President Bush thought common shareholders in financial institutions should be massacred to preserve Darwinistic capitalism. President Obama thinks the evil ones should suffer for their crimes against the people. Both Presidents wanted to preserve the sanctity of debt holders, for they are a tool to expand credit and reflate the economy.

The only difference appears to be that Obama is being more forceful in expanding mortgage modifications and refinancing; something Bush only paid lip service to. Both are pretending that they can hold down mortgage rates for a protracted period of time, and both have so many caveats in their mortgage plans that few will actually benefit.

The similarities become highlighted in the treatments of AIG (AIG) and Citigroup (C) and the cascading effect of diminished common shareholder confidence. Neither President wanted to pressure counterparties to negotiate their collateral terms with AIG. Both Presidents thought AIG’s counterparties such as Goldman Sachs (GS) and Merrill Lynch (BAC) should be made whole at the same time that Ambac (ABK) and MBIA (MBI) were able to commute their insurance at a discount. Although AIG foolishly agreed to post collateral if their credit rating dropped or their underlying insured securities lost value, the Presidents saw more benefit in preserving the value of credit insurance than AIG’s equity. Therein lays the underlying problem with the bank rescue efforts of both Presidents.

Neither President wanted to take a majority equity stake in Citigroup, but they did not want to promote its common equity value either. Now the cascading effect is not only being felt in Bank of America (BAC), but also in the previously thought to be strong JP Morgan (JPM) and US Bancorp (USB). The Presidents did not have the political strength to convert the Treasury’s Citigroup preferreds at a price high enough above market to instill confidence. While the Treasury’s new stress test is purported to be focusing on TCE, they are doing nothing to stop the decline in the value of the “E”.

Realistically, there’s not much more common equity the Treasury can take without bank equity being deemed worthless. Between the TARP warrants and Citigroup preferred to common equity conversions, even the value of bank preferreds is even being called into question. But as long as major bank runs have subsided, the Administration seems satisfied to let stock prices approach zero. After all, Citigroup depositors did not react like National City (PNC), WaMu (JPM) and Wachovia (WFC) depositors.

Bernanke was wrong when he said stock prices do not matter as long as depositor confidence remains. President Obama needs to be bold enough to convert the remaining TARP preferreds to common equity at a price high enough to truly stimulate a recovery plan in bank stocks.

Disclosures: Author is long AIG, BAC, C, and WFC.