Can’t you smell that rat?

The federal government is going to spend a portion of the $700 billion it’s budgeted for a financial bailout to buy stock in ailing financial institutions. At this point, I think we’re all prepared to admit that we’re in uncharted territory. I don’t know what’ll come of all this, but the plan admits of some obvious angles of analysis: for one thing, just what ailing financial institutions is the federal government going to put this money into? How is it going to decide? Just who, in this brain trust of i-bankers Treasury Secretary Paulson has hastily thrown together in the last couple weeks, is going to make those decisions? How did they get their jobs? I’d be surprised if we weren’t reading about allegations of corruption in the process for years to come.

In her take on CNNMoney, Jeanne Sahadi writes:

“We are working to develop a standardized program that is open to a broad array of financial institutions,” Paulson said.

“Such a program would be designed to encourage the raising of new private capital to complement public capital,” he said following a meeting of G-7 finance ministers and central bankers.

Any shares purchased by the U.S. government would be non-voting shares except, he said, “with the respect to the market standard terms to protect our rights as investors.”

Paulson said that developing a standard program is the best way to “use taxpayer money more efficiently and have it go farther.”

A standardized program doesn’t strike me as a particularly bad idea, but there are essentially two choices for the federal government as it buys stock in banks: either take voting shares in the institutions, in which case it opens the door for conflicts of interest and the politicization of business decisions on a scale never before seen in the United States; or take non-voting shares, in which case it provides little incentive for the institutions not to spend the money in ways they’d never risk their own.

When the government makes a decision that leaves it with only those choices, I think it’s fair to characterize it as a bad decision.