Leading article: Lehman's dodgy figures

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"Rep 105" is not perhaps the phrase that trips most often from ordinary people's tongues. That may well be about to change after yesterday's report by a US court-appointed examiner into the collapse of Lehman Brothers – the world's biggest bankruptcy and the primary cause of the credit crunch that brought the global financial system to a juddering halt in September 2008.

"Repo 105" was the term by which the bank managed to hide the true extent of Lehman Brothers' exposure as it careered towards insolvency. By enabling the company to place as much as $50bn liabilities off balance sheet, it flattered its figures and reduced its requirements to hold capital.

The report, by Anton Valukas, is long (2,200 pages), detailed and devastating. In legal terms, its findings are careful to avoid direct blame or accusations of wrongdoing on the part of Lehman Brothers and its directors. But it does point the finger clearly at its chief executive at the time, Dick Fuld, and other senior directors and the company's auditors, Ernst and Young, for allowing the financial massaging to go on. It is also reveals that the London law firm Linklaters had sanctioned the use of "Rep 105" after the American lawyers had rejected it.

It is the role of the auditors and the lawyers, and particularly the suggestion that British law was more lax than the US, that should most concern the regulators here. In its remorseless narrative the report paints a horrifying picture of one of the world's major investment institutions hell-bent on growth, slack in its management controls and largely oblivious of the true extent of the risks it was taking.

Could it have been prevented? Would tighter regulation, tougher auditing and more active supervision have stayed its descent into bankruptcy? These are questions that need to be answered as urgently in London, where much of the dealing was done, where the accounting methods were approved and the final rescue plan of a Barclays buyout failed, as in New York.

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