LAS VEGAS (The Deal) -- Former Treasury Secretary Lawrence Summers and Nassim Taleb, author of "The Black Swan," on Thursday clashed over whether policy-makers have moved toward solving the issue of systemically risky banks that emerged during the 2008 crisis or just made the financial system more dangerous for the next downturn.
"We live under pressure of extortion by the financial system," Taleb said to applause at the SALT hedge fund conference in Las Vegas. "Let's go back to when banks were boring like utilities and didn't taking too much risk and taxpayer money and investment banks were the ones taking risk and would go bust like Drexel did."
At issue in their debate, was whether the system would be safer if the 1933 Depression-era Glass-Steagall Act had remained in force. The act had kept commercial banks out of the investment banking business until a statute, that was supported by Summers, was approved in 1999 that allowed commercial banks to combine with investment banks. Restoring Glass-Steagall would require big banks such as Citigroup (C) and JPMorgan Chase (JPM) to break in two.
Summers also was director of the White House National Economic Council for the Obama administration between 2009 and 2010 and helped develop some of the post-crisis policies. Democrats' criticism of Summers' role in the undoing of Glass-Steagall factored in the former Treasury Secretary's withdrawal from running for the head position at the Federal Reserve last year.Summers argued that the institutions that got in trouble in 2008 were not primarily firms that combined investment banks and commercial banks. He noted that Bear Stearns and Lehman Brothers, both central to the crisis, had no commercial banking units. In addition he said two other key companies involved in the crisis, American International Group Inc. and Washington Mutual Bank FSB, did not have investment banks. Summers said the reforms after the crisis, which included higher capital, more liquidity, derivatives clearinghouses, living wills and a system to resolve a financial institution outside of traditional bankruptcy have made the system safer. "The idea that this is all about combination of banking and investment banking isn't a plausible concept," Summers retorted. "Every time someone has attempted a version of your idea which is to have a heavily regulated, very safe utility bank system and then have all the rest outside that system, what inevitably happens is that the outside stuff becomes hugely risky, consequential and dangerous for the rest of the economy. That's why it's a much harder problem."
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