Repo 105 - Symptoms or disease?

As I asked in the previous entry about the swelling scandal surrounding Lehman's use of the so-called repo 105 accounting dodge, 'Coming to a bank near you soon? Already arrived but no one has told you? Never forget Enron and Arthur Andersen.'

So yesterday the Securities and Exchange Commission, who regulate US markets, initiated their investigation into this scandal by asking 'more than 20 financial groups' whether they used repos for the same purpose. I shall be a bit surprised if they don't use repos in general, given that repos are a perfectly respectable hedging device, but it will be interesting to see how they are used.

The SEC are not planning to get to the real bottom, though. According to the FT, their investigation will only ask 'whether companies booked repos as asset sales for accounting purposes over the past three years, and whether these deals were concentrated with certain counterparties or certain countries'.

The latter part suggests that they are looking for whether other companies or governments were parties to this dubious process, which is essential to understanding how widespread it is. But the former - the limit to three years - suggests a residual timidity about looking at real roots of the crisis - the consistent misleading of the markets and regulators over much longer periods, to build up extremely profitable but highly risky positions that cumulatively led to our collective fall. We know that Lehman's use of repo 105 went back far longer than three years; it is preposterous to believe that this only because a useful accounting tool for staving off crisis immediately before the crisis itself.

Understanding the scale and exact nature of the crisis means looking at much more than the shifting tectonic plates; it is also important to know why - and when - the decision was made to undermine the building' foundations, which made the quake so disastrous.

It will be equally interesting to see how this investigation is report by the SEC. What if it turns out that a significant number of these financial groups not only used this misleading technique in the past but are using it now? Will we hear? And exactly what will we hear. After all, what would be the repercussions of discovering that, yet again, the books are being massively cooked?

I look forward to future reports.