Lehman’s Shadow World

The lead article in today’s New York Times, “Lehman Channeled Risks Through ‘Alter Ego’ Firm,” describes how Lehman used a company called “Hudson Castle” to h ide its high-risk investments from regulators and