WASHINGTON (Reuters) - Five former Treasury secretaries urged Congress on Sunday to bar banks that receive federal support from engaging in speculative activity unrelated to basic bank services.
"The principle can be simply stated," the five said in a letter to The Wall Street Journal. "Banks benefiting from public support by means of access to the Federal Reserve and FDIC insurance should not engage in essentially speculative activity unrelated to essential bank services."
The Treasury secretaries said, however, that hedge funds, private-equity firms and other organizations engaged in speculative trading should be "free to compete and innovate" but should not expect taxpayers to back up their endeavors.
"They should, like other private businesses, ... be free to fail without explicit or implicit taxpayer support," said the former secretaries for both Republican and Democratic presidents.
The appeal comes as Senate lawmakers are pressing ahead with efforts to produce a financial regulatory reform bill that would curb some of the practices that led to the 2008 financial crisis.
Several major financial firms collapsed, were sold or had to be bailed out after a bubble in the housing market popped, causing real estate prices to plummet and leaving markets uncertain about the value of billions of dollars in mortgage-backed securities.
The liquidity crisis that followed threatened the financial system and deepened a U.S. recession that became the worst since the Great Depression.
The regulatory reform proposal endorsed by the five former Treasury secretaries is the so-called Volcker Rule, formulated by former Federal Reserve Chairman Paul Volcker, a top economic adviser to President Barack Obama.
Obama surprised the financial markets in late January when he announced the proposal, which calls for new limits on banks' ability to do proprietary trading, or buying and selling of investments for their own accounts unrelated to customers.
Volcker told the banking committee earlier this month that a failure to adopt trading limits would lead to another economic crisis and warned "I may not live long enough to see the crisis, but my soul is going to come back and haunt you" if proprietary trading is not curbed.
The five former Treasury secretaries -- Michael Blumenthal, Nicholas Brady, Paul O'Neill, George Shultz and John Snow -- said in their letter that banks should not be involved in speculative trading activity and still receive taxpayer backing.
"We fully understand that the restriction of proprietary activity by banks is only one element in comprehensive financial reform," their letter said. "It is, however, a key element in protecting our financial system and will assure that banks will give priority to their essential lending and depository responsibilities."
(Editing by Philip Barbara)