Larry Summers and Nassim Taleb Go Mano a Mano
At last week’s SALT conference, the former U.S. Treasury secretary and bestselling author engaged in a fierce debate over how to avoid another financial crisis.
Held every May at Las Vegas’s opulent Bellagio hotel and casino, the SALT Conference draws some of the biggest names in alternative investments, including Steven Cohen, John Paulson and, this year, David Tepper. The four-day gathering, hosted by $10.5 billion, New York–based fund-of-hedge-funds firm SkyBridge Capital, attracted other celebrities too. At this year’s sixth annual installment, some 1,800 guests were treated to lunches with astrophysicist Neil deGrasse Tyson and NBA legend Magic Johnson, who appeared fresh from the controversy over racist remarks by Los Angeles Clippers owner Donald Sterling. Academy Award–winning actor Kevin Spacey lectured captivated guests, and after-hours the ties came off for the Lenny Kravitz show, where tired financiers bobbed their heads to “American Woman” and “Fly Away.”
Amid the mostly convivial fare, one event stood out: a chippy debate on banking policy between Nassim Taleb, bestselling author of The Black Swan: The Impact of the Highly Improbable, and former U.S. Treasury secretary Larry Summers, moderated by SkyBridge founder Anthony Scaramucci.
Taleb, distinguished scientific adviser at Miami-based hedge fund firm Universa Investments, didn’t temper his criticism of the Obama administration’s postcrisis financial policies even as he sat next to Summers, who helped forge those policies as head of the administration’s National Economic Council. Taleb contended that not enough has changed to rein in risk-taking by major banks, that “too-big-to-fail” remains a problem and that banks’ lack of “skin in the game” has kept the scales tipped in their favor. “A utility should not be a casino,” he opined, calling for a return to boring banking. He noted that JPMorgan Chase & Co. has continued to use the controversial value-at-risk metric, even though VaR enabled “the London Whale,” trader Bruno Iksil, to pile on credit exposure that ended up costing the bank more than $6 billion in the spring of 2012. The work done to fix the economy since the crisis has been “cosmetic,” Taleb contended.
Taleb’s pronouncement could stem from the fact that, despite Iksil’s multibillion-dollar loss for JPMorgan, the bank delivered record high profits later that year. As a taxpayer, Taleb noted, he doesn’t like that JPMorgan CEO Jamie Dimon is paid a bonus. Allowing for the government to act as a “sponsor of risk” is unacceptable, he said, offering the winding down of failed hedge fund firm Long-Term Capital Management as an example of the right way for the government to act in an emergency. (In September 1998 the New York Federal Reserve Bank orchestrated a $3.6 billion bailout of LTCM by 14 large banks, including JPMorgan, after the hedge fund firm suffered billions in losses that summer.)
A testy Summers appealed for “factual discipline,” pointing out that Lehman Brothers Holdings and several other big firms stung by the crisis didn’t have commercial banking units. Policymakers have worked to address systemic problems, he asserted, citing bank stress tests, higher capital requirements and the adoption of rules for resolving failed banks. The Harvard University economist challenged Taleb to move from finger-pointing to tangible solutions. “I’m for punishment,” Taleb replied.
Taleb has since spoken out to express his unhappiness with Summers’ comportment during their debate, claiming the Harvard man broke agreed-upon rules for the talk. But for a statistician like Taleb, a rematch with Summers would be the ultimate black swan event.