Political Risk and Institutional Trust in U.S. Capital Markets

The erosion of institutional independence in the United States, particularly within the Department of Justice (DOJ), has emerged as a critical risk factor for capital markets in 2025. The DOJ's role as a guardian of the rule of law and impartial enforcement of legal norms has been increasingly compromised by executive overreach, political reorganization, and legislative shifts. These developments threaten not only the integrity of governance but also the stability of financial markets, where trust in institutions underpins long-term investment and innovation.

The Erosion of DOJ Independence

The Trump administration's 2025 reorganization of the DOJ has systematically undermined its autonomy. Attorney General Pam Bondi's dismissal of the Ethics Office director and the establishment of a “Weaponization Working Group” to review investigations into Trump allies signal a deliberate effort to politicize enforcement priorities The Anti-Corruption Tracker: Mapping the Erosion of …^[1]. Executive orders such as the “Agency Accountability Order” have further centralized control, requiring DOJ actions to align with presidential directives and reducing the department's ability to operate independently of political agendas New Executive Orders Seek White House Control of …^[2].

This politicization extends to personnel decisions. At least 20 career prosecutors have been reassigned or replaced with individuals aligned with the administration's political goals, including figures with ties to the “Stop the Steal” movement Trump DOJ shake-up sidelines top prosecutors in …^[3]. The Public Integrity Section, historically a bulwark against political corruption, has been weakened, with its authority suspended and staff reduced How Trump defanged the Justice Department’s …^[4]. Such actions create an environment where legal enforcement is perceived as a tool for partisan advantage rather than a neutral arbiter of justice.

Implications for Capital Markets

The consequences of this erosion are already manifesting in financial markets. The rule of law is a cornerstone of investor confidence, ensuring that contracts are enforceable and regulatory frameworks are predictable. When institutions like the DOJ lose their independence, uncertainty rises, deterring long-term investment. A report by the University of Connecticut highlights that arbitrary enforcement and deregulation have destabilized investor trust, with businesses citing policy risks as a top concern alongside traditional economic volatility The Rule of Law is Key to Capitalism − Eroding it is Bad News for American Business^[5].

The DOJ's shift in enforcement priorities—such as narrowing Foreign Corrupt Practices Act (FCPA) investigations to focus exclusively on cartel-related bribery—has further muddied the legal landscape. While the department emphasizes self-disclosure incentives for corporations, the lack of standardized procedures across jurisdictions creates a patchwork of compliance risks US DOJ Outlines New Enforcement Priorities for Corporations and Individuals^[6]. For instance, companies operating in regions with cartel ties now face heightened exposure, while the pause on FCPA enforcement for 180 days has raised concerns about uneven competition and increased corruption The Rule of Law is Key to Capitalism − Eroding it is Bad News for American Business^[7].

Market volatility in early 2025 underscores these risks. Aggressive tariff announcements and trade uncertainties, compounded by regulatory unpredictability, triggered sharp fluctuations in asset prices and volatility indices Financial Market Volatility in the Spring of 2025^[8]. The Vanguard Investor Expectations Survey reveals a mixed outlook: while investors anticipate a 6.4% return for 2025, inflation expectations have risen to 3.2%, and a 15% probability of exceeding 6% by year-end reflects growing unease Investor Pulse: A mix of optimism and uncertainty^[9].

Long-Term Governance and Investor Trust

The erosion of DOJ independence also threatens the broader governance framework. When legal institutions are perceived as politicized, the credibility of the U.S. legal system—and by extension, the dollar's status as a global reserve currency—comes into question. The Federal Reserve's independence, which underpins monetary policy credibility, is indirectly at risk if similar pressures extend to other institutions The Looming Shadow: Investor Alarm Rings as Federal Reserve Independence Faces Unprecedented Challenge^[10].

Internationally, the U.S. risks alienating democratic allies and trading partners. The pause on FCPA enforcement and the DOJ's focus on transnational cartels have already raised concerns about a “level playing field,” with some firms adapting to a regulatory environment that prioritizes political expediency over equitable enforcement The Rule of Law is Key to Capitalism − Eroding it is Bad News for American Business^[11]. This could lead to retaliatory measures or a decline in cross-border investment, further fragmenting global capital flows.

Conclusion

The U.S. capital markets are built on a foundation of institutional trust. The erosion of DOJ independence, driven by political interventions and executive overreach, undermines this foundation, creating a climate of uncertainty that deters investment, inflates legal risks, and destabilizes governance. For investors, the lesson is clear: the health of markets is inextricably linked to the integrity of institutions. Without a restoration of the DOJ's apolitical role, the U.S. risks not only financial instability but also a long-term erosion of its position as a global economic leader.