Finally, Something I Can Agree With Citigroup About!

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No surprise here: As the deadline approached for comments on the "Volcker Rule" provision of the Dodd-Frank financial reform legislation letters poured in from banks and other financial institutions telling regulators that if the Volcker Rule is passed as it's currently written, rivers will turn to blood and a rain of evil, rabid frogs will darken the skies.

Ok, so they didn't put it exactly like that, but The Wall Street Journal summed up Goldman Sachs' (NYS: GS) letter as arguing that:

... the rule underestimates the complexity of the financial markets, diminishes the role of banks in making money flow around the world to companies and countries, and could wind up causing banks to lend less and charge more for their services.

Goldman joined a chorus of banks that included Morgan Stanley (NYS: MS) , which declared that the "list of undesirable consequences is long and troublesome" and Bank of America (NYS: BAC) , which warned that the Volcker Rule "is rife with unintended consequences, many of which would undermine the safety and soundness of U.S. banking entities and U.S. financial stability."

Citigroup (NYS: C) , meanwhile, had many of the same dire warnings for regulators, but what caught my eye in its letter was Chief Risk Officer Brian Leach writing:

... the proposed rule is complex, with overlapping and imprecise compliance requirements, and does not provide sufficient clarity as to what type and level of activity is permissible, which itself may impair capital markets.

To which I say, "Amen, Brian!"

The fact is that the Volcker Rule is complex and is unclear in many areas. Loopholes abound in the rule, particularly as it pertains to market making, which is allowed under the Volcker Rule. That alone creates big questions for banks in terms of what is truly market-making and what slides over the line into proprietary trading. The best answer may be the simplest of all, but hardly the one the Citi's Leach had in mind: Remove market making from the banks' business model as well.

In its extensive and well-written comment letter on the Volcker Rule, Occupy the SEC quoted Nobel Prize winner Myron Scholes:

[A] leveraged market-making business is inherently unstable.  Banks might be the wrong providers of liquidity to markets.  Simply put, leverage can only be reduced by selling assets to raise cash if market makers are making markets in the assets they need to sell and they no longer can continue to do so at times of shock and to make conditions worse, they borrow from each other with short-term financing to hold longer-maturity relatively idiosyncratic assets.

It would also seem to fit with Volcker's original intentions in championing the Dodd-Frank provision. In his own comment letter on the issue, Volcker reminded regulators of the spirit behind the rule and the Dodd-Frank legislation as a whole.

The basic public policy set out by the Dodd-Frank legislation is clear: the continuing explicit and implicit support by the Federal government of commercial banking organizations can be justified only to the extent those institutions provide essential financial services. A stable and efficient payments mechanism, a safe depository for liquid assets, and the provision of credit to individuals, governments and business (particularly small and medium-sized businesses) clearly fall within that range of necessary services. [Emphasis Volker's.]

Not that the banks should be blamed for arguing vehemently against the Volcker provisions. Trading is a seriously profitable activity for the major banks and the regulation seriously threatens that cash cow. The extent to which trading-related activities have taken over the banks is astounding and nowhere is it on display in higher relief than at Goldman Sachs.

Though Goldman recently started breaking out its business segments differently -- which makes it a bit more difficult to isolate trading (wink, wink) -- in 2009 trading and principal investments accounted for a staggering 87% of the company's total pre-tax profit. Back in 2000, the year after the company first went public, that arm made up less than a third of pre-tax profit.

The golden tongues of those in big banking have accomplished a lot in the past couple of decades to make banks far larger and more profitable, but at the same time they've created a riskier system as a whole. As the Volcker-Rule comment letters suggest, the banks would like us to continue to act like Stockholm-syndrome sufferers, deferring to the godly judgment of our "too big to fail" kidnappers, who, for understandable reasons, have their sights set on big profits and absurd bonuses.

But after decades of deregulation that did little to prove anything except the fact that the former regulations were pretty smart after all, it seems high time that we put a little less stock in how highly-paid bankers think that banks should be regulated.

Citigroup's Leach is correct, the Volcker Rule -- thanks to lobbyist wrangling and the watering-down of the provision that's already taken place -- is complex and often unclear. Let's simplify it and make it clear. Let's make banks simple and clear. Let's make them once again into safe, boring deposit-taking institutions that don't think they can hold a gun to the entire global economy's head.

That, of course, won't happen. But as the Volcker Rule approaches the currently-slated implementation date in July, we'll get a chance to see if there's any spine at all left in financial regulators.

At the time this article was published Fool contributorMatt Koppenhefferowns shares of Bank of America and Morgan Stanley, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting hisCAPS portfolio, or you can follow Matt on Twitter@KoppTheFoolorFacebook. The Fool'sdisclosure policyprefers dividends over a sharp stick in the eye.The Motley Fool owns shares of Bank of America and Citigroup.Motley Fool newsletter serviceshave recommended buying shares of The Goldman Sachs Group. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.

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