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A Project of The Annenberg Public Policy Center

Specter’s Scorched-Earth Slip-Ups

The Pennsylvania Republican blasts an old foe who probably will challenge him in a primary in 2010.


Pennsylvania Republican Sen. Arlen Specter apparently doesn’t need an official opponent to come out with guns blazing in an attack ad that marks the first TV spot in this race. His ad criticizes former U.S. Rep. Patrick Toomey, a probable challenger in the GOP primary. But Specter misfires a few times along the way:

  • The ad says Toomey "sold risky derivatives called credit default swaps … that have now plunged us into this financial mess." But Toomey dealt in interest rate and currency derivatives. Credit default swaps didn’t become a part of Wall Street’s derivative dealings until after Toomey left the financial world.
  • The spot charges that "Toomey fought for less oversight of Wall Street" while in Congress. It’s true Toomey is a big proponent of deregulation, but the vote Specter’s ad cites sprang from the FDIC’s efforts to combat money-laundering.
  • Finally, the ad charges Toomey "even wants to gamble our Social Security … in the stock market," a misleading reference to his support for President Bush’s plan to allow younger people to voluntarily put some – not all – of their Social Security taxes in mutual funds.


The 2010 election is well over a year away, and one possible GOP primary opponent to Pennsylvania Sen. Arlen Specter hasn’t even declared his candidacy (yet) – but that didn’t stop Specter from launching a preemptive attack. The incumbent has released a 30-second TV ad on a $100,000 buy across the state, tying Patrick Toomey, a former member of the House of Representatives, to risky deals on Wall Street and a staunch anti-regulation stance. But a few of the ad’s assertions miss the mark.

Citizens for Arlen Specter Ad:

[TET ]

Specter: I’m Arlen Specter and I approve this message.

Narrator: Pat Toomey. As a Wall Street trader, he sold risky derivatives called credit default swaps. The same swaps that have now plunged us into this financial mess. In Congress, Toomey fought for less oversight of Wall Street. He even wants to gamble our social security accounts in the stock market.

Now Toomey wants a bonus — a seat in the United States Senate.
Should we let him have it?[/TET]

Derivative Dealings

The ad says that Toomey “sold risky derivatives called credit default swaps.” Actually, he didn’t. In fact, this type of derivative came into vogue long after Toomey left Wall Street.

The support for the claim is a May 1999 article in Derivatives Strategy magazine, in which Toomey talked about his previous work as a derivatives swaps dealer. But Toomey said he was dealing with “all kinds of interest rate and currency-related derivatives – options, swaps, forward and so on.” Currency and interest-rate swaps aren’t the same as credit default swaps, which are used to transfer the risk of debt default. A quick explanation: Bank A, for instance, may enter into a credit default swap contract to protect itself against debt default. Bank A pays Bank B a premium for taking on the risk of default (like insuring a debt). If the debt is defaulted, Bank B pays Bank A a set amount. Interest-rate swaps, meanwhile, involve an exchange of interest payments, usually fixed versus floating rates. Currency swaps are exchanges of principal and interest payments on loans given in different foreign currencies. (Read more on credit, interest and currency derivatives on the International Swaps and Derivatives Association’s Web site and Forbes’ Investopedia.)

According to Forbes’ Investopedia, the first credit default swap contract was introduced in 1997. Derivates Strategy magazine published an article that year that hailed "The Long-Awaited Arrival of Credit Derivatives." It put the genesis of the financial tool in 1991, with the introduction of “collateralized loan obligations,” but said it wasn’t until recently (1997) that credit derivatives “are actually being used in the real world by real financial institutions.” Toomey’s derivative days ended back in 1991, when he took a leave of absence from his financial job, opened a restaurant with his brothers and then started his foray into politics. He was elected to the House of Representatives in 1999.

In a statement, Toomey said he didn’t deal in credit default swaps at all. “While I worked in banking twenty years ago, I have never sold a single credit default swap to anyone in my life,” he said. “They hadn’t even been invented yet.”

Specter’s ad goes on to say these credit default swaps “have now plunged us into this financial mess,” citing Warren Buffett’s remarks in the 2002 annual report for Berkshire Hathaway. Buffett, chairman of the board of the company, didn’t exactly say that – his comments are dated February 2003, well before our current financial crisis. But he did predict that derivatives in general (not just credit default swaps) would lead to major problems. Derivatives, Buffett wrote, are “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” He did say that credit risk was of particular concern: “Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others.”

