Simon Johnson: Lie More, as a Business Model Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of "White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You." On Monday, Robert E. Diamond Jr., the chief executive of Barclays, one of the largest banks in the world, was supposedly the indispensable man, with his supporters contending that he was the only person who could see the global megabank through a growing scandal. On Tuesday, Mr. Diamond resigned, and the stock market barely blinked. In fact, Barclays stock was up three-tenths of 1 percent. As Charles de Gaulle supposedly remarked, "The cemeteries are full of indispensable men." Mr. Diamond's fall was spectacular and complete. It was also entirely appropriate. Dennis Kelleher of Better Markets, a financial reform advocacy group, summarized the situation nicely in an interview with the BBC World Service on Tuesday. The controversy that brought down Mr. Diamond had to do with deliberate and now acknowledged deception by Barclays staff with regard to the data they reported for Libor, the London Interbank Offered Rate. Mr. Kelleher was blunt: the issue is "Lie More," not Libor (pronounced LIE-bore). This post on his blog makes the point that this behavior affects credit transactions with a face value of at least $800 trillion. Mr. Kelleher's words may seem harsh, but they are exactly in line with the recently articulated editorial position of The Financial Times, not a publication generally hostile to the banking sector. In a scathing editorial on June 28, ("Shaming the Banks Into Better Ways"), the editorial writers blasted behavior at Barclays and nailed the broader issue in what it called "a long-running confidence trick": The Barclays affair may lack the spice of some recent banking scandals, involving as it does the rather dry "crime" of misreporting interest rates. But few have shone such an unsparing light on the rotten heart of the financial system. The editorial was exactly right about the cultural problem - within Barclays it had become acceptable, perhaps even encouraged, to provide false information. The editorial underemphasized, however, the importance of incentives in creating that culture. The employees of Barclays were doing what they were paid to do - and the latest indications from the company are that none of their bonuses will now be "clawed back." Martin Wolf, senior economics columnist at The Financial Times and formerly a member of Britain's Independent Banking Commission, sees this as the core issue: Banks, as presently constituted and managed, cannot be trusted to perform any publicly important function, against the perceived interests of their staff. Today's banks represent the incarnation of profit-seeking behavior taken to its logical limits, in which the only question asked by senior staff is not what is their duty or their responsibility, but what can they get away with. This matters, he says, because, "trust is not an optional extra in banking, it is, as the salience of the word "credit" to this industry implies, of the essence." As the editorial put it, "The bankers involved have betrayed an important public trust - that of keeping an accurate public record of the key market rates that are used to value contracts worth trillions of dollars." In the words of Mervyn King, governor of the Bank of England, "The idea that my word is my Libor is dead." Translation: No one will believe large banks again when their executives assert that they could have borrowed at a particular interest rate; we will need to see actual transaction data, i.e., what they actually paid. Presumably there should be similar skepticism about other claims made by global megabanks, including whenever they plead that this or that financial reform - limiting their ability to take excessive risk and impose inordinate costs on society - will bring the economy to its knees. It is all special pleading of one or another, mostly intended to rip off customers or taxpayers or, ideally perhaps, both. Mr. Kelleher of Better Markets has the economics exactly right. Global megabanks have an incentive to deceive customers, including both individuals and nonfinancial corporations. Their size confers both market power and the political power needed to conceal the extent to which they engage in economic fraud. The lack of transparency in derivatives markets provides them with an opportunity to cheat, but the abuses are much wider - as the Libor scandal demonstrates. The ripoff is not just of retail investors. Chief financial officers of major corporations should be up in arms. Boards and shareholders of companies that buy services from big banks should be asking much harder questions about all kinds of derivatives transactions - and who exactly is served by the terms of such agreements. As Mr. Kelleher puts it on his blog: They like to call themselves "banks," but they aren't banks in any traditional sense. They are global behemoths that are not just too-big-to-fail but also too-big-to-regulate and too-big-to-manage. Take JPMorgan Chase, for example. It has a $2.35 trillion balance sheet, more than 270,000 employees worldwide, thousands of legal entities, 554 subsidiaries and, as proved by the recent trading losses in London, a chief executive, a chief financial officer and management team that have no idea what is going on in their own bank. Let's hope for the sake of the global financial system, the global economy and taxpayers worldwide that Mr. Diamond's resignation is the first of many. What is needed is a clean sweep of the executive offices of these too-big-to-fail banks, which are still being governed by the same business model as before the crisis: do whatever you can get away with to get the biggest paychecks as possible. Remember, Mr. Diamond of Barclays was paid £20 million last year and was the British banking leader insisting that everyone stop picking on the banks. "Lie more" is just the latest example of why that all has to change, and the sooner the better.