FORTUNE — It has been more than 2½ years since President Obama signed the Volcker Rule into law, as part of the broader Dodd-Frank financial reform package. And in that time Wall Street bankers have learned a very important lesson: Don’t be too quick to honor Washington’s wishes.
The Volcker Rule was intended to prevent banks from taking too many risks with their own money, including in areas like private equity and hedge fund investing. The idea was that banks primarily exist to serve clients rather than to enrich themselves via levels of proprietary and principal account investing that could (theoretically) lead to another Lehman-style collapse.
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It was controversial on Wall Street, but so was virtually every single word of Dodd-Frank. Outside the financial lobby’s echo chamber, most of the Volcker Rule seemed to be a reasonable safeguard. So it passed through Congress, albeit a bit watered down, in July 2010. Included was a two-year waiting period that would allow politicians and regulators to hammer out the final language.
Many institutions soon began trying to get their houses in order, with efforts to sell or spin out private equity groups. These moves happened at banks in the U.S. and abroad, including Bank of America (BAC), Barclays (BCS), and Lloyds (LYG). Better to comply early than be stranded by unforeseen circumstances, even if that meant divesting at a discount.
Politicians and regulators, however, have not seen fit to reward such prudence. Instead, they’ve tacitly penalized it by missing so many deadlines that we still don’t have any final Volcker Rule language — a full seven months after the law was supposed to take effect. Even if the procrastinating “authors” were to fulfill their obligations tomorrow, the Volcker Rule might not have any actual teeth until 2014. And, even then, it is expected to include so many exemptions and extensions that banks could be allowed to maintain existing private equity investments for upwards of a decade.
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The Volcker Rule: safeguarding us from financial crises in 2024 and beyond. Catchy tag line. Wonder why President Obama didn’t hand it out on bumper stickers during the 2010 signing ceremony.
The smart money either ignored Volcker on private equity or applied it only to future activities. The most obvious example is Goldman Sachs (GS), which in 2007 raised a $20.3 billion private equity fund called GS Capital Partners VI that included approximately $9 billion in commitments from the bank and bank employees (too high a percentage to comply with Volcker). Goldman has decided not to divest its interest in the fund, believing that it will be able to secure enough extensions to responsibly liquidate once Volcker is finalized. The bank’s group also has raised several new funds since Dodd-Frank was signed, including an energy fund, a renminbi-denominated fund, and a real estate mezzanine fund. Goldman believes these new vehicles will comply with Volcker, based on language in a draft proposal of the rule. But if not, it can either request extensions or spin them out to a later date.
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In other words, Goldman Sachs is profiting from activities that may be banned under Volcker because it didn’t begin moving when Obama’s pen struck paper. In fact, its earnings are probably amplified because rising public equity values over the past two years have led to a particularly strong exit environment for private equity. And the exact opposite is true for banks and other regulated institutions that divested from private equity during the past three years, based on the false assumption that Congress actually meant what it passed.
So the Volcker Rule has become a cautionary tale, but for all the wrong reasons. It was intended to help curb Wall Street recklessness — a culture in which banks invest first and ask questions later. But instead it just validated those who expertly exploit the sloth of federal officials and encouraged such behavior the next time around. Some reform.
This story is from the February 4, 2013 issue of Fortune.