BUSINESS
05/16/2010 05:12 am ET Updated May 25, 2011

Will The Volcker Rule Survive In Dodd's Bill? Citigroup Is Betting That It Won't

Devotees of former Fed Chairman Paul Volcker may less than thrilled by the bill unveiled by Sen. Chris Dodd (D-Conn.)

Citigroup, for its part, doesn't seem to believe the rule is coming anytime soon. The bank is actually hiring employees at a trading unit that could be affected by the rule, Bloomberg reports.

Announced earlier this year by the Obama administration, the so-called Volcker Rule was devised to prohibit banks from owning, operating or sponsoring hedge funds or private equity operations. The aim of the Volcker Rule is to prevent the nation's largest banks from using taxpayer-provided financing -- from the Fed's discount window, for one -- to fund trades for their own accounts.

In short, the rule is intended to ensure taxpayers don't directly subsidize hedge fund-like trading or private equity investments.

The rule, however. appears to be something less than a strict mandate in the latest legislation. Here's the FT:

The bill instructs regulators to study and then enforce the "Volcker rule" in spite of Mr Dodd's earlier frustration at the White House for pushing a ban on deposit-taking banks from trading for their own account, which has been advocated by Paul Volcker, the former Federal Reserve chairman.

However, the financial industry is still betting that the rule will be softened amid scepticism from Republicans and Democrats.

Mark Warner, a Democratic senator from Virginia, yesterday told the Financial Times: "I don't necessarily think it needs to be a mandate."

In other words, it's completely unclear whether or not the Volcker Rule will actually have any teeth.

Citigroup -- which we should point out is 27 percent owned by the U.S. government -- is making a significant wager that the rule won't be enacted anytime soon. The bank's execs, Bloomberg notes, told employees it is increasing its trading capital limits in its proprietary trading unit.

Here's more from Bloomberg:

Citigroup is trying to preserve the unit, which produces about $100 million of annual revenue, as banks face a proposed ban on proprietary trading dubbed by President Barack Obama as the Volcker rule. Chief Executive Officer Vikram Pandit fed concern among the unit's remaining employees that Citigroup's commitment might wither under U.S. pressure when he told a bailout oversight panel this month that banks shouldn't use their own money to speculate, the people said.

"Vikram the academic can put on his academic hat and conclude that the Volcker rule makes sense," said Brad Hintz, an analyst for Sanford C. Bernstein & Co. who follows the securities industry. "On the other hand, the Volcker rule hasn't been passed, nobody knows what the capital rules are going to be, so why on earth not take advantage of it?"

Last month, the Treasury Department indicated it will allow regulators discretion to determine what constitutes "proprietary trading" and what counts as serving client interests or legitimate market-making activities.

Get ready to hear a lot more about the definition of "prop trading" in the next few months.