A Look at Dodd-Frank

Banks are having trouble peddling risky loans they’ve made in conjunction with the current (and dying down?) mergers and acquisition boom. These are loans made when one company buys another for their mutual benefit, and the buyer borrows some or most of the purchase price.

Here’s the kicker:

In past decades, banks sometimes held the loans until markets stabilized, but such warehousing became prohibitively expensive because of high capital charges required under the Dodd-Frank law that was passed in response to the 2008 financial crisis.

If it becomes too difficult or expensive to borrow—or to lend—to support a merger/acquisition, those deals won’t get done.

Often, the target of the deal is a company in trouble, and the deal would save some or all of the company by merging it with a stronger company that has better management and/or more efficient processes. The deal thereby also saves a large number of jobs (not all—that’ll be part of the improved efficiency in the acquiree). The deal also winds up being beneficial to the consumer as the acquiree’s products or services both continue to be available and often at a lower price.

If the deals aren’t done, those jobs won’t get saved, and the goods and services won’t continue to be available.

Will these lost mergers/acquisitions be a big deal for our struggling economy? I don’t know. But I am very certain that those who passed Dodd-Frank didn’t give an iota of thought to the possibility.

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