3 Ways Banks Will Be Killed by New Rules

NEW YORK (TheStreet) -- The highly controversial "Volcker Rule" is back in the news since the period for public comment on the Securities and Exchange Commission's proposal ended Feb. 13. It's easy to see why banks are worried.

The rule, named after 84-year-old former Federal Reserve Chairman Paul Volcker, aims to sharply reduce risk-taking at banks by placing limits on so-called proprietary trading, as well as investing in hedge funds and private equity.

While the debate continues to rage, there are essentially three reasons bankers are sweating the new rule.

3. Banks will lose talented people

Banks have already lost lots of talented people, but the more boring banks get, the more talented people they will lose. Or so goes their argument.

Goldman Sachs (GS), for example, lost several teams of proprietary traders, including Bob Howard, head of its Principal Strategies Group, and eight traders who reported to him, to KKR (KKR).

Citigroup (C) lost Andrew Hall, a highly profitable commodities trading talent and head of a unit known as Phibro that traded out of a Connecticut farm house, to Occidental Petroleum (OXY).

Morgan Stanley (MS) spun off its FrontPoint Partners hedge fund unit, parting company with co-heads Dan Waters and Mike Kelly.

These are just a few examples.

2. Volcker is another regulatory battleground in the banking war

Many rules have come out of the Dodd Frank legislation, but the Volcker Rule was the one that prompted Occupy the SEC to weigh in on the regulatory debate, showing the rule is not just powerful as a profit killer, but also as a symbol of financial services reform.

Occupy's letter has blown open at least one big new hole in the debate over the rule. Up to now, the main argument had been over the difference between proprietary trading (banks making their own bets) versus market making (acting as a go-between to allow other parties to make bets). Everyone seemed to agree that the latter activity should be permitted. The only issue was how to draw a distinction.

But hold on a minute, says Occupy to the SEC. Who says market making belongs in banks?

"Market making is an indispensable component of liquid, efficient markets. This service, however, simply does not belong in banks. One of the most challenging aspects of our attempt to digest and comment on this Proposed Rule has been navigating the presupposition that banks have some inherent role in proper market making. We are familiar with the extensive lobbying efforts by the banking industry to present this idea as a fact, but we propose that the Agencies seriously reconsider this premise for both the safety and soundness of the industry and the simplicity of this Rule."

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