Ignoring the rule of law is toxic

The rule of law is a key maxim of a just society and democracy. It dictates that laws of the land be transparent, published and applicable to all. No one, regardless of title, position or wealth can be held above the law and government decisions must be predictable because they follow known legal principles and encoded rules.

For most of the 19th century America was advantaged in its progressive efforts to adhere to the rule of law and strive toward equal opportunity for its citizens regardless of class, wealth or title. While politicians and individuals acting in self-interest have frequently transgressed this key principle (seems to be human nature for some), historically the courts were able to correct back to founding principles. If applying the law of the land results in a shockingly unfair or unjust outcome in a particular set of facts,courts are able to restore balance and respect for the rule of law through the principles of equity.

It seems that American courts have fallen horribly short of their impartial role in recent years. One of the most shocking examples of this is the recent decision out of the Court of Appeal in the case of Sentinel Management Group Inc. In this case Sentinel failed to maintain customer assets in segregated accounts as required by law, and instead pledged hundreds of million of dollars of client assets to secure an overnight loan at Bank of New York Mellon. Bank of New York was complicit in transfers to them from Sentinel client accounts for years, extending more and more credit to Sentinel. When Sentinel blew up in 2007, Bank of New York stepped to the front of the creditor line and seized 312 million dollars of Sentinel client assets. The district court allowed Bank of New York Mellon to keep the assets and on Aug 9 the Court of Appeal outrageously upheld the decision: See more here.

“Perhaps the bank should have known that Sentinel violated segregation requirements,” U.S. Circuit Judge John D. Tinder wrote for the panel, “but as the district court found, ‘such a lack of care does not rise to the level of egregious misconduct necessary for equitable subordination.’”

If this is not egregious misconduct, I cannot imagine what is. I have rarely read a legal judgment as unjust and outrageous in its conclusion as this one. Everyone should read the reasoning for themselves here. You can also watch this clip for more detail.

If America continues to plunder the rule of law by saving bankers from deserved punishment and allowing corporate offenders such as JP Morgan (MF Global custodian) and Bank of New York Mellon (Sentinel custodian) to retain rich rewards for willful blindness, fraud and collusion, then there is no way back to a strong economy or a just, vibrant democracy.

There are numerous examples of the federal government suspending or ignoring settled rules of law in order to quickly and effectively respond to particular problems created by the broader financial crisis starting in 2008. UPenn Law Professor, David Skeel, says that the federal government’s inability to revert to the long established principles associated with rule of law in the United States is beginning to have a profoundly negative impact on the national economy. He talks with Bloomberg Law’s Lee Pacchia. Here is a direct link.