Volcker Rule Already Affecting Banks

The White House bank reform proposal known as the Volcker rule is already affecting banks' strategic decisions, despite lingering questions about the plan's feasibility.
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NEW YORK (

TheStreet

)--The White House bank reform proposal known as the Volcker rule is already affecting banks' businesses, even as questions remain about the plan's feasibility.

As described by Obama adviser and former

Federal Reserve

chairman Paul Volcker before Congress Tuesday, the proposal would force banks like

Citigroup

(C) - Get Report

,

Bank of America

(BAC) - Get Report

and

JPMorgan Chase

(JPM) - Get Report

to exit highly profitable proprietary trading, hedge fund and private equity businesses.

Less retail-oriented banks like

Goldman Sachs

(GS) - Get Report

and

Morgan Stanley

(MS) - Get Report

might have to make similar moves, or to exit certain commercial and retail banking businesses that benefit from government guarantees.

While many questions remain about whether these proposals will become law, or whether they will be watered down, the simple threat of the proposals may be enough to cause key executives in trading, private equity and hedge fund units to jump ship.

The exodus may be about to begin, as banks will finish paying out bonuses to their executives in the next few weeks. While bonus season always causes a massive, industry-wide shuffling of chairs, this year the traffic may be one way: out of the banks and into hedge funds and private equity firms that do not own banks.

Such considerations may have affected Citigroup's

reported decision

to put its $10 billion private equity unit up for sale. Though "a person close to Citigroup" told

Bloomberg

, which broke the story, that the unit isn't affected by the Obama proposal, it is hard to blame Citi for saying that.

The last time it was essentially forced by regulators to

sell an energy trading hedge fund unit

, known as Phibro, for political reasons, it got a price so low that Steve Chazen, the President and CFO of buyer

Occidential Petroleum

(OXY) - Get Report

, gloated about it later in an interview with

The Wall Street Journal

.

"If you've got to sell why should I pay a premium? What leverage does the seller have?" Chazen told the newspaper.

The threat of the proposal is also causing

JPMorgan to think twice about plans

it had to buy

RBS Sempra Commodities

, a joint venture between the

Royal Bank of Scotland

(RBS) - Get Report

and

Sempra Energy

.

While these regulatory threats may all go away eventually, it could be costly to banks nonetheless if they have to pay up to try and rehire executives who didn't feel like waiting around for Washington to make up its mind.

--

Written by Dan Freed in New York

.