Jeremy Warner: Lehman's: time to call in the Serious Fraud Office

Outlook Isn't it about time the Serious Fraud Office is called in over the collapse of Lehman Brothers? In the US, Federal investigators are crawling all over what is now unambiguously the worst financial crisis since the 1930s, yet in Britain, no criminal investigation of any aspect of the banking maelstrom has yet been announced. This is despite growing evidence of malfeasance in connection with the Lehman's insolvency in particular, but also more generally in the market-ing of some of the securities at the heart of the crisis. Where there is financial meltdown, there is nearly always fraud, so why isn't the SFO in there asking questions, collecting evidence and bringing prosecutions, as its US counterparts are in spades?

Britain has a notoriously more tolerant attitude to white-collar crime than the US, and this may be part of the explanation. The UK is less vigorous both at pursuing it and in prosecuting it. Yet it may also be partly down to the fact that here in Britain there were simply fewer rules to break. The regulatory regime applied to wholesale markets in London was not just "light touch", but almost wholly non-existent.

American investment banks came to London not for the restaurants, sky-high house prices, gloomy weather and appaling transport infrastructure, attractive though these attributes no doubt are, but because they could do things here that they couldn't back home. In Britain, it was possible to mix up client and proprietary interests in a manner that is not allowed in the US, where there are strict laws governing separation.

It is now conventional wisdom to argue that Hank Paulson, the US Treasury Secretary, made a huge mistake in allowing Lehman Brothers to go to the wall. The banking crisis became infinitely worse, it is argued, once it was realised that America couldn't be relied upon to rescue its banks. This led directly to the massive state bailouts seen around the world over the last month, and in Britain, the part- nationalisation of several banks.

Yet the truth of the matter is that the fallout from the Lehman's collapse was far more intense in London and Europe than it was in the US. In America, the impact has remained relatively contained and certainly no worse than Mr Paulson might have anticipated when he pulled the plug. Yet in Europe, it has had devastating consequences, with perhaps as much as $400bn of assets becoming frozen in the system.

This is because a very substantial part of Lehman's leverage was run through London, where there appear to have been virtually no constraints, either on the size of the liabilities racked up or in the way they were man-aged. How was it that the Financial Services Authority allowed the accumulation of liabilities on this scale with virtually no cash or capital in the Euro-pean bank to support them? At the end of each week, Lehman regularly swept the balance sheet clean and carted off any surplus cash back to New York. Lehman should not have been allowed to operate in London without its own liquidity pool, yet it was.

Worse, many clients have found that, unbeknown to them, their assets were being "rehypothicated" by Lehman for its own use for stock lending and other purposes. Many such clients find themselves as just ordinary creditors, eventually likely to receive no more than 30p in the pound. Why isn't the SFO trying to bring the perpetrators to justice? Perhaps it is because of the embarrassment it would cause regulators, who were not just asleep at the wheel, but perfectly tolerant of all this abuse.

As for Mr Paulson's decision – yes, it was a mistake, but only because he was perhaps ignorant of the state of anarchy that ruled in London.