When Zero Hedge first wrote about the adverse role of prop trading in capital markets, long before it was a mainstream issue, which in turn incited the response of one Lucas van Praag, in which they assured us and our readers that there were never any issues with Goldman's prop trading desk and that all concerns about prop trading are misplaced. A few months later one of the luminaries of modern finance picked up the Zero Hedge banner and proposed a rule that would end banking prop trading for ever, in essence overriding Mr. van Praag explanation. Yet for the past three months most had left the Volcker Rule for dead, after the banking lobby had once again bought a two year full recourse lease on Obama and his cronies. Until the last two weeks, when first on May 6 we saw what happens how an entire market, gripped in computerized gambling and speculating can break in the span of a few minutes, without doubt facilitated by the banks' prop operations, and also when we saw that the big 4 banks had monopolized prop trading to such an extent (and disingenuously masking it as flow trading: yeah, right, flow trading with a VaR of $150 million... better luck finding greater idiots next time) that none had a losing day, in essence making Madoff's ponzi scheme, with its worse "win" track record a joke in comparison with the ponzi that the market has become. Which is why we read with great satisfaction in the FT that the banking lobby's power is slipping at a critical time: this week the Volcker Rule will be voted on by the Senate, and it may very well pass, despite the "cornered rat" response by the banks. As the FT notes, "the political mood is such that a straight vote on derivatives would be close and the Volcker Rule would be likely to pass." Should the Volcker Rule pass, this will be the beginning of the end for the current casino capitalism system that has gripped Wall Street. And don't be surprised to see a 10% drop in the market as a last ditch self defense mechanism by the primary dealers.

More from the FT, which also discusses the Blanche Lincoln's derivative reform proposal:

The derivatives change, which faces a groundswell of opposition from regulators as well as Mr Volcker, head of a White House economics advisory board, is slated to come up first.



Two bank lobbyists said a powerful combination of Mr Volcker, Mr Obama and the anti-bank fervour in the country meant they had almost given up hope of modifying the Volcker Rule, which would prohibit banks from trading for their own account and investing in hedge funds and private equity firms.



The controversial derivatives provision, likely to be considered on the Senate floor before the Volcker Rule, is a different matter. Here, the industry has the backing of Mr Volcker and Sheila Bair, who chairs the Federal Deposit Insurance Corporation.



Neither provision has been subject to congressional hearings and both are widely opposed by Republicans and some moderate Democrats. But the political mood is such that a straight vote on derivatives would be close and the Volcker Rule would be likely to pass.



The administration is involved in a complex dance with Blanche Lincoln, the Democratic senator from Arkansas, who authored the derivatives provision and is refusing to modify it. Many believe her primary election challenge next week, where she is battling a rival on her left, is the reason why the White House and Treasury will not come out and oppose it.

And who else if not the biggest republican apologist for Wall Street Bob Corker comes out in support of banking status quo:

“I do think we’ll deal with [it],” said Bob Corker, the Republican senator from Tennessee, who blamed the Obama administration for allowing Democrats to offer the provision. “They are aware it is a problem,” he said. “But they want Republicans to fix it.”

The banks' usual bullshit response is that same as it ever was when they want to get something from the idiot politicians: do it our way or the system will blow up. Well, not this time.

The banks’ argument in both cases is similar – the attempt to lessen risk will perversely increase it by preventing deposit-taking banks from mitigating their risk and by driving activities into the less-regulated shadow banking sector of pure investment banks, hedge funds and private equity firms.

And they are hitting where it allegedly hurts most: the household net worth:

Some of the more astute lobbyists have realised that arguments about competitiveness and risk just do not cut it in the current febrile atmosphere. The only way to modify the provisions is to show that they have negative “real world” effects. So, an industry paper by the Securities Industry and Financial Markets Association finds that “if banks cannot use swaps to hedge the risks associated with home mortgage lending, the cost of a $200,000 home mortgage will increase by at least $6,000 to $10,000 and probably more”.

Surprisingly a paper authored by Zero Hedge but riddled with far too many expletives and f-bombs to ever see the light of day, concludes that the impact on mortgages will be negligible, but that banker bonuses will be cut by 50% or more, which is the primary and only reason why SIFMA has been bribed to goalseek whatever results the banking kleptocracy wants published so that Goldman partners can end up owning every apartment in 15 CPW and build a moat around it. This way when D-day comes, the morts will have to first deal with ill-tempered mutated seabass as they go asking politely for explanations why the economy, and the stock market, just like the Madoff ponzy, no longer exist.