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 - Get Report) and JPMorgan Chase (JPM - Get Report) 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."

Taleb, however, said that some big banks became vulnerable because of large scale [investment banking] risk they took on their books. He described the Volcker Rule, which seeks to limit speculative trading by big banks, as a "minor thing" and raised concerns about bankers getting bonuses even as the financial institutions they worked for were bailed out by taxpayers.

"The policies did not address the cancer. What is the cancer? Lack of skin in the game by a larger class of decision maker than ever in history," Taleb said. "As a taxpayer I do not want [JPMorgan Chase & Co. CEO] Jamie Dimon to get a bonus. It's not personal."

Taleb argued that despite the Dodd-Frank Act written in the wake of the crisis there has been no structural repair to a system that has become more risky because of big banks that were combined - and became larger - during the crisis.

"Moral hazard is still there. Skin in the game is not sufficient. It is necessary. You have a lot of people taking risk sponsored or supported by the state and banking system and even more too big to fail banks and we will have to pay a larger extortion next time."

Finallly, Taleb argued that the system that big financial institutions still use to model their own risk internally to help calculate how much capital they must hold for their securities divisions, called "value at risk" modeling, is a major problem that is sanctioned by regulators. "JPMorgan uses something called value at risk," Taleb argued. "We [taxpayers] are still sponsoring their risk taking."

In response, Summers said he backed bank stress tests that the Federal Reserve and other regulators have enforced on big banks in the wake of the crisis "so that analysts can judge the risks." He also raised concerns about the government designing the compensation arrangements for financial institutions.