“How do you think I would go about buying a million lotto tickets? I mean the mechanics of it. Would I have to sit in line at the candy store for, like, 10 hours?”

The question came from the trader sitting next to me. It was 2006, the height of the financial frenzy, and we were both working in our bank’s proprietary trading group. We were 20 people tasked with placing bets on which way markets would go, using our bank’s own money.

His question was only half-joking. Our mandate was to make more money than we lost. How we did so was less important. Buying a million lotto tickets was a stretch, but not much of one.

After the crash of 2008, our group was disbanded. Most traders, including me, found jobs doing the same thing in different groups in the bank, but four years later, we lost our jobs more or less for good, as banks started to cut back before something called the Volcker Rule, which was meant to end the casino days.

The Volcker Rule is the creation of Paul Volcker, the respected former secretary of the Treasury and chairman of the Federal Reserve, who set out in 2010 to rein in the excesses of Wall Street. His rule was appended to Dodd-Frank financial reform, and three years and 300 pages later, it's still not law.

The Volcker Rule should be simple. It bans proprietary trading, or, as it's known on Wall Street, prop trading. The goal of the rule is to prevent banks from gambling with the deposits of people, institutions and companies.

What is proprietary trading?

Prop trading is easier to understand if you break down the term: it's when banks trade stocks, bonds or assets for their own proprietary purposes. These are bets that aren't supposed to involve the money of bank customers; they're bets where the burden of profit and loss is entirely on the bank itself.

Why is this so important? Because deposits (checking accounts and such) are at risk. During the financial crisis, banks made proprietary bets on complex mortgage securities, and when those bets crashed, the federal government had to step in with bailouts, in part to protect those deposits. JP Morgan's London Whale trade, which resulted in a $6bn loss, started with a few billion in "excess customer deposits".

Traditional banking takes in deposits and loans the money to small businesses or homeowners. It is clearly not proprietary trading. It is the type of simple, direct banking that I assume Paul Volcker wants to return to.

Paul Volcker, right, with then-president elect Obama. Photograph: Rex Features Photograph: Rex Features

But it won't be easy to turn back the clock. Wall Street banks have changed dramatically in the last 30 years, intertwining themselves with every major entity in the US and globally. They don't serve mom and pop primarily any more; they are mostly in the business of middlemen: buying and selling bonds and stocks from big, wealthy customers, including pension funds, hedge funds, and mutual funds. That middleman job is called "market making", and it makes everyone and everything a bank customer.

This is where the Volcker Rule starts getting dicey. When everyone is your customer, when anyone could be on the other side of a trade, how do you prove which trading ideas are yours and which are theirs?

I could imagine a banker arguing that my friend’s plan to buy lotto tickets is not proprietary trading because the convenience store selling tickets is the bank's customer, in some capacity. Maybe the bank owns the store's mortgage, or the state selling the ticket is a customer of the bank via underwritings.

Banks, with their teams of lawyers, will argue anything.

Lotto tickets or complex trades?

The proprietary desk where I worked would have been better off had we just bought the million lotto tickets from that imaginary store. In 2008 we lost a lot of money. As bad as those losses were, they were dwarfed by massive losses from a few customer businesses.

One of those businesses sat near us on the trading floor, creating, buying and selling esoteric mortgage products with customers. They sat in a dozen rows, all math-savvy traders and salespeople.

Traders at the New York Stock Exchange. Photograph: Spencer Platt/Getty Images Photograph: Spencer Platt/Getty Images

Four years earlier, their fiefdom on Wall Street was considered a growth business, the new new thing. There was an endless sense that they were winning. During the early years you could hear the excitement across the trading floor, a buzz that was the collective sound of an exuberant market, punctuated by the yelp of an occasional high five.

The rows were stocked with traders yelling into phones and watching computer screens with flickering numbers dancing around, making money on the tiny difference between the bid to buy and the offer to sell.

Losing money is a silent process

In 2008 the high fives quieted down. All of it changed dramatically. The housing market's collapse brought a frighteningly quick drop in the prices of the esoteric mortgages. The computer screens no longer flashed dancing prices. Instead they showed a single column of numbers: desperate offers to sell something that nobody wanted or needed. The offers to buy never materialized. The hum from the dozen rows went quiet. Making money is loud. Losing money is silent.

The dancing was over. What banks had once sold to customers, they were forced to keep for themselves at a huge loss. It was these losses, from customer businesses, that pushed my firm and others towards the threat of bankruptcy and the reality of government bailouts.

Traders watch stock prices in October, 2008. Photograph: Mike Segar/Reuters Photograph: Mike Segar/Reuters

The Volcker Rule might curb this risk-taking behavior; it might dampen the loudness of making money. Regulators will argue that buying and selling illiquid products with customers is ultimately proprietary trading, as it turned out to be in 2008, but banks will fight back.

Banks, flush with lawyers, always fight back.

Never let a monkey sell bananas

That is the downfall of the Volcker rule; it is a nebulous rule dependent on the interpretation of "proprietary", and banks are accustomed to defining words in ways that profit them. A drug dealer once told me why he doesn’t employ addicts: “Never let a monkey sell bananas.” Well, never give Wall Street an ill-defined regulation. It is an industry addicted to exploiting the grey areas.

What the Volcker Rule is intended to do is curb unnecessary and excessive risk taking. That's a very good intention, but there are better and simpler ways to do this that allow banks less wiggle room.

Better ways to fix banks

The simplest fix would be to force banks to keep 12% or more of their capital to absorb potential losses from risky trades and excess debt. It is somewhat akin to asking homeowners to put at least 12% down when they buy a house, except on Wall Street, 12% is a very high percentage. This would force bank executives to think about what they own and why.

Another approach is to limit the total amount of assets any one bank can have. JP Morgan owns about $2.2tn. A cap of $800bn or so would force them to spin off ancillary business and take fewer risks.

Yet another strategy would be to require a regulatory board's approval of any new financial product. That would force Wall Street to explain exactly how they will provide liquidity for something so complicated.

The problem with the Volcker Rule is not that it won’t help. To some degree it has already forced banks to rethink the risk they run. The problem is that regulators, the public and the financial industry itself, will pretend it is a panacea – when it is actually more of a placebo.

Because of the Volcker rule, banks no longer have groups that could buy a million lotto tickets. They are, however, still taking huge risks. Just like it was in 2008, it could prove to be their and our undoing.