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 former 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, both Republican and Democratic.
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 US 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 US President Barack Obama.
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.
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