the program was initially. It was called the “Healthy Banks Program,” because the allegation was Secretary Paulson kept saying, over and over, these are investments in healthy financial institutions; no one needs any subsidy.

And so we put it in on the claim by Secretary Paulson that that money was going to be used in lending to small businesses and consumers and kind of get our whole credit market going again. That didn’t happen.

Q: We’re just past the year anniversary of the collapse of Lehman Brothers where a lot of safeguards were ostensibly put in place. The TARP money went out. As an economic nation, are we better off systemically now? Have we put things in place to prevent this from happening?

A: You know, this really has me worried. A year ago when we talked about why we needed to pass the TARP, why we needed a $700 billion blank check written to the secretary of Treasury, remember what we were saying. We said the big crisis is toxic assets on the books of the banks.

Today, the banks still have those toxic assets. Almost none of the TARP money was used to remove the toxic assets. Some of it may have been used to write down the total amount. But, in the meantime, those toxic assets, many of them have gotten more toxic, more foreclosures, higher unemployment rate. Now we’re starting to move into commercial mortgages creating problems. So the way we described the crisis a year ago is still a very serious crisis today.

A year ago, we talked about too big to fail, too much concentration of the banking industry and too deeply interwoven. A year later, the big are bigger than they were. They are more intertwined, and there’s more concentration in the banking industry. The failures have all occurred among the intermediate-sized and smaller banks, so we have a more concentrated industry.

And then the — kind of the third part of it, rolling forward just a little bit, our path out was going to be the stress tests. And so we had the announcement in February/March, we’re going to do the stress tests, and then everyone passed the stress tests. But the Congressional Oversight Panel at the time, which was trying to review these stress tests, were very concerned about not seeing enough of the detail about how the stress tests had been implemented. They were only implemented on the 19 largest financial institutions.

Q: I was reading a transcript of a hearing that you conducted with Secretary Timothy Geithner. And you had a very good question, which was why is it that the banking institutions and the automobile companies were treated differently, that the criteria for receiving the funds was very different. The banking industry didn’t really have to meet much, and the automobile industry did. If I recall right, you asked the question three times. And I’m not sure he ever answered it.

A: If he answered it, I didn’t catch it.

Obviously, it bothered me. That’s why I kept asking it. There is such a difference. I mean, just take a deep breath for a second on this. We said with the auto companies you have to have an entirely new business plan. You have to go through bankruptcy. You have to wipe out your shareholders. Your debt holders have to take a hit. Your labor has to take a reduction. Your management team is at risk for being fired; some of them got fired.

And we said to the banks, take the money, but we didn’t ask for any of those things. We didn’t ask that they wipe out their shareholders, that they make their debt holders take a hit, that they come up with a new business plan. We didn’t ask for any of that. We just said here’s the money.

And I really wanted to understand that. You know, this isn’t a political cheap shot that I was engaged in. I want to understand. If it’s taxpayer money on the line, if these are described as systemically significant institutions and that’s the reason for coming in, did he think the banks were better run? We know there were problems in the auto industry, but I would think this crisis would suggest there were some problems in the banking industry.

The Treasury Department on behalf of the taxpayer was tough in dealing with the auto industry. Some still think maybe we shouldn’t have gone in at all. But I want to make the point, they were tough. They were not tough with the banks, and I want to understand why.

Q: On the banks, this notion of too big to fail begs the question, why can’t they fail? Why are they too big to fail?

A: Well, the view of the Treasury Department is that if they fail, they will bring down other institutions, and, therefore, it will be really too hard for the economy overall. It’s like hikers who are up on a mountainside, and they’re all roped to each other, and the fear is that if one hiker falls off, you know, he’ll tear 10 other hikers off with him.

Q: What do you think?

A: I’m deeply skeptical about that point. I watch big institutions make really stupid economic decisions and pay the ultimate price, get wiped out.

So I start from a premise that the way capitalism works is that there is always a death threat at the end that if the business is not properly managed and properly run, it can be liquidated through, we can call it bankruptcy.

We can call it resolution authority. We can call it a receivership under the FDIC, but the point is there are ways to get rid of them, to kill off the institutions that don’t work, and that, ultimately, in my view, that’s good for the system in that the healthy ones survive and the bad ones are weeded out.

But, also, an absolutely important message to every institution going forward, if your shareholders don’t monitor you, if your debt holders don’t monitor you, if you don’t monitor yourself, you could all end up out of a job.

Q: Would the economy be better off if we broke up these financial conglomerates into smaller focused entities that could fail?

A: That’s a really good question because it goes right to the heart of the game. What’s the ultimate solution? Once you’ve decided that Citibank is too big to fail, what’s the right answer? Once you’ve decided Bank of America is too big to fail, that means you’ve just announced, although you haven’t said the words, taxpayer dollars will always be used to back up this financial institution. … And all of the smaller institutions have to compete with that big institution, but they don’t have those guarantees to back them up.

So my view is any institution that is too big to fail is one that distorts the economy and ultimately is very costly to all of us.

Q: Are we going to look back in two, three years at this TARP expenditure and say, well, it worked?

A: I think there are a couple of pieces of it that are already clear. One is there was a moment of panic, perhaps a moment of panic fueled by the secretary of Treasury and a perceived need to have a strong response. TARP clearly accomplished that.

But the TARP money was spent in ways that really are groundbreaking for America. They changed the rules of the game in fundamental ways. … We put taxpayer money in without saying you’ve got to use up everyone else’s money first. We put taxpayer money in without saying you got to show us how this business plan is totally changed. We put taxpayer money in without saying you’ve got to tell us how in the future this is not going to happen again. … I don’t know how you ever put the genie back in the bottle. I don’t know how you ever persuade either a large corporation or the wider marketplace that if you can just get big enough and tie yourself to enough other important people, institutions, that if something goes wrong, the taxpayer will be there behind it. That’s a game changer.

That is a whole different approach than any we’ve ever used before in the United States.

I think three years from now when we’ve all had a deep breath and we kind of figured out where we’ve come out of the recession, we’re going to look back at that one, and I think that’s going to continue to be a “wow” moment.