Citigroup Regulator: Don't Blame Prop Trading

NEW YORK (TheStreet) -- Citigroup's (C) primary federal banking regulator sounds an awful lot like a bank executive in explaining a cause of massive losses in the financial crisis.

Comptroller of the Currency John Dugan, a former banking lobbyist who began his current role in 2005, echoed many banking industry executives in dismissing proprietary trading, or the practice of banks trading their own money, for fueling excessive risk taking that led to big losses during the crisis. The Obama administration's so-called "Volcker Rule" proposes banning proprietary trading from large national banks, one of the ideas being considered as Congress mulls reform of the financial industry on the heels of the health care bill's passage.

The argument Dugan, Goldman Sachs (GS) CFO David Viniar and others who oppose the proposed proprietary trading ban make comes down to the definition of proprietary trading. They argue that the majority of trading losses are not proprietary trading at all, but are actually trading on behalf of clients. Thus, banning the practice doesn't address the problems that led to the crisis.

John Dugan, comptroller of the currency.

"If you define proprietary trading in a way that gets at customer accounts you can go to the core of what money center banks do and that's something that really has to be looked at carefully," Dugan told CNBC last week .

In the fourth quarter of 2007, Citigroup posted negative revenues of $16.9 billion in its Fixed Income Markets division, according to its quarterly earnings release. In a footnote, Citigroup stated "lower revenues due to writedowns on non sub-prime securitized products and in fixed income proprietary trading."

In an article I wrote in January, that quarterly loss by Citigroup stood out as the most glaring example of several I found showing that proprietary trading losses by Citigroup, Morgan Stanley (MS) and other big banks were not as minor as opponents of the proposed proprietary trading ban said they were.

It is very hard, if not impossible, to know what goes on at giant banks from reading their financial statements, but here they were admitting that proprietary trading was an important factor in several big losses.

Now that markets have rebounded, however, and the idea of banning proprietary trading is on the table, some might be forgiven for thinking the banks and their regulator want to rewrite history. If it wasn't proprietary trading that caused the losses, why did Citigroup say it was?