FORTUNE — Wall Street may have a bigger Volcker problem than it’s letting on.
Most Wall Street firms have spent the past few years shedding businesses that clearly don’t comply with Volcker, which is supposed to limit the banks’ ability to make money on risky, in-house trading. What’s more, most big bank CEOs say their firms have been Volcker-compliant for a while now.
Nonetheless, this week’s vote on the Volcker rule, which is supposed to come on Tuesday, has some worried. Bloomberg reported that the nation’s five Wall Street firms — JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), and Morgan Stanley (MS) — generate as much as $44 billion a year from trading. A lot of that money, though, is not really at risk. That number includes some of the fees the firms get from executing clients’ transactions. That business is not banned by Volcker.
It looks likely that the final rule could ban so-called portfolio hedging, which are broad trades that are supposed to protect a bank against a macro-risk, like an economic downturn. JPMorgan has said the failed London Whale trade, which lost the bank $6 billion, was a portfolio hedge.
But banks will still be allowed to hedge. There could be some good news for the banks in the final rule. The draft of the rule said that all non-client trades had to be “reasonably correlated” to offset a risk the bank was taking for a client. Some advocates of more Wall Street regulation pushed for that to be reworded to “highly correlated.”
But, sources say, in a win for Wall Street, that the final rule regulators will vote on next week says nothing about correlation. That requirement is out all together. Instead, regulators will use other measures to try to limit non-customer trading. It’s not clear those measures will be effective.
Also, the $44 billion figure is down significantly from what it was before financial reform law Dodd-Frank was passed, despite the fact that the stock market has come back and the bond market has been relatively stable. That suggests that the big banks have jettisoned much of their non-client trading businesses.
Still, the question is how much of that $44 billion is generated by the big banks in trading that will eventually be banned. Surely, when the final rule is enforced by regulators, it will be more restrictive than the way in which banks have been policing themselves.
And the impact will be bigger for some firms than others. In a research note out last Wednesday, Morgan Stanley analyst Betsy Graseck said Goldman would be the most affected among Wall Street banks. Goldman declined to comment.
Goldman has traditionally made more of its money trading than other Wall Street firms. And a big drop in its currencies business in the past quarter has reignited concerns about Goldman’s trading operations.
Graseck says that Goldman generates about half of its revenue from trading. Another 17% of its revenue comes from direct investments, some of which are made through Goldman private equity or hedge funds. The Volcker Rule is expected to significantly limit how much money banks can put in those investment vehicles as well. And my colleague Dan Primack has detailed how Goldman has been slower than other banks to exit those investments. All told, Graseck says Goldman is at risk of losing 25% of that revenue because of the Volcker Rule, or nearly 17% of its overall revenue.
But the impact could be larger than that. Unlike other firms, Goldman does not break out the profits it gets from its various lines of business. Typically, trading revenue tends to be more profitable than other lines of business. So, a 17% drop in revenue coming from that business could lead to a bigger drop when it comes to the actual bottom line, say 20%.
Like other banks, Goldman has struggled to get its return on equity, a key metric for financial firms, back to where it was before the financial crisis. Last quarter, Goldman’s ROE was just over 10%. The hit from Volcker could take Goldman’s ROE down to 7% next year, well below the 20% it used to regularly report before the financial crisis.
“The question is whether Goldman takes on more directional risk than others, and whether they will still be able to do it,” says Glenn Schorr, an analyst at Nomura. “It’s a fair question.”
One answer: Every quarter, firms report a figure called value at risk, which is supposed to track how much money a bank stands to lose trading each day. Goldman’s VAR is down from what it was a few years ago. But it is still higher than most of its rivals. In the most recent quarter, Goldman’s VAR averaged $80 million. That compares to an average of $68.5 million at Goldman’s closest rivals, suggesting that Goldman is conducting riskier trading than Morgan Stanley, JPMorgan, and others.
That might not be the case. Many say VAR isn’t a reliable stat, and firms have leeway in how they report it. Goldman doesn’t disclose enough about its business to figure all this out. But with the Volcker Rule now back on track, we may soon find out.