Volcker says must let big financial firms fail

Chairman of the President's Economic Recovery Advisory Board Paul Volcker testifies before the U.S. Senate Banking, Housing, and Urban Affairs Committee on Capitol Hill in Washington, February 2, 2010.

WASHINGTON (Reuters) - Large financial institutions that engage in speculative activities for profit should be allowed to fail if they get in trouble, White House advisor Paul Volcker said on Sunday.

"If a big non-bank institution gets in trouble and threatens the whole system, there ought to be some authority that can step in, take over that organization and liquidate it or merge it -- not save it," Volcker said on CNN.

"It's called euthanasia, not a rescue."

As Congress debates financial reform in the wake of the worst financial crisis since the 1930s, Volcker has argued for fencing off investment firms primarily engaged in market speculation from commercial, deposit-taking banks.

The former Federal Reserve Chairman, most famous for raising interest rates sharply in the early 1980s to quell double-digit inflation, said the central bank and other regulators were amiss in preventing the crisis.

"I don't think there's any question the Federal Reserve and other regulators were not on top of the housing picture," Volcker said.

(Reporting by Pedro Nicolaci da Costa, editing by Philip Barbara)