It's fair to say the jury is still out on the Volcker Rule. The goals of the rule--as embodied in the Merkley-Levin provisions of Dodd-Frank--are laudable. And there are plentiful signs that banks are acting. But they are doing so for different reasons. 

Morgan Stanley (NYSE: MS), for example, is spinning off its FrontPoint hedge fund unit to the fund's management, according to media reports. The plan calls for Morgan to cut its stake in FrontPoint, which it acquired four years ago, to about 25 percent and perhaps even lower over the next five years. Some have characterized this as a bow to the Volcker Rule. But you can view this another way: The Volcker Rule is a good reason to spin off a unit that Morgan Stanley was never happy with. The fund has certainly not racked up notable gains. And the cultural fit was always a poor one. Silicon Alley Insider suggests that the fund firm is bleeding money. "Although it probably detracts only a tiny amount from their bottom line, unchecked spending in their expense budget is evidence of FrontPoint's poor and inefficient management right now." 

Bank of America (NYSE: BAC), as another example, says it has spun off part of its middle-market private equity arm to form Ridgemont Equity Partners. Discussions about such a move have been on-going for years, but the spin off was no doubt accelerated by the Volcker Rule. 

You would have to think that other banks are likely using the Volcker Rule as an excuse to sell assets or clean house to some extent. Some, in fact, think the bloom is off the proprietary trading rose at many banks. So perhaps this is a great time to realign. 

The executive suites are abuzz with talk of all the possibilities. Citigroup (NYSE: C) has floated the idea of distributing prop traders to market making units, where they would still be free to prop trade. That has angered some politicians, which makes it a risky move for banks. "We do not expect Wall Street to give up its risky and conflict-ridden trading operations without a fight. But the Merkley-Levin provisions, which we drafted, are intended to give you strong tools to protect our nation's families and small businesses from the vagaries of the Wall Street casino," notes a letter from the two senators who sponsored the Volcker Rule to Treasury leaders. They are urging regulators to make sure that the intent of the law will hold up. 

Certainly, placing prop traders in market making roles in a way that would essentially allow them to continue trading house money would violate the spirit. Whether Treasury, which seems a bit too cozy with Wall Street for some reform advocates, takes a proactive role in enforcing the spirit of the law rather than the letter of the law remains an open question. 

For the moment, all eyes are on Goldman Sachs (NYSE: GS), which has the most at stake. Its powerful principal strategies unit has spawned a host of big-name hedge fund managers, such as Edward Lampert and Daniel Och, and is held in high esteem. Rumors were rife last week that the bank would reassign prop traders to a new hedge fund that would be spun off top investors. But the bank might instead transfer the business under its asset management unit, where it would have to find investors for new internal funds. Regulators are certainly watching. - Jim