Americans who play by the rules just got coal in their stockings, courtesy of the United States Government.

The most damaging -- and dispiriting -- government action this month is not its treatment of the Fiscal Cliff, but its enforcement decision showing that the rule of law is deliberately uneven. That is the message conveyed by the Department of Justice with its announcement earlier this month that neither HSBC nor any executives at the international bank would be criminally prosecuted for activities involving the money laundering of funds for terrorists and drug cartels (among other bad actors) for which the company itself has agreed to an unprecedented $1.92 billion fine, out of concern that such criminal charges could "destabilize the global financial system."⁽¹⁾

The message of a two-tiered justice system is actually amplified by the slap-on-the-wrist criminal plea on December 19th by a subsidiary of the equally too-big-to-fail UBS to one felony count of wire fraud in an emerging interest-rate manipulation scandal, providing for about $1.5 billion in fines and accompanied by criminal indictments of two hapless traders whom the bank decided to throw under the bus in a show sacrifice.⁽²⁾ One need not be a cynic to view the institutional criminal plea, and the financial settlement which amounts to little more than a rounding error, a cost of doing business, as a transparent attempt to uphold the image -- if not the rule -- of equality under the law, precisely when they are being broken with impunity and the unofficial imprimatur of the government.

Lands where justice can be bought, where the application of the law depends upon whom it is to be applied, are typically found in Third World countries ruled by despots and the law of the jungle, where might makes right. In such countries, any purported rule of law is best referred to as crony justice. (Note: One cannot define it as "crony justice," since the definition of justice involves equal application of uniform rules, hence, a two-tiered system involving arbitrary applications or "special treatment" ceases to be justice and that term cannot properly be modified by the word "crony," or any other adjective, for that matter.)

As former TARP Inspector General Neil Barofsky wrote this week,⁽³⁾ the Justice Department's treatment of HSBC is missing "actual criminal charges for obvious criminal conduct." The frustration that results comes from the Justice Department's virtually unchecked latitude and freedom from accountability to outsiders regarding its decisions as to whom and what to investigate and prosecute. Justice's prosecutorial discretion is all but unreviewable by judges (this would present a separation of powers issue) and although Congress has oversight capabilities through committees and subcommittees in both the House and Senate, their oversight raises the danger of producing the same type of target-based disparity in justice, differing only in the identity of the victim.

It is curious how the Justice Department cannot find legal justifications to bring criminal indictments against the executives of the Too Big To Jail financial institutions, yet spares no expense to charge executives, managers and investors of small companies and institutions with technical felonies like the making of false statements to government officials. The United States Attorney's Office in Manhattan continues to investigate and bring complex insider trading charges. This shows that the Justice Department has the resources to bring complex cases -- when it wants to. It also indicates that deliberate inaction (some would even say, "depraved indifference") regarding Too Big To Fail crimes results from the Justice Department's unstated but true role in the Obama Administration as a powerful tool for effectuating policy decisions, choosing winners and losers, even settling political scores. In this regard, the Justice Department can use the twin hammers of the fearsome prosecutorial power to destroy individuals (innocent and guilty), businesses and even entire industries like online gaming (legal everywhere else in the world), while simultaneously blessing favored Friends of the Administration with blanket immunity. This type of "Justice activism" is as bad as the "Judicial activism" for which many federal judges get criticized. Just as judges depart from their mandate to interpret the law when they seek to make (or unmake) it through their decisions, so too has the Justice Department when it seeks to effectuate policy by giving a green light to entire segments of industries.

The discouraging effect this has on entrepreneurs and business owners -- people whose investments and effort are at risk of total loss -- is obvious. An unpredictable legal system presents participants in today’s American economy with a tough choice between two undesirable options: Either step on the playing field and learn what the laws are, changing on the fly, and assume the risk that yesterday's business practices are today's crimes,⁽⁴⁾ or totally withdraw from the playing field, drop out of the economy and cease all economic activity as the only guaranteed means of avoiding the risk of criminal prosecution. However, the HSBC slap on the wrist indicates that the legal system is worse than unpredictable; it may have become irretrievably, predictably rigged against the law-abiding.

What former TARP Inspector General Barofsky misses in his article is the much wider corrosive effect the Justice Department's unofficial "Too Big To Jail" safe harbor from criminal sanction policy will have. The harm will not be confined to Wall Street or even Main Street. It will corrode the very glue holding together American society.

Equality under the law is perhaps the most fundamental tenet of our entire society, and one of the tenets that makes us uniquely American. Our Declaration of Independence⁽⁵⁾ states that "all men are created equal." America is not an aristocracy. We do not have a monarchy, nor do we exalt our leaders. Our colonial ancestors came here fleeing repression (often religious ) and seeking a land where none would have to worry about the persecution that results from inequality under the law and the related message that some are superior to others in the eyes of government (or our Maker).

The all but explicit admission in the HSBC deal that our justice system bends (or suspends) the rules depending on who you are threatens to discourage continued obedience to the law. The basis of the law is one standard, predictable and evenly applied. Unpredictability and arbitrary application of the law are hallmarks not of justice, but of the casino craps table. Why obey the law when its enforcers have all but admitted that the law will be applied unequally, haphazardly and arbitrarily? In fact, our system of justice (at least as it pertains to economic matters) may have moved far from one governed by the "rule of law" and towards one best defined as a game of chance.

