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Robb: Maybe AIG bailout wasn’t needed

From the political notebook:

• The public outrage over the AIG bonuses obscured a far more disturbing revelation.

AIG got in trouble because of a line of business insuring the collateralized debt obligations of other parties. The federal government has been shoveling cash to AIG supposedly not to rescue it, but to prevent the entire financial system from collapsing as a result of AIG not being able to make good on its insurance of these instruments.

However, exactly who these parties are and what of theirs AIG had insured wasn’t being made public. Under pressure, the counterparties were revealed last week.

The revelation seriously undermines the claim that AIG represented a systemic risk. There were numerous counterparties, including foreign banks, domestic investment banks and hedge funds. There weren’t staggering large sums involving large traditional domestic banks.

If AIG couldn’t make good on its insurance of these financial instruments, they wouldn’t have been worthless. Even mortgage-back securities, the most distressed of these instruments, are still producing a cash flow.

It’s hard to accept that these counterparties couldn’t have weathered some loss in value in their collateralized debt obligations insured by AIG without the rest of us standing in bread lines.

The real outrage isn’t the $165 million in bonuses. It’s the $173 billion in bailout funds.

• Nevertheless, the public was outraged over the bonuses, and Congress responded at its demagogic worse. The House voted to put a 90 percent tax on bonuses paid executives for companies receiving substantial bailout funds.

My suspicion is that this will become for the Democrats a hasty, emotional overreaction they will rue, just as Republicans came to rue their hasty, emotional overreaction to the Terri Schiavo case.

Schiavo was the comatose woman whose husband wanted to take her off life-support, an action opposed by her parents. Republicans rushed to intervene by passing a federal law.

They were driven by the emotions of the moment. But in the end, the public saw Republicans as too eager to intervene in a family matter.

Likewise, as angry as the public is over the AIG bonuses, my guess is that many will, in the end, find the Democratic eagerness to impose confiscatory taxes bothersome as well.

• Not that Republicans covered themselves in glory either. They were equally demagogic, seeking to deflect public anger to the Obama administration and the Democratic Congress, and about half of House Republicans voted for the confiscatory tax.

Arizona’s delegation generally split along party lines, with the Democrats voting for the confiscatory tax and the Republicans voting against. The exception was Harry Mitchell, who was one of just six Democrats to oppose the tax.

• The latest episode in the soap opera that is Maricopa County government found the board of supervisors setting up a civil litigation department independent of County Attorney Andrew Thomas.

Thomas, of course, promptly sued. The supervisors dodged a preliminary injunction last week, but I doubt that they will ultimately prevail.

Arizona case law, while spotty, does seem to give the supervisors the authority to manage litigation involving the county, including selecting lawyers other than the county attorney to represent it. So, on a case-by-case basis, the supervisors can probably give the job to someone other than Thomas.

But setting up a separate division reporting to the county manager to routinely handle future civil litigation is probably a step too far. It’s a fundamental restructuring of county government, not a decision about how to handle a particular case.

The supervisors-Thomas flap illustrates a serious fundamental flaw in the structure of state and county government. Regardless of whether the legal ethical rules acknowledge it, there is a basic conflict between the functions of providing legal advice and civil representation to government officials and the prosecutorial role.

In today’s world of excessive legislation, regulation and litigation, government officials operate in a vast field of legal grey. They need to have lawyers in whom they can confide and trust. That doesn’t exist if your lawyer can also put you in jail.

At the state level, when a more low-grade but similar conflict developed between Gov. Bruce Babbitt and Attorney General Bob Corbin, former Senate President Leo Corbet proposed that the functions be divided – that a department of law be created to provide advice and civil representation to state agencies, appointed by and reporting to the governor. And that the attorney general be an independently elected prosecutor.

It struck me at the time as a sensible division of responsibilities. Still does.

Robert Robb, an Arizona Republic columnist, writes about public policy and politics in Arizona. E-mail: robert.robb@arizonarepublic.com

Citizen Online Archive, 2006-2009

This archive contains all the stories that appeared on the Tucson Citizen's website from mid-2006 to June 1, 2009.

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