Democratic Sen. Elizabeth Warren © Gretchen Ertl, Newscom, RTR

One of Wall Street's worst nightmares has come true. No, not the re-election of President Barack Obama. What has the financial community exasperated is Elizabeth Warren's victory in Massachusetts. In toppling incumbent Republican Scott Brown, Warren recaptured for the Democrats the seat that until 2010 had been held for more than four decades by Ted Kennedy.

Warren is a former Harvard Law School professor and former special adviser to the secretary of the Treasury, where she helped create the Consumer Financial Protection Bureau.

In doing so, Warren had plenty of adversaries, particularly within the Republican Party, which tends to view the CFPB as a burdensome regulator of Wall Street.

Executives at Wall Street's biggest banks likely haven't forgotten a suggestion Warren made in September 2011, when the newly created CFPB produced a seven-page report for the 50 state attorneys general investigating improper foreclosure procedures by Bank of America (BAC), JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C) and Ally Financial. In the report, the CFPB said banks dodged more than $20 billion in expenses between 2007 and 2010 by taking shortcuts in servicing troubled home loans.

The report was presented as the banks and the states were engaged in settlement talks, and there was speculation that the financial firms would cough up somewhere between $5 billion and $30 billion to put the issue behind them.

But Warren balked at the $5 billion figure, saying it "would seem too low" considering that "rough estimates suggest the largest servicers may have saved more than $20 billion through under-investment in proper servicing during the crisis."

In the end, banks ended up settling for a whopping $25 billion.

Oh, and don't forget Warren's calls for a breakup of big banks by reinstating a modern version of the Glass-Steagall Act, a Depression-era law that separated investment and commercial banks. That's not winning her any love from the big banks, either.

Now, just a year later, Warren claims victory over a moderate Republican in a hard-fought Senate race. She's likely to get a seat on the Banking Committee.

As the Los Angeles Times points out, with Rep. Barney Frank, D-Mass., retiring, Warren becomes Capitol Hill's chief defender of the Wall Street reforms passed during Obama's first term.

"At exactly the time that big banks don't want more oversight -- or another potentially activist regulator -- that's what they're getting," says hedge fund manager Shah Gilani. "Not only will Momma be protective and nurturing with her offspring, she will champion a much harder stare-down and, most frighteningly to the banks, a possible breakup frontal assault on them while their underbelly is being further exposed."

How's that going to sit with banks?

JPMorgan Chase CEO Jamie Dimon may be particularly interested in watching Warren's moves. Warren called for Dimon's resignation as a director at the Federal Reserve Bank of New York after his bank's embarrassing $6 billion trading loss earlier this year.

Dimon, of course, didn't take her up on the suggestion, but that hasn't stopped the senator-elect from continuing her crusade against Dimon and Wall Street. After Dimon appeared before the Senate Banking Committee over the trading loss, Warren issued a statement saying, "If there is one thing we learned at the hearing, it's that Wall Street still doesn't get it. Jamie Dimon and his defenders have spent millions lobbying for delays, loopholes and exceptions to block any real accountability on Wall Street -- and they're still at it."

Notes Gilani, "The ascent of Elizabeth Warren spells further declines for big banks. From her new, lofty perch she will be able to feather the nest of her offspring, the CFPB."

Wall Street's problems don't end with Warren, though. Dennis M. Kelleher, the president and CEO of Better Markets, a nonprofit that focuses on financial markets, says the industry has been dealt a crushing defeat.

"Wall Street put hundreds of millions of dollars into defeating Warren, Obama and financial reform. They went all in. Today they have a much bigger problem," Kelleher says.

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