By Heidi N. Moore, contributor

The Volcker Rule is one of those things that may come out of financial reform looking imperfect and end up being useless.

In its most recent manifestation, the Volcker Rule is supposed to prevent banks from holding too much exposure to risky activities like proprietary trading and investing in unpredictable businesses like private equity funds and hedge funds. According to Citigroup analyst Keith Horowitz, banks have different exposures to these businesses, ranging from Morgan Stanley’s (MS) $6.34 billion of proprietary investments to JP Morgan’s (JPM) $8.88 billion to Goldman Sachs’s (GS) kitty, the biggest, at $29.1 billion.

The biggest objection of the banks to the Volcker rule is that these activities didn’t cause the financial crisis. That is arguable, and certainly can’t be verified, mostly because almost none of the activities are publicly disclosed. There are a few obvious contradictions to the banks’ argument. Merrill Lynch’s own proprietary traders, for instance, were intimately involved with packaging and selling of CDOs, many of which were held on the bank’s own balance sheet. Citigroup’s (C) strategy of stuffing troubled loans into “structured investment vehicles” caused governments to consider a plan to create a master-SIV to bail them out. (Eventually, Citi just took $3 billion of losses.) Most importantly, however, Volcker’s idea is to separate the old-fashioned commercial banking business from the more volatile investment banking business, a la the Glass-Steagall Act of 1933.

Good luck with that. What the Volcker rule actually does is give banks permission to keep pretty significant PE and hedge fund businesses — and ample time until 2019 to actually do anything about it, which means nine more years of rich profits before they have to shut down the risk factory. Even Volcker isn’t thrilled with the rule that carries his name.

The result, predictably, has been some fancy footwork in which banks sorta kinda seem to be acknowledging the rule, but in truth are just following self-interest.

Consider Citigroup. Citigroup sold a $3.5 billion real-estate fund to Apollo Management and a $4.2 billion fund of hedge funds to SkyBridge Capital, and it let its star commodities trader, Andrew Hall, go free to pursue his own business. But those deals had little to do with observing either the letter or the spirit of the Volcker rule; instead, Citigroup had already committed to divesting some of those businesses, and in the case of Hall, the bank preferred to let him start his own venture — and accept some of the profits from the new business — rather than conform to potential government pay limits on his $100 million compensation.

And, as always, it didn’t take banks long to start thinking about outsmarting the rule by moving their proprietary traders around where regulators couldn’t find them.

Citigroup has been the most bold about it, casting around for $3 billion more to invest in private equity and hedge funds including “special opportunities” — read, riskier, distressed assets — in real estate and emerging markets. It also renamed its largely money-losing Citi Alternative Investments unit as the vaguer “Citi Capital Advisors.” In Wall Street jargon, that makes it sound more like a portion of the investment banking business advising corporate clients rather than raking in fees for Citigroup’s private equity and hedge-fund managers.

More recently, Citigroup sold a $900 million-plus private equity portfolio to secondary investments firm Lexington Partners, as reported by peHUB yesterday. But that doesn’t mean that Citigroup is stepping away from PE; in fact, the portfolio of old Citigroup Private Equity investments was a “zombie” portfolio after the main investor left earlier this year. Several years ago, Citigroup threw its support behind Metalmark Partners, which used to be Morgan Stanley’s in-house private equity fund.

Citigroup, in short, appears to be approaching the Volcker rule ideas more like suggestions. That’s not the bank’s fault; the creaky machinery and extensive compromises of financial reform provide no reason for the bank to do more.

–Heidi Moore is Sweeping the Street while Colin Barr is on vacation.