Summers told Taleb that he was for more capital, more liquidity, living wills for banks and procedures to wind them down. “What are you for?” he challenged.

“I’m for punishment,” Taleb replied.

Taleb outlined a system in which everyone would know which systemically important banks would be bailed out, but would presumably see strict oversight of bonuses and operations afterward. Other institutions would be left to fail, he said.

Summers countered that such a system was in place prior to the financial crisis. But when push came to shove, Bear Stearns, an investment bank that wasn’t envisioned as systemically important, was rescued. And then we all know what happened when Lehman Brothers failed.

Summers said that building a system is sort of like saying you’ll never pay ransom to kidnappers. It sounds good in practice, but in reality sometimes even the Israelis pay ransom, he said.

Taleb had the final word, saying the system should be designed so that you can’t get upside without being exposed to the downside.

The audience seemed split between the antagonists, with each getting smatterings of applause in the back-and-forth debate.

via Too-big-to-fail battle between Larry Summers, Nassim Taleb – The Tell – MarketWatch.