(MONEY Magazine) – The plaid-shirted former Tennessee governor bills himself as a crusader for "new ideas." Critics, however, have derided his ideas as a vague collection of schemes to privatize government services or transfer federal duties to the states. But even if you like Alexander's notions, you can hardly be encouraged by his unsuccessful attempt as governor to enact one of his favorites--prison privatization. His proposal was voted down--at least in part--because of his and his wife's cozy moneymaking ties to the Corrections Corp. of America, a private prison management company founded by one of his best friends and contributors.

Here's what happened. In 1979, early in his first term, Alexander persuaded the Tennessee legislature to toughen sentencing and parole policies--but without expanding prison capacity. One result: The prisons got seriously overcrowded. By 1982, conditions had deteriorated to the point that a U.S. district judge declared the system unconstitutional. Alexander still did not add capacity. Then, in July 1985, riots exploded, leaving two inmates dead. Three months later, another federal judge forbade the state to imprison any but the most dangerous convicts until it cut its prison population below 7,019, its official peak capacity.

Alexander's prison crisis became a business opportunity for his friends at CCA. The firm's president was former GOP state chairman Tom Beasley, Lamar's longtime political adviser, contributor and friend. Furthermore, nearly half of the two-year-old company's financing came from Massey-Burch, a venture-capital firm co-founded by the late multi-millionaire businessman Jack Massey, another generous Alexander supporter.

Another CCA investor was none other than Alexander's wife Honey. Massey-Burch sold her five shares in the company for $5,000 in December 1983. When her interest eventually came to light, in April 1985, she refused to relinquish her investment but promised instead to donate to charity any profits she earned while her husband was governor. Four months later, however, she relented, and swapped the shares back through Massey for stock in an insurance company in which he had a large interest.

The next month CCA made a formal unsolicited pitch to the state: In return for a contract to operate Tennessee's entire prison system, CCA would build two new 500-bed maximum-security prisons and put up $100 million for improvements to existing jails. Shortly thereafter, Alexander unveiled his own more modest privatization plan to a special session of the legislature. Although that plan did not mention CCA by name, the following morning on NBC's Today show Alexander praised the company, saying: "I think they can do it better. I think they can do it cheaper."

Though the privatization plan might well have saved taxpayers as much as $17 million a year--today CCA operates prisons for 10% less than the average state does--the Democrat-controlled legislature dug in its heels, at least in part because of the Alexanders' financial ties to CCA. "This was an interlocking directorate," says Ed Koren, then a lawyer for the American Civil Liberties Union's National Prison Project. "The company was charging on a per diem basis, so the more prisoners, the more profits. With a friendly governor controlling the flow of prisoners through sentencing and parole policy, CCA was close to being in the driver's seat."

As it turned out, the Alexanders fared considerably better than Tennessee taxpayers. When Honey swapped her CCA shares back to Massey-Burch in 1985, she got 10,000 shares of South Life, a private insurance company in which Massey was a major investor. When Honey finally sold that stock in 1989, she netted a $137,000 profit, the equivalent of a 94% compounded annual rate of return on her original CCA investment of $5,000. In the end, prison reform was one of Lamar's "new ideas" that worked best for his wife and himself. --Ann Reilly Dowd