Ever since we began following the storyline of "Repo 105," a sly balance-sheet maneuver performed by Lehman Brothers that helped it hide billions in dodgy assets, we noted that Lehman auditor Ernst & Young had some explaining to do. That explaining has begun.

Contrarian Pundit posted a letter that Ernst & Young sent out yesterday, defending itself: not to the media, but to its clients. Check out both pages of the letter (PDFs).

A few choice bits:

Lehman's bankruptcy was the result of a series of unprecedented adverse events in the financial markets. The months leading up to Lehman's bankruptcy were among the most turbulent periods in our economic history. Lehman's bankruptcy was caused by a collapse in its liquidity, which was in turn caused by declining asset values and loss of market confidence in Lehman. It was not caused by accounting issues or disclosure issues.

....

While no specific disclosures around Repo 105 transactions were reflected in Lehman's financial statement footnotes, the 2007 audited financial statements were presented in accordance with US GAAP, and clearly portrayed Lehman as a leveraged entity operating in a risky and volatile industry.

In other words, we at Ernst & Young didn't point out that Lehman was doing things to hide its risks, but you should've known Lehman was in trouble anyway.

Felix Salmon points out that at least they're no longer denying that they knew about Repo 105.