The effects not far down the road are troubling indeed. The flip side of arbitrary injustice is the opportunity to engage in outright criminality without sanction. If jail becomes less a function of one's criminal intent and actual crimes and more a result of one's bad luck, when the nexus between one's malfeasance and one's punishment is all but erased, then crime carries much less risk. If the best metaphor for justice's "new normal" is now a roll of the dice, and the chances of committing crimes without punishment are pretty good, there will be many more people willing to take those chances. The consequences will be undesirable. In a competitive society, the failure to sanction and punish bad behavior will put those engaging in good behavior -- obedience to the law and following the rules -- at a tremendous disadvantage. Raw economic rationality would dictate, therefore, that people would change their behavior to respond to this new risk-reward ratio. There you have it: crime will become economically rational.

But this rational paradigm shift will not stop there. The apparent injustice will accomplish something thought impossible (or repugnant): a moral argument for breaking the law. When the law becomes a joke, when its application is based on the whim of its regulator or prosecutor, one can easily conjure up rationales to resist and disobey authority, to break rules with impunity, and to disobey the law as one pleases, and to do so not out of greed or malevolence but rather out of the economic rationality inherent in the survival instinct and the desire to protect one's loved ones.

This disastrous policy must be reversed. The responsibility lies directly with the President, for the Justice Department lies squarely within the Executive Branch. Legislative solutions will be ill-advised and risk treating the disease of crony justice (or prosecutorial abdication) with an even more lethal cure of overcriminalization. The buck stops with the Executive, with President Obama. He sets the tone, and now that he has a second term without any risk of electoral defeat in the future, there is no excuse for failing to act.

Having established where the responsibility lies, the next question is the strategy for effective change. Most elected leaders confuse quantity of laws with their efficacy. America does not need more laws to be used as weapons on the productive classes by feckless, reckless or redistributionist prosecutors who wish to use the criminal law as a tool for class warfare. Such an argument implies the impotence of their enforcers. When elected officials and prosecutors bemoan how the thousands of laws⁽⁶⁾ already on the books are somehow ineffective or insufficient to “do the job,” they subconsciously admit that they are incapable of using those laws to enforce, deter and punish real crimes, or too lazy to get the job done. Therefore, their cry means that the pre-existing laws weren’t good enough, so we need more laws. What we really need are legislators and chief prosecutors who aren’t afraid of some old-fashioned hard work.

Efficient, energetic prosecutors will punish and deter plenty of crime, and can use fewer laws to handle the task. America actually needs fewer and less complex and contradictory laws. Fewer but more understandable laws will give people a sense of predictability and fairness. Most of all, law-abiding Americans simply want to know what the rules are before they step on the playing field. Americans aren’t afraid of hard work, of playing the game, taking risks and even of losing. But what Americans fear – with good reason – is a rigged game where the outcome has been decided, where their future is in the hands of a capricious master and where their efforts and intent has no bearing on their outcome. Americans may fear losing their investments in the stock market, but they will fear being prosecuted or jailed far more.

To this end, America needs a Justice Department whose actions actually follow its primary mandate to enforce the laws already on our books. This means that Justice Department decision makers must be chosen, and then given the tools to a determination -- the desire plus the effort -- to enforce the laws already on our books. The tone for this agenda starts at the very top. Now that the election is over, there is no excuse for President Obama to clear the decks at his Justice Department. More than anything else, more than “fixing the fiscal cliff,” a renewed sense of legal equality, clarity and predictability will instill confidence among business owners and investors.

FOOTNOTES 

⁽¹⁾ Ben Protess and Jessica Silver-Greenberg, “HSBC To Pay $1.92 Billion To Settle Charges of Money Laundering,” The New York Times, December 10, 2012, available at http://dealbook.nytimes.com/2012/12/10/hsbc-said-to-near-1-9-billion-settlement-over-money-laundering/. 

⁽²⁾ Ben Protess, "Leniency Denied, UBS Unit Admits Guilt In Rate Case," The New York Times, December 20, 2012, available at http://dealbook.nytimes.com/2012/12/19/leniency-denied-ubs-unit-admits-guilt-in-rate-case/?hp. 

⁽³⁾ Neil Barofsky, “Too Big To Jail: Our Banking System’s Latest Disgrace,” The New Republic, December 12, 2012, available athttp://www.tnr.com/blog/plank/111041/too-big-jail-our-banking-systems-latest-disgrace#. 

⁽⁴⁾ For a further discussion of the perils of the overcriminalization of many economic activities, see Eric Dixon, “Strategies For Staying Out of Jail In An Age of Criminalized Business,” October 2, 2012, available at http://www.financialpolicycouncil.org/articledetails.aspx?id=37 (reprinted October 5, 2012 at RealClearMarkets.com, available at http://www.realclearmarkets.com/2012/10/05/staying_out_of_jail_in_an_age_of_criminalized_business_132257.html )

⁽⁵⁾ The unanimous Declaration of the thirteen united States of America (“The Declaration of Independence”), July 4, 1776, paragraph 2, available at http://www.ushistory.org/declaration/document.

⁽⁶⁾ See Harvey A. Silverglate, “Three Felonies A Day: How The Feds Target The Innocent,” (Encounter Books, 2009).