Wall Street hopes to dodge two reform bullets

NEW YORK (CNNMoney.com) -- With any luck, Wall Street can still escape two of the harshest elements of Washington's reform efforts.

The two measures, included in the Senate bill passed last week, take direct aim at some of the more risky -- and profitable -- parts of banks' business.

One proposal would require financial firms to spin off their trading desks that deal in derivatives.

The other -- dubbed the Volcker Rule for its proponent, former Federal Reserve Chairman Paul Volcker -- would ban banks from wagering with the firm's own money, what the industry calls "proprietary trading." Firms would also be restricted from investing in or sponsoring private-equity funds or hedge funds.

The restrictions, if included in the final bill, would hit bank profits.

Trading activity, for example, has been crucial to financial firms' recent success. Of the $12.8 billion in revenue generated by Goldman Sachs (GS, Fortune 500) last quarter, 80% was due to trading activity. At crosstown rival Morgan Stanley (MS, Fortune 500), it accounted for 44% of its overall revenue. Neither firm detailed just how much they earned from derivative activity however.

Financial firms have also feared what the passage of the Volcker Rule would mean for other parts of their business.

JPMorganChase (JPM, Fortune 500), for example, controls one of the world's largest and arguably most successful hedge funds, Highbridge Capital Management.

Goldman's leveraged buyout business is estimated to account for 10% the company's total revenues.

As the bill now moves to negotiations between key leaders of both the Senate and the House, there is a growing belief that both those proposals run the risk of getting derailed.

Experts believe that the amendment aimed at regulating derivatives proposed by Sen. Blanche Lincoln, D-Ark., will be left on the cutting-room floor or watered down substantially.

The White House and most Republicans have come out strongly against the proposal, partly out of fear of what kinds of unintended consequences the new rule could have.

At the same time, there have been growing signs of trouble for the Volcker Rule. Lawmakers already missed an opportunity to strengthen the proposal after choosing not to vote on an amendment jointly proposed by Sen. Carl Levin, D-Mich., and Sen. Jeff Merkley, D-Ore., that would have prevented banks from trading for their own benefit rather than for the sake of their customers.

While some version of the Volcker Rule will likely make it to President Obama's desk, experts suggest that the Senate bill does not do a good job of explicitly defining what businesses banks should, and should not, be involved in, positioning the topic as a subject of intense debate among lawmakers.

"The definition of proprietary trading has really been up in the air," Jenn Fogel-Bublick, executive vice-president at the Washington lobbying firm McBee Strategic, said during a conference call with clients Friday. "I think that is still very much in flux."

That ambiguity, experts suggested, should give the banking industry one last opportunity to influence lawmakers.

So far, the bill has turned out far tamer than industry had initially feared. There were concerns in recent months, for example, that Congress could seek to break up some of the country's largest financial firms, in order to prevent future bailouts of firms that were considered "too big to fail."

The belief now is that Wall Street may be breathing a sigh of relief in private. Thus far however, the industry has been quite critical of the bill publicly.

The Securities Industry and Financial Markets Association, which represents the interests of hundreds of financial services firms, warned that forcing banks to spin off their derivatives business would deplete their capital levels, ultimately meaning higher borrowing costs for consumers looking to secure mortgages and other loans.

"While we support the bill's original goal of enhancing systemic risk regulation and ending too big to fail through resolution authority, we must oppose the Senate's legislation due to these provisions," SIFMA President and CEO Tim Ryan said in a statement.