Citigroup's Mortgage/Credit Opportunity Fund was up 16 percent through April, a torrid pace and certainly good news for the bank. About 90 percent of the $395 million invested in the fund is Citi's proprietary capital, according to Bloomberg. With the Volcker Rule looming, this leaves Citigroup (NYSE:C) with an interesting situation.

Most assume that the rule, as finally passed, will definitely prevent these sort of massive investments in risky products. So it could be argued that the strong performance arrives at a good time, as Citigroup comes under pressure to find a way to divest the funds in which it is heavily invested. Recall that Goldman Sachs and Morgan Stanley have already divested themselves of some proprietary funds.

If Citigroup wants to hang onto the fund, it may come up with a creative way to pitch the investment as part of a principal investing strategy, which certainly has a better chance of enduring at banks in the Volcker Rule era. But that would seem to be a longshot.

Goldman Sachs is lobbying hard to make sure principal investments are not curtailed. The bank has styled principal investing as an "investing and lending" operation, which encompasses a lot of direct investment activity. The firm's pitch may be more palatable, as it seems to cover big direct investments in companies like the Industrial and Commercial Bank of China.

It's unclear how Citigroup intends to play this. But it does have a lot on the line. The firm needs earnings, and proprietary investments could certainly help. Of course, fund performance could turn on a dime. In that case, the many supporters of the Volcker Rule will have more ammunition.  

For more:
- here's the article

Related Articles:
Goldman's special situations unit tests Volcker Rule
Citigroup explores Volcker Rule options