FORTUNE -- Round one goes to the banks.
Later this week, regulators are expected to finalize a rule that will allow banks to continue to hold a complicated, risky structured bond that was set to be banned by the Volcker Rule.
The fight started a few weeks ago from an unlikely source. In mid-December, Salt Lake City-based Zions Bancorp said it was being forced to take a $387 million loss, more than the bank had earned in any single year since 2007. The reason: Volcker.
A few years ago, Zions had bought a type of collateralized debt obligation that was backed by trust preferred securities (TruPs), which are a type of debt that are issued by banks and insurance companies. Volcker classifies TruPs-backed CDOs as hedge funds, which are banned under the rule.
Zions had lost a bunch of money on the investment, but it had never told its investors that. Accounting rules allow banks to delay recognizing losses on investments they promise to hold to maturity. Now that TruPs CDOs were set to be banned under Volcker, Zions could no longer promise they would be held until they were paid back, forcing the bank to take the loss that was there all along.
Bankers, nonetheless, cried foul. In late December, the American Banking Association sued to halt the Volcker Rule from going into effect, saying it was unfairly punishing Zions and hundreds of other small banks that had bought TruPs CDOs. Almost immediately, regulators announced they were reviewing TruPs and the Volcker Rule. And now it looks likely regulators will exempt the securities.
The retreat from regulators is understandable. The purpose of the Volcker Rule was to deter banks from making risky trades with their own money. TruPs CDOs are not actually hedge funds, or a proprietary trade. As Zions said, it planned to hold the CDOs to maturity, and that makes them more like many other bonds that banks buy and are still allowed to hold under Volcker. And they are largely held by small banks, not the large banks that threatened the economy in the financial crisis. So, not the types of things that the Volcker Rule was set up to limit.
But that doesn't mean banning TruPs CDOs is a bad thing. TruPs are a type of debt that is sold by banks and other financial firms and bought by other banks and financial firms. Didn't the financial crisis teach us that the system was too interconnected? Making it harder for banks to hold TruPs (they can still own them outside of CDOs) would help to limit that interconnectedness.
TruPs CDOs are not as risky as subprime CDOs, which are what caused the biggest losses during the financial crisis. But they are structured bonds. And they are certainly not risk-free. Zions, after all, lost nearly $400 million on them.
The Volcker Rule will deliver unintended consequences. Not all of those will be bad, though. Opportunity missed.
The government took another whack at the banks Tuesday, but individual bankers continue to skate by unscathed.
The Securities and Exchange Commission scored a $154 million settlement with JPMorgan Chase (JPM) over its misleading bond-sales practices during the bubble.
In a replay of the Abacus case against Goldman Sachs (GS), the SEC charged JPMorgan Chase with admitting* it misled investors by failing to mention that the securities they were buying were being MOREColin Barr - Jun 21, 2011 3:51 PM ET
Are we being too hard on the economic forecasters who failed to predict the financial meltdown?
The question comes to mind in the wake of Friday's takedown of the big banks' subprime misdeeds, by ProPublica and NPR. The piece offers the latest glimpse into the games the bankers played to keep their fees and bonuses flowing as cracks started to show in the highflying U.S. housing market.
ProPublica and NPR show how the MOREColin Barr - Aug 27, 2010 2:31 PM ET
A new report shows how the too-big-to-fail banks gave the housing bubble a final breath of air, at great cost to everything but their bonuses.
They did it by manipulating the market for the yucky subprime-related debt called collateralized debt obligations, say ProPublica and NPR. The CDO boom started early in the last decade, as banks such as Goldman Sachs (GS), Citigroup (C) and the Merrill Lynch brokerage now owned by MOREColin Barr - Aug 27, 2010 1:18 PM ET
Ambac tumbled 24% after the bond insurer said it is pursuing a prepackaged bankruptcy filing.
The New York-based company lost $58 million in the latest quarter, which doesn't look too bad compared to its year-ago loss of $2.4 billion. Ambac (ABK) also said the statutory surplus at its Ambac Assurance unit surged to $1.5 billion from $160 million in March, following an agreement this spring to settle some insurance contracts covering bubble-era MOREColin Barr - Aug 10, 2010 10:23 AM ET
The feds are cracking down again on Wall Street's antics during the housing meltdown.
The Securities and Exchange Commission filed a civil suit Monday alleging that a New York money manager, Thomas Priore of ICP Capital, swindled buyers of bubble-era housing-related debt.
The agency claims the firm socked away tens of millions of dollars by "fraudulently managing investment products tied to the mortgage markets as they came under pressure in 2007."
The SEC MOREColin Barr - Jun 21, 2010 11:35 AM ET
|GM raising Corvette prices|
|Everything must go: There's a flood of store closings|
|Albertsons to merge with Safeway|
|Boeing reports wing cracks on Dreamliners|
|Bitcoin matters. Ignore the media circus.|