FORTUNE -- It has no been more than 2½ years since President Obama signed the Volcker Rule into law, as part of the broader Dodd-Frank financial reform package. And in that time Wall Street bankers have learned a very important lesson: Don't be too quick to honor Washington's wishes.
The Volcker Rule was intended to prevent banks from taking too many risks with their own money, including in areas like private equity and hedge fund investing. The idea was that banks primarily exist to serve clients rather than to enrich themselves via levels of proprietary and principal account investing that could (theoretically) lead to another Lehman-style collapse.
It was controversial on Wall Street, but so was virtually every single word of Dodd-Frank. Outside the financial lobby's echo chamber, most of the Volcker Rule seemed to be a reasonable safeguard. So it passed through Congress, albeit a bit watered down, in July 2010. Included was a two-year waiting period that would allow politicians and regulators to hammer out the final language.
Many institutions soon began trying to get their houses in order, with efforts to sell or spin out private equity groups. These moves happened at banks in the U.S. and abroad, including Bank of America (BAC), Barclays (BCS), and Lloyds (LYG). Better to comply early than be stranded by unforeseen circumstances, even if that meant divesting at a discount.
Politicians and regulators, however, have not seen fit to reward such prudence. Instead, they've tacitly penalized it by missing so many deadlines that we still don't have any final Volcker Rule language -- a full seven months after the law was supposed to take effect. Even if the procrastinating "authors" were to fulfill their obligations tomorrow, the Volcker Rule might not have any actual teeth until 2014. And, even then, it is expected to include so many exemptions and extensions that banks could be allowed to maintain existing private equity investments for upwards of a decade.
The Volcker Rule: safeguarding us from financial crises in 2024 and beyond. Catchy tag line. Wonder why President Obama didn't hand it out on bumper stickers during the 2010 signing ceremony.
The smart money either ignored Volcker on private equity or applied it only to future activities. The most obvious example is Goldman Sachs (GS), which in 2007 raised a $20.3 billion private equity fund called GS Capital Partners VI that included approximately $9 billion in commitments from the bank and bank employees (too high a percentage to comply with Volcker). Goldman has decided not to divest its interest in the fund, believing that it will be able to secure enough extensions to responsibly liquidate once Volcker is finalized. The bank's group also has raised several new funds since Dodd-Frank was signed, including an energy fund, a renminbi-denominated fund, and a real estate mezzanine fund. Goldman believes these new vehicles will comply with Volcker, based on language in a draft proposal of the rule. But if not, it can either request extensions or spin them out to a later date.
In other words, Goldman Sachs is profiting from activities that may be banned under Volcker because it didn't begin moving when Obama's pen struck paper. In fact, its earnings are probably amplified because rising public equity values over the past two years have led to a particularly strong exit environment for private equity. And the exact opposite is true for banks and other regulated institutions that divested from private equity during the past three years, based on the false assumption that Congress actually meant what it passed.
So the Volcker Rule has become a cautionary tale, but for all the wrong reasons. It was intended to help curb Wall Street recklessness -- a culture in which banks invest first and ask questions later. But instead it just validated those who expertly exploit the sloth of federal officials and encouraged such behavior the next time around. Some reform.
This story is from the February 4, 2013 issue of Fortune.
We don't need the Volcker Rule. So let's finalize it.
By Rick Jones, contributor
In the world of magical realism that produced Dodd-Frank, I have had energy for only a bit of remote intellectual annoyance over the impact of the part of the Rule commonly known as "Volcker."
Among the joys of the Volcker Rule -- and there is much, much more here to celebrate or loath -- is a limitation on the ability of a MOREOct 17, 2012 4:27 PM ET
The Volcker Rule is having an impact, even though it hasn't been finalized.
FORTUNE -- When private equity firm Catalyst Investors began raising its third fund in early 2011, it quickly found that many of its past investors didn't want to re-up. Not because of performance, but because they were banks and other financial institutions that felt constrained by a part of the so-called Volcker Rule.
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At the heart of JPMorgan's $2 billion whale of a trading loss was a deeply flawed belief.
FORTUNE -- If you want to understand the ill-fated trade that has cost JPMorgan Chase (JPM) more than $2 billion and counting, all you really need to understand are three words: Negative carry trade. And what you need to understand about those three words is that they are dirty - really, really dirty.
In general, MOREStephen Gandel, senior editor - May 15, 2012 6:01 AM ET
Bash JPMorgan all you like, and feel free to snicker at the spectacle of Jamie Dimon losing his swagger. But don't confuse Morgan's mess-up with the supposed need for the Volcker Rule. By Allan SloanAllan Sloan, senior editor-at-large - May 11, 2012 1:13 PM ET
More than 16,000 comments were filed to the SEC on the proposed Volcker Rule, but don't expect the debate to end just because the comment period is over.
By Moshe Silver, Hedgeye
The Volcker Rule is scheduled to go into effect in July, just five months from now. This is good news for folks who want a Volcker Rule, but it may be even better news for folks who desperately do not MOREFeb 29, 2012 1:05 PM ET
The financial industry is besieged by protestors. It's also facing a slow-growth world and a wave of new regulation. In order to flourish again, the big firms must first change in painful ways.
By Geoff Colvin, senior editor-at-large
FORTUNE -- The brighter side of financial cataclysm wasn't easy to see in late 2008 -- the crisis was at its most acute, and no one knew if Armageddon lay ahead -- but Barney MOREDec 12, 2011 5:00 AM ET
It's time for our financial institutions to get back to basics: making money off good customer service - not wild speculation.
By Sheila Bair, contributor
FORTUNE -- Financial reformers are pointing to the collapse of the $41 billion MF Global brokerage house as evidence of why we need Dodd-Frank's "Volcker Rule" to prohibit FDIC-insured banks and their affiliates from making proprietary bets on the markets. Fortunately, MF Global was not a bank or MOREDec 9, 2011 5:00 AM ET
Goldman Sachs lost money by doing all of the things the Volcker Rule says it shouldn't be doing.
FORTUNE -- Goldman Sachs reported just its second quarterly loss since it went public and the first since the dark days of late 2008. It also gave Paul Volcker a great big reason to push harder for his proposal to clamp down on investment banks trading for their own accounts.
Basically, the Volcker rule MOREBrendan Coffey, Contributor - Oct 18, 2011 9:58 AM ET
Goldman and Morgan have had two years to figure out what they want to be in the post-financial crisis world: Are they investment banks or bank holding companies? The Volcker Rule may change it all again.
By Cyrus Sanati, contributor
FORTUNE -- Goldman Sachs and Morgan Stanley are facing headwinds like never before. The two financial firms are widely expected to post weak third quarter earnings in the coming days thanks to MOREOct 11, 2011 11:18 AM ET
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