How the Wall Street reformers are winning

If you wanted any further evidence that regulators have dramatically slowed down the Wall Street profit machine, look no further than Morgan Stanley's earnings Friday morning, which showed a pretax loss in its institutional securities business of $1.1 billion.

The number was dragged down by legal expenses but also included a drop in fixed income and commodities sales and trading revenue to $694 million from $811 million a year ago.

Paul Giamou | Aurora | Getty Images

The results came after Goldman Sachs reported a 13 percent drop in fixed income currency and commodities revenue to $8.65 billion. For the year, Goldman earned a total of $8.04 billion. That's still a lot of money. But consider that in 2007, before the financial crisis, Goldman earned nearly $12 billion for the year.

(Read more: Raising the debt limit a breeze? Don't bet on it)

Citigroup, JPMorgan Chase and Bank of America also all posted very modest results this week, leading to a sharp selloff in bank stocks as investors begin to realize that there will be no swift return to the pre-crisis days of eye-popping Wall Street profits.

The king of the banking industry is now far more sedate Wells Fargo, which wrested the title of most profitable financial institution in America from JPMorgan.

All the data support a controversial argument I made in POLITICO this week that Wall Street reform in Washington, coupled with higher capital standards coming from international regulators in Basel, Switzerland, have made big U.S. banks less risky and less profitable institutions.

Advocates of even stronger financial reform did not like this argument, saying regulators should have gone further to break up the biggest banks and not included any exceptions to the Volcker Rule ban on banks trading for their own accounts or owning stakes larger than 3 percent in private equity and hedge funds.

(Read more: Volcker rule changes bring relief to banks)

But these complaints do not change the fact that many of the biggest banks are selling off their private equity and hedge fund businesses entirely while maintaining much less risky balance sheets and earning far less for high-risk proprietary trading.

Just this week, the Office of the Comptroller of the Currency—once viewed as an entirely toothless regulator—moved to implement tougher standards for risk management at the largest banks and to speed up punishment for offenders.

It is true that much of the success of financial reform will depend on final implementation of higher Basel capital standards as well as how regulators choose to enforce the Volcker Rule. If permitted hedging and market making turns back into casino-style proprietary trading, then the critics of reform will be proven correct.

And all the criticism that Wall Street fought hard against the Dodd-Frank law as well as new capital standards is also 100 percent true. It's just that the banks lost most of those battles, even if the final reform product is not as draconian as the most ardent of reformers would like.

It's also true that the current appropriations bill that just passed Congress funds front-line regulators at much lower levels than the White House and congressional Democrats requested. That will make the job of enforcing financial reform more difficult and represents a win for Wall Street.

(Read more: Goldman beats as investment banking offsets trading woes)

Banks face tougher rules on risk

But those rules are still on the books and the banks have already spent the last couple of years trying to comply with them. Morgan Stanley, for instance, is in the process of selling its commodities trading unit and is focused on its asset management business as well as its strong merger advisory and equity underwriting operations.

Citigroup and Bank of America have sold off proprietary trading desks and private equity and hedge fund businesses. And the market for many of the riskiest products that Wall Street created during the real estate bubble, including collateralized debt obligations, no longer really exists.

Want a simple way to measure how much Washington trounced Wall Street in the regulatory reform war? Just look at Goldman's return on equity, a measure of how successfully the bank deploys its capital.

Before the financial crisis, Goldman regularly posted dazzling returns on equity of over 30 percent. Now it struggles to get above 10 percent. The firm reached a 12.7 percent return in the fourth quarter but only by cutting bonuses, with payroll falling 3 percent to $12.6 billion.

That is still a lot of money per person at Goldman. And many other bankers are still making far more than the average American (and perhaps more than they deserve). So there will be no quieting the break-up-the-banks-and-jail-the-bankers crowd. But by way of comparison, Wall Street is nothing like the money machine it was before the financial crisis and reform is having a major impact.

—By Ben White. White is POLITICO's chief economic correspondent and a CNBC contributor. He also authors the daily tip sheet POLITICO Morning Money [politico.com/morningmoney]. Follow him on Twitter @morningmoneyben.