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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, …show more content…

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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Introduction Blake Goodwin is the CEO of Goodwin Wealth Management. He was deciding to hire a consultant to make an assessment of his situation. Three large companies had expressed interest to acquire Goodwin Wealth Management. In the fall 2007, Ice Financial Income Fund, First Canadian Band, and Brawn Financial Corporation were the potential suitors and they had made offers to acquire the company. Blake Goodwin had to decide whether to sell the company and if he sold it, which buyer was the best one.

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If there was ever a word to describe the events that led up to the financial crisis of ’08, “Moral Hazard” would fit the bill perfectly. Moral hazard happens in financial terms when the success of a particular transaction is very heavily dependent on the performance of a particular party’s obligations, but where a particular party has no interest or incentive to carry out that obligation diligently. Let’s for instance take the example of a loan worth $720K, which was given to a strawberry picker earning around$14K/year to acquire a certain piece of property in the early 2000’s . In this case moral hazard was there and existed because the loan company intended to sell the loan forward to the credit rating agencies due to the inability of the

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The FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. The FDIC was a provision of the Glass-Steagall Act. During the nine year period from 1921-1929 more than 600 banks failed each year. The failed banks were small banks operating in the rural suburban areas and held the deposits of mostly farmers and blue collar folks. When banks fold and continue to do so, people will start to worry about their money in any bank.

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Many banks had collapsed or were substantially injured as the result of Black Tuesday. But it did have a little impact (Nash 334-336). The National Credit Corporation was composed of the major banks in the United States. NCC’s main goal was lending money to small banks in the United States in order to minimize the repercussions of the smaller bank’s crash. However the major banks did not want to lend money to the smaller banks because they were having problems themselves (Nash 336-337).

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What happened to all the banks then? Well first off people had complete trust in them, that is until the stock market crashed. Banks had invested a lot of money in the stock market also. But when it crashed they lost it all and

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When banks failed, people that had money in their account, in the bank would lose their money even if they did not owe any debt to the bank. This caused families to go homeless and even

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During the 1920’s there was a sense of a booming economy leading more people to buy on credit with the economy being stable. However after the stock market crash droves of people rushed to withdraw their money. This caused many problems for the banks as they had invested money into the stock market themselves, many closed down leaving millions questioning where their money had gone. This is the main reason people viewed banks as untrustworthy and feared giving them there hard earned money. This is why President Roosevelt created programs such as the FDIC to create a trust between the people and the government.

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According to FDIC.gov “An average of more than 600 banks per year failed between 1921 and 1929”. This led to millions of people losing the money they put into bank accounts, for some it was their entire life’s saving. It was this lack of security in deposits that led to the establishment of the FDIC (Federal Deposit Insurance Corporation). This program let the public have security when investing money in the banks by having bank deposits insured, not only was the FDIC successful in the 1930’s but it is also hugely successful today, almost every bank in America is FDIC insured.

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Another reform to the Emergency Banking Act of 1933 happened three months later. The new reform increased the power of the Federal Reserve to regulate banking, which divided the banks that dealt with public deposits of investors on Wall Street (Rauchway). Roosevelt feared that one day the FDIC would have to pay out too large a sum, which would lead to the closing of more banks, but he agreed with the reform anyway (Rauchway). In 1935 the FDIC obtained a permanent charter, and now plays a large role in today’s banking

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After the stock market had crashed and backs had failed people feared putting their trust and money in banks. “FDR went on national radio to deliver the first of his many “fireside chats,”” (Oakes 828). After reopening banks, FDR convinced people that their money would be safe in a reopened bank through his fireside

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So when people started taking all their money out of the bank before they closed down because they were scared the bank had no money to stay in business and had to close down. Banks now are much different than back then because most of the money people bring in doesn’t stay there but their money is kept online/ in the bank system. But that doesn’t mean that they can’t still crash and go out of

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The only good thing to come out of Lehman’s collapse was that the US regulators had to tighten up regulations and limit the chance of such a crisis happening again. This will bring back investors confidence in Wall Street and keep the economic wheel turning.

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