Buffett’s comments on derivatives in general could apply to the types of deals Toomey made in his derivative days, but as we’ve pointed out before, experts have blamed various factors for causing the economic meltdown. And if Specter wants to blame credit default swaps explicitly, he hasn’t shown that Toomey was a part of such deals.

 Deregulation Devotion

Specter’s ad is essentially correct when it says that "in Congress, Toomey fought for less oversight of Wall Street," citing his 1999 vote on an amendment to legislation that tore down the wall between banks, securities firms and insurance companies. But the amendment, backed by Republican Rep. Bob Barr of Georgia and others, sprang from an effort by the Federal Deposit Insurance Corporation and other federal agencies to combat money-laundering by requiring banks to monitor their clients’ accounts and report any "suspicious activity" to the government; it had nothing to do with subprime lending, credit default or any other swaps, or the subsequent financial collapse that Specter tries to hang around Toomey’s neck.

The government’s "Know Your Customer" initiative for banks triggered a huge outpouring of opposition (according to one report, of 257,000 public comments, only 100 were favorable) from privacy advocates, civil liberties groups and libertarians. It prompted a Senate resolution that would have prohibited implementation of the FDIC’s proposal, though the resolution never came to a vote on its merits. 

But the Barr proposal in the House went much further. (There was no equivalent in the Senate.) It would have changed current law by taking away the power of the Treasury Secretary to require bank officials to report "suspicious transactions" to the government. Instead, it gave banks the discretion to file reports or not, and replaced the term "suspicious  transactions" with the more focused "transaction relevant to a possible violation of a law or regulation." The change could well have led to less reporting by banks. The measure also would have placed strict limits on how long the government could keep any such reports, and strictly barred the feds from requiring or encouraging banks to do such things as monitor its customers’ body language, determine what transactions are "normal or expected" for a customer, or ask a customer the source of funds being used in a transaction.

The amendment failed, 299-129, with almost as many Republicans voting against it as for it. While both Specter and Toomey voted for the underlying legislation, and while that legislation was unquestionably deregulatory, huge majorities in both the Senate and House supported it as well. Toomey went further with his backing of the Barr amendment.

Beyond that, Toomey’s rhetoric has long been that of a zealous deregulator, especially in the financial sector. “The trend in deregulation, beginning in the early 1980s, is one of the biggest reasons for the sustained economic expansion,” Toomey told Derivatives Strategy magazine in May 1999. “I would like to see us continue to deregulate on many fronts, including the financial services industry.” And the Club for Growth, of which Toomey is president, says on its Web site that "regulatory reform and deregulation" is one of its principal policy goals.

Heads Up Again, Seniors!

The last claim in the ad is a mischaracterization and a variation of an allegation we’ve heard repeatedly in congressional and presidential races. Toomey, the narrator says, "even wants to gamble our Social Security accounts in the stock market."

That’s a reference to Toomey’s support for President George W. Bush’s plan to allow younger workers to invest a portion of their Social Security taxes in mutual funds that would be run by the government. Contrary to the impression given in the ad, though, the plan would have been totally voluntary; individuals could have stuck with the current system. And in any case, only part of anyone’s account could be invested this way.

At one time, Specter supported Bush’s plan as well. But during a debate in 2004, the last time he was up for reelection, Specter announced a change of heart:

Specter, Oct. 3, 2004: At one time I had considered a small portion of Social Security in private accounts. … I looked more deeply into the issue. … I think it is unwise. I believe the seniors ought to be reassured that their Social Security benefits are solid.

– by Viveca Novak and Lori Robertson


Hunter, Robert. “Patrick Toomey: From Wall Street to Capitol Hill.” DerivativesStrategy.com, May 1999.

Pinsent, Wayne. “Credit Default Swaps: An Introduction.” Investopedia, A Forbes Digital Company, accessed 2 April 2009.

International Swaps and Derivatives Association Inc. Product descriptions. ISDA.org, accessed 2 April 2009.

McDermott, Robert. “The Long-Awaited Arrival of Credit Derivatives.” Dec./Jan. 1997.

Buffett, Warren. Berkshire Hathaway Inc. 2002 Annual Report. Chairman’s Letter, 21 Feb. 2003.

"EPIC Alert," Electronic Privacy Information Center, 25 March 1999.

Toomey, Pat. "Personal Accounts or Bust," NRO online. 17 April 2007.

"Specter, Hoeffel Come Out Firing in First Debate," PBS Online NewsHour, 4 Oct. 2004.