November 26, 2008 12:56PM

Should the Government Sit on Bailed-Out Boards?

By Ray Hennessey

The U.K. has decided to put a representative of the government on the boards of banks it bails out. That runs counter to the U.S. where Paulson has purchased preferred stock with no voting rights and instead relies on a bully pulpit to make banks toe the line on issues like executive compensation.

Now, the free marketeer in me says the U.S. should stay out of the boardrooms.

But...

The free marketeer lost the minute these companies received government funding. So, since the money is invested, and it belongs to us, the taxpaying public, would it be the worst thing in the world to have a seat at the table?

Take Citigroup as Exhibit A. The government has saved the company from ruin, and, if the money spent on preferred stock had instead been spent on common stock, the U.S. could have bought out the company entirely. Yet no one is representing the taxpayers' interest among the directors. Seems potentially problematic.

Of course, having someone there is equally problematic. The government board member would come with an agenda, and that agenda may change with the whims of Congress and the new administration. And, the government hasn't proven that it's the best steward of capital.

Still, it's worth asking who's minding our money at these banks.