(Fortune) -- Elizabeth Warren, who came to Washington in 2008 with the task of keeping tabs on the financial bailout, today faces the unthinkable: business as usual for the Wall Street firms whose dealings plunged the country into the most severe recession in almost 80 years.
The Harvard law professor and plainspoken voice of financial reform and consumer protection was asking politicians to level the playing field between Main Street and the banking industry even before Lehman Brothers fell. When Harry Reid appointed her head of the Congressional Oversight Panel two years ago, it furthered her reach in D.C. and gave her more opportunity to whip up support for a new Consumer Financial Protection Agency.
Now her dream of a CFPA is growing dim. In Sen. Chris Dodd's sweeping financial reform package, the agency would be housed inside the Federal Reserve, a move opposed by many members of Congress and current and former members of the Fed's Consumer Advisory Council. There are also doubts that his proposed measures would have the teeth to rein in Wall Street's excess and the banking industry's overreaching power over the economy.
Between now and May when lawmakers will be itching to leave D.C. for mid-term election campaigns, health care will dominate the schedule, leaving Congress with little juice to attack something as powerful as Wall Street or fend off the bank lobbyists swarming Capitol Hill.
Even if the Senate Banking Committee approves the bill before a congressional recess begins on March 29, it must be reconciled with the bill passed by the House. A big sticking point will be whether the CFPA will be a part of the Fed.
When asked why the government didn't capitalize on the perfect storm of a crisis and populist backlash to change the rules for Wall Street in the beginning of 2009, Warren hesitates. She doesn't want to criticize either party or the Obama White House. But she says that it was a missed opportunity and one that the administration may never have again.
"People are losing hope for real reform, so they're growing quiet," Warren says. "It means they're just losing trust in lawmakers, not that they are okay with the way this has all played out."
Warren would not comment on specifics of the Senate bill, but she said in a statement: "Since bringing our economy to the brink of collapse, Wall Street has spent more than a year and hundreds of millions of dollars in an all-out effort to block financial reform. Despite the banks' ferocious lobbying for business as usual, Chairman Dodd took an important step today by advancing new laws to prevent the next crisis. We're now heading toward a series of votes in which the choice will be clear: families or banks."
In the meantime, Warren continues to lead the COP. Though the panel has no regulatory authority, it has issued some critical and thoughtful reports on the bailout, including last week's critical report on the GMAC rescue. A report on foreclosures is scheduled for April, and a lending volume paper will come out in May. Save another appointment, she likely heads back to Cambridge when her reports are done.
"It's tragic to see what Warren has worked for stymied by bankers and politics," says Chris Whalen, a bank analyst and co-founder of Institutional Risk Analytics. "While there aren't many pro-regulation voices in government, voters want rules for banks and consumer protection. Warren represents what most Americans want."
Warren is incensed by the delays, the foot dragging, and the dilution of what she hoped to accomplish. She's spent her career studying how families are impacted by debt and the financial crisis has made her believe that the stakes are higher than ever.
So Warren has ramped up her public presence over the last few months, making headline-worthy statements about reform, credit, and even commercial real estate. Her owlish, bespectacled face has been seen on television shows that span the political spectrum, from Fox Business News to MSNBC's Rachel Maddow Show. She is always the financial den mother, able to break down the most complex of ideas into easily understood, fundamental concepts.
"She has this moment now with access to microphones that she might not always have," says Dan Geldon, a policy fellow at the Roosevelt Institute and a current aid to Warren. "She is incredibly distressed about the state of regulation and thinks families and the middle class are being crushed by it."
Warren is often asked why consumer protection creates financial stability. She responds that usurious interest rates, hidden fees, sky-high penalties, and fraudulent mortgages are not only harmful to consumers, but those products' unsustainable profits will come back to bite lenders in the form of high defaults and big losses -- causing another disastrous boom and bust.
"It's sort of like the airline industry," says Warren of high finance. "If we didn't have an FAA and suddenly a couple of airlines started posting very high profits, the investor would not know whether the high profits were the result of better business operations or shortcuts on safety," she asks. "So there are rules that force companies to compete based on products that are safe for consumers, rather than high-risk strategies, so that investors aren't hurt by bad practices blowing up in everyone's face."
Critics, including the U.S. Chamber of Commerce, say that Warren would sacrifice profitable business models in service of a consumer protection agency. "Warren's proponents say we need a CFPA in response to the current crisis, but her idea for this agency was created years ago and not in response to the underlying causes of the financial crisis," says Rep. Scott Garrett, a member of the Republican House Financial Services Committee. Garrett adds that effective consumer protection legislation can be created outside of Warren's plan, and he has drafted an alternative bill.
But Warren's take is that she believes in markets, just not as they've been created over the last 30 years. Deregulation has allowed banks to change their business models, using the lack of oversight to take on unprecedented risk. The new bank model created incalculable risk and unimaginable profits, but taxpayers, not bank employees, paid for the inevitable mistakes. As she told Charlie Rose, "It will not save us if a handful of Wall Street banks prosper and the rest of America fails."
In its current incarnation, Warren says bank regulation encourages short-term profiteering that hurts banks when they blow up, and crushes Americans when their tax dollars must clean up the mess. She wants firms like JPMorgan Chase (JPM, Fortune 500) and Goldman Sachs (GS, Fortune 500) to make money but not according to the current set of rules.
"She truly believes that markets can work, but she knows that participants in the market have strong incentives to rig things in their favor," says Adam Levitin, a former student of Warren's who specializes in bankruptcy law at Georgetown University. "If participants have a sweet deal, they'll be upset at anyone who wants to level the playing field."
Warren could someday wield regulatory authority. As the intellectual mother of the CFPA, she is widely considered the natural choice to head the agency, and Congress could frantically push through a financial reform package so that politicians have something to tout during the elections.
But Warren isn't fighting for Beltway power broker status, which her proponents and her detractors say make her an anomaly in D.C. Supporters, including Rep. Barney Frank, say she would rather have someone else lead an agency with real power rather than have control over a paper tiger. She would rather agitate from her perch at the Congressional Oversight Panel or from Harvard Yard.
"My first choice is a strong consumer agency," Warren said in an interview with the Huffington Post. "My second choice is no agency at all and plenty of blood and teeth left on the floor."
It's that kind of talk that has made Warren a figure of populist cheer, which, in the end, may do more for her than leading any government body. How many other factotems, after all, have numerous Facebook fan clubs?
"People admire her and respect her and support her, because she's onto something very important," says Frank. "She believes in the importance of protecting consumers, and consumer issues address the needs of Americans, especially the middle class, in a very real way."
An earlier version of this story incorrectly stated that "Morning Joe" airs on Fox News. It airs on MSNBC.