A Lesson for the Crisis of Confidence: The ‘Politics' of Shareholders and Taxpayers

The oft repeated slogan by the U.S. administration and the presidential candidates has been to ‘protect the taxpayers' and ‘punish the shareholders'. Indeed shareholders were punished by decimating their investments in Lehman, Washington Mutual, AIG and the receivership of Freddie and Fannie while taxpayers were protected by exercising punitive equity stakes or interest payments by most of these corporations. Who then are these taxpayers and shareholders?

It is now unraveling that the shareholders and taxpayers may, in the main, be none other then the very same American citizens themselves.

Senator Barack Obama's campaign strategy and collections have recently revealed. that ultimately it is the critical mass of numbers thats going to make a difference. In a similar way, it may now be revealing that indeed it was the individual investors who constituted the market. They were the ones who fed the hedge funds, mutual funds and essentially constituted the 401K. As passive investors they really did not have any control over the bad bets made by the boardrooms. Now that they are withdrawing their investments, the market is in the middle of a serious crisis of confidence. It is becoming apparent that no amount of government backstops or debt mechanisms will have the capacity to save this country from the current crisis of confidence. On hindsight, it would have been cheaper to save a few critical corporations then to attempt bailing out the whole system.

All is not lost. Rather then getting embroiled in the politics of protecting taxpayers, the U.S. administration needs to refocus on building the confidence with investors by assuring that their equity investments will not be wantonly wiped out. The Administration must explicitly exhibit that they are not in the market to make a quick buck at the expense of investors or to gain taxpayer political mileage. This can be easily done by reviewing some of the punitive measures imposed on AIG and Freddie/Fannie. The Administration must also play an active role to pick up the pieces of their strategic errors in letting Lehman and Washington Mutual fail. They must take ownership and show strong leadership in the credit swaps market by preventing fire sale prices that will only serve to exasperate the already dire assets valuation of almost the entire U.S. banking system.

The time has come for real leadership to come forward. The country is simply too precious to stake its future for parochial partisan politics.

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