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A Project of The Annenberg Public Policy Center

DSCC Wrong on Toomey’s Wall St. Experience

A Democratic Party ad says Republican Senate candidate Pat Toomey of Pennsylvania was a "Wall Street wheeler dealer" trading in financial products that "wound up nearly destroying our economy." We find that to be false.

The ad also falsely claims that Toomey "wrote the law" that it blames for weakening government oversight of Wall Street. Toomey, a former congressman, did have a hand in the legislation, but he was by no means its principal author.


What Caused the Financial Crisis?

What’s worse these days than being a politician? Maybe being a Wall Street trader. And Toomey is both, as the Democratic Senatorial Campaign Committee’s ad "Dealer" makes clear in the first seven seconds.

The ad, which first aired Aug. 13, accuses Toomey of helping to "pioneer the use of derivatives" that "wound up nearly destroying our economy." (A derivative is a contract that derives its value from something else, such as mortgages, interest rates or foreign currency. There are different types of derivatives, including swaps, options or futures.)

It is true that Toomey worked for about eight years, from 1984 to 1991, for investment banks (Chemical Bank and Morgan Grenfell). But Toomey was dealing at the time in the emerging markets of interest rate and currency derivatives, not the more risky credit default swaps that came later. It’s the over-the-counter credit default swaps (OTC CDS) that have been widely blamed for triggering the economic crisis, as professor Michael Greenberger of the University of Maryland School of Law said in his recent testimony before the Financial Crisis Inquiry Commission:

Michael Greenberger, June 30, 2010: It is now almost universally accepted that the unregulated multi-trillion dollar OTC CDS market helped foment a mortgage crisis, then a credit crisis, and finally "a-once-in-a-century" systemic financial crisis that, but for huge U.S. taxpayer interventions, would have in the fall of 2008 led the world economy into a devastating Depression.

Interest and currency swaps were either an aggravating factor in the economic meltdown (as Greenberger also testified) or not a factor at all. Albert "Pete" Kyle, a professor of finance at the University of Maryland’s Robert E. Smith School of Business told us: "The role of those kinds of swaps was very minimal."

Democratic Sen. Arlen Specter, who lost to Rep. Joe Sestak in the Democratic primary, wrongly stated in one of his early TV ads that Toomey "sold risky derivatives called credit default swaps." And we called him on it. The DSCC avoided making that mistake, but the result is the same. Toomey was not dealing in the kind of derivatives that caused the economic crisis.

Author! Author!

The ad also claims that Toomey "wrote the law to weaken oversight of Wall Street." The DSCC says it is referring to the Financial Services Modernization Act, which repealed some of the Depression-Era banking regulations in the Glass-Steagall Act.

But Toomey’s role in the bill was minor. At the time, he was a freshman member of the House Banking and Financial Services Committee. He didn’t even cosponsor the bill, which is better known as the Gramm-Leach-Bliley Act after the members of Congress who were chiefly responsible for writing the bill. That would be Republicans Phil Gramm, a former Texas senator; Jim Leach, a former House member from Iowa; and Thomas Bliley, a former House member from Virginia.

It’s true that Toomey has said he "helped craft" the bill, and Leach publicly thanked him — along with seven other Republicans who Leach said also helped. But to say he "wrote" the bill is wrong.

Also, it is worth noting the Democratic Party is slamming a bill that passed with broad bipartisan support and was signed into law by Democratic President Bill Clinton. The House approved it 343-86, with 205 Republicans and 138 Democrats voting for it. Although the law now has critics, there are still some prominent defenders — including Clinton, who credited the law for allowing the government to respond more quickly to the financial crisis and lessen its impact.

In defending its ad, the DSCC did provide a damaging video that shows Toomey on the House floor praising the credit default swaps as "legitimate bank products" and incorrectly predicting that they would be "adequately regulated" by the Financial Services Modernization Act. That could be the subject of another ad, but it doesn’t back up the false allegations in this ad that Toomey wrote the bill or traded in risky derivatives that caused the economic meltdown.

Correction, Aug. 18: We revised this article to reflect that Toomey delivered his speech on the House floor (not the Senate floor).