Dodd Frank Wall Street Reform Case Study

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Both Nature and Hedge Funds Abhor a Vacuum

The passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act in July, 2010 was largely a knee-jerk reaction to the financial crisis. This sweeping piece of legislation has had, like most legislation, numerous unintended consequences. For example, many believe that Dodd-Frank is responsible for the precipitous decline of the small community bank, the life blood of small business across the country.

However, it is difficult to lie this at the door-step of Dodd-Frank. In 1995, there were about 13,000 banks with assets under $100 million. By the time Dodd-Frank became law in 2010; this number had dropped to 2,265 and it continues to shrink. In the four years following the passage of Dodd-Frank, another 365 small banks have closed,
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Also whetting hedge fund managers’ appetites for this type of investment are the potential returns. The research firm eVestment reports that hedge funds dedicated to lending experienced average returns of almost 12% in 2012, compared to average hedge fund returns of around 2% in the same year. This heady combination of high demand and large gains is not lost on hedge fund managers.

There is little evidence of a paradigm shift in the banking industry with regard to small business lending. As a result, hedge funds and other purveyors of alternative lending options will continue to erode the market once dominated by community banks and other traditional lenders.
We may never fully understand the reasons for the decline of the community bank but, it is heartening to see the vacuum being filled by hedge funds, private equity firms and others. More than one-half of American workers owe their jobs to small business and hedge funds are saving and creating those jobs by engaging this
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