Last week, the crisis was Greece and the culprit was supposed to be naked CDS. We said then that “speculation” wasn’t the villain; rather, it was structured derivatives designed to hide Greece’s perilous finances. Now, the scandal de jour is the bankruptcy examiner’s Lehman report, which blamed something called Repo 105. But, it wasn’t the repurchase agreements that scuttled Lehman’s highly-leveraged ship. As with derivatives, it was instead that a legitimate market tool was used for nefarious ends. The Greek case shows how quickly politicians will take a scandal and turn it into a shut-down. If banks aren’t careful, the repo case has the same potential to spin out of control.

What are Repo 105s? According to the fascinating Lehman report, these were repurchase agreements Lehman structured – there’s that word again – to move assets off its books as each quarter ended so that its leverage – a critical risk criterion for regulators and markets – was less alarming and, eventually, proved deceptive. The 105 in the name stands for how the deals were structured to get around GAAP and get a favorable opinion from counsel – albeit offshore attorneys who might have been a bit easier about the niceties of U.S. accounting. This worked – sort of. The deals were blessed by auditor and attorney alike and off they went.

Who knew about them? That’s to be determined despite the extensive discussion in the latest report. We know one thing, though: the magnitude of the transactions warranted board approval and review. Anything of the size of these repo transactions is strategic at best and risky for sure. The board’s defense at Lehman – as at so many other failed firms – is that the Repo 105 transactions were complex. Thus, even if brought before them, the board looked to the auditor and attorney letters and, comforted by them, approved the deals.

Having been a bank director, we understand how easy it is to go with this flow, especially for complex financial instruments. However, as with the CDS or other tortuous instruments, there’s one simple question boards should ask: what’s it for? Management should be able immediately to provide the board with a clear, satisfactory answer about the legitimate business rationale for any massive, complex transaction. And, if it can’t, the board should not permit the transaction. Simple, but a sure-fire way to prevent short-term finagles that pose profound long-term risk.

It isn’t that the biggest institutions didn’t see either the CDS or repo problem coming. With the Federal Reserve Bank of New York, a group led by – guess who – Goldman Sachs has been working on voluntary ways to curb operational and conflict problems. It first addressed credit derivatives, but doing so took more than four years before much came of it. By then, of course, the crisis was upon the waters and the tentative, contentious intra-industry work did little to stem the political backlash against over-the-counter derivatives.

As the crisis unfolded, regulators began to worry at least as much about repos as CDS. They thus again turned to the industry group which again promised in all seriousness to work on the obvious operational problems that posed significant systemic risk. That work is advancing, now on a quicker pace than before, as regulatory patience is wearing thin.

The industry should, we think, put the pedal down on repos and work hard and fast to define which are appropriate and which might be structured transactions that warrant prior board review. If it can’t differentiate the deals quickly, regulators – or, worse, Congress – could do it for them. As with CDS, any intervention by policy-makers on complex financial instruments is fraught with peril. Given how critical repos are to so many financial institutions – not to mention to the smooth functioning of the financial system – parsing the repurchase market seems to us a first-order priority.