BofA Says Volcker Rule Won't Be Too Tough

NEW YORK ( TheStreet) -- The closure of big banks' prop trading desks may be getting a lot of splashy headlines - invoking fear about the future of Wall Street - but the moves don't stand to impact the industry's bottom line very much.

During a keynote speech on Monday, Bank of America ( BAC) CEO Brian Moynihan became the first top-gun on Wall Street to indicate that the so-called "Volcker rule" won't be applied broadly to all banking activities performed in the interest of clients.

"The adoptive version of the Volcker rule should restrict some form of proprietary trading but still allow financial services to provide your clients good trading activity," Moynihan said at the Bank of America Merrill Lynch Investment Conference in New York.

At another event on Tuesday, Moynihan added that Bank of America has "a very small proprietary trading operation" -- essentially saying the change hasn't causing much concern about a drag on trading revenue.

His presentation at the Barclays Capital Financial Services Conference was preceded by JPMorgan Chase ( JPM) CEO Jamie Dimon, who also indicated that Volcker would not significantly impair his bank's white-shoe division.

"We do not believe that this limits our ability to grow our client businesses, market make and serve our clients," said Dimon. He went on to note that JPMorgan will continue to serve its 16,000 investors at 100 trading desks.

The CEOs' comments, along with those of others in the industry, indicate that banks will be able to make investments to hold in inventory for client demand, or provide liquidity in market-making activities. Volcker will restrict just the speculative investments performed by smarmy characters in an Oliver Stone flick.

Part of the Dodd-Frank financial reform bill named after former Federal Reserve Chairman Paul Volcker, the rule declared that banks "shall not engage in proprietary trading." But it wasn't clear what, exactly, constitutes "proprietary trading."

Mark Williams, who teaches finance at Boston University's School of Management, explains that under a broad definition, regulators could consider all types of buys, sells and hedging activities using balance sheet capital to be "proprietary." If so, he says, "bank trading floors set up to risk firm capital will go the way of the dodo bird."

But Williams points out that it makes little sense for regulators to take such a stringent view: "For example, is it speculative to put firm capital at risk when buying triple AAA rated U.S. Treasuries?" he asks.

Besides Moynihan's speech, there have been other indications that Volcker won't be quite as tough as some had feared. When word leaked that JPMorgan had decided to shut down its prop desk entirely last month, sources inside the bank indicated that Volcker wouldn't affect all trading operations. While "trading" in general delivered about 22% of JPMorgan's $100 billion in revenue last year, straight-up "proprietary trading" was marginal at best. The closure of the bank's prop desk will likely lead to a few lay-offs in London, but not much else.

After Citigroup's ( C) canning of star trader Andrew Hall last year and Goldman Sachs' ( GS) headaches over a subprime CDO gone bad, the rule of thumb appears to be: If a type of trading or a type of deal has gotten negative headlines, it needs to be Volckerized.

For its part, Goldman Sachs - which has the most prop-trading exposure, at 10% to 15% of annual revenue - has been quietly winding down its prop desk while looking for new sources of revenue, like derivatives clearing. Goldman may retain star traders by wooing them into cushy new jobs in other divisions, such as asset management -- a business that rival Morgan Stanley ( MS) has been building up lately as well.

As the Volcker change is understood by the industry thus far, Goldman will retain its ability to be one of Wall Street's chief market makers. It will also have to find new avenues for growth. Goldman might have to stay away from taking the other side of any more "sh*tty deals" -- but that won't be a bad thing for any counterparty involved.

--Written by Lauren Tara LaCapra in New York.

>To follow the writer on Twitter, go to http://twitter.com/laurenlacapra.

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