Standard and Poor’s estimates that the Volcker rule, due to be finalized at the end of the year, will eliminate $10 billion from bank profits annually. This is a sharp increase in the perception of the Volcker rule’s impact, and it comes before the extent of the rule is even known.

“We currently estimate that the Volcker rule could reduce combined pretax earnings for the eight largest U.S. banks by up to $10 billion annually, up from our initial $4 billion estimate two years ago,” S&P said today in a statement announcing a new report on the issue.

Goldman Sachs Group Inc. (GS) and Morgan Stanley, which were the two biggest U.S. securities firms before converting to banks in 2008, stand to lose the most because they get a larger percentage of their revenue from trading than the other lenders, S&P said in the report. Regulators are unlikely to draft a final version of the rule until the end of 2012, S&P said.

“Less strict rules would have a limited impact on banks’ earnings and business positions, so it’s unlikely that we would take any rating actions as a result,” S&P said in the statement. “Stricter rules could lead us to take negative rating actions on certain banks.”

I think it’s clear what’s going on here. This now becomes a report that banks can hand to the regulators and say that an overly burdensome final rule could sink their business. “Protecting the banks” will become associated with watering down the Volcker rule. So Standard and Poor’s, owned by McGraw-Hill, which produces financial research, and funded by the banks whose deals they rate, is doing the banks a great favor here in their fight against stiffer regulations on proprietary trading.

S&P did contradict themselves later in the report, arguing that prop trading rules could make banks safer and reduce volatility on earnings, “which we would view favorably.” But the banks will go into the regulators with only that statement about stricter rules leading to negative rating actions. They will argue that a stricter rule will reduce US competitiveness with banks around the world (even though stricter rules would impact US operations of those global banks as well). They will argue that the regulators seek to tie their hands and strangle their businesses.

If you think this won’t work, consider how Barney Frank is running interference for big banks like JPMorgan Chase, arguing they should not be prosecuted for actions that their subsidiary Bear Stearns took because they were forced to purchase the company during the crisis in a kind of shotgun wedding. This is a preposterous statement, the idea that how a deal gets consummated allows law enforcement to absolve the companies involved from blame for crimes they committed, but virtually any argument banks make to their willing co-conspirators in Washington has the potential to succeed.

Wonder what S&P will get in their Christmas stocking from the financial industry this year.