Toomey Supported Bailout that Led to ‘Too Big to Fail’

Yesterday Toomey says that Taxpayer is Not his Concern, It’s Encouraging Ability to “Take a Risk”

MEDIA, Pa. – Congressman Toomey frequently launches misleading attacks using the word “bailout.” What he doesn’t mention is that he has a record of supporting big bailouts including one of the most famous bailouts in Wall Street history. Moreover, he said yesterday that when it comes to these bailouts, the taxpayer is not his concern. His criteria for a bailout is based on ability to “invest” and “take risks.”

“Congressman Toomey has always been for big bailouts.  He is only opposed to protecting middle class savings and financial security,” said Sestak spokesperson Jonathon Dworkin. “As long as Wall Street is allowed to take enormous risks and reap huge profits, then he’s all for it.  But, when it comes to protecting middle class savings, Congressman Toomey draws the line.”

In 1998, Toomey supported a bailout in which the Federal Reserve intervened to save failing hedge fund Long Term Capital Management (LTCM).  Despite this intervention, no new regulations were proposed leading to a “moral hazard” and “too big to fail” mentality on Wall Street.

At a press conference yesterday, Congressman Toomey proved once again that that the middle class taxpayer is not his concern.  When he was reminded that the Emergency Economic Stabilization Act (TARP) was unlikely to cost the taxpayer he said, “Whether or not taxpayers ultimately get their money back on some bailout is not the criteria I think is the appropriate one. I believe in a free enterprise model, in which people should be encouraged to make investment, to start a business, to take a risk, to create jobs and opportunity, and if it works out for them they should be able to [sic] most of the fruits of their success.”

Long-Term Capital Management

The near collapse of LTCM was brought on by risky business practices, including excess leverage using derivatives – some the same practices behind the financial meltdown in 2008 – but Toomey didn’t think any changes to regulations were needed. Toomey praised equity swaps as important financial products – the same financial derivatives LTCM used leading to its near-collapse.

Toomey still opposes Wall Street reform that would address the problems behind both the 2008 and 1998 financial crises.

LTCM  “Took Huge Risks Through Derivatives” and Represented a Huge Portion of Worldwide Derivatives Use. In 1998, the New York Times reported: “The scope of Long-Term Capital’s use of swaps and other financial derivatives was remarkable. Its derivatives portfolio had a notional value of $1.25 trillion, representing one-thirtieth of the worldwide notional value of these investments, according to the International Swaps and Derivatives Association.” [New York Times, 9/26/98, 12/6/98]

IMF: The LTCM Could Lead to “Moral Hazard” in the Financial Sector. In a 1998 report published by the IMF, it was speculated that the involvement of the Federal Reserve Bank Of New York could empower banks to take more risks, knowing they will get help if they fail. “…The involvement of the central bank in facilitating the private rescue might entail moral hazard for institutions not ordinarily regulated or supervised by the central bank, or for institutions that ordinarily take on high leverage in their activities.” [IMF, World Economic Outlook, Interim Assessment, “Chapter III: Turbulence in Mature Financial Markets,” pages 54-56, December 1998]

Toomey said of the LTCM Bailout: “I would be very leery about, and I will resist, any effort to impose inappropriate regulations as a knee-jerk reaction to what was a big problem but was essentially solved.” [Derivatives Strategy, May 1999]

Toomey Later Admitted the Bailout may have Promoted “Too Big To Fail” Mentality. Asked later that year about the LTCM bailout, Toomey told CBS News, “I’m concerned that the Federal Reserve sent a signal to Wall Street and the world. If it is indeed true that a firm can be too-big-to-fail, then all a firm has to do is get real big, and the Fed will rescue you.” [CBS MarketWatch, 9/18/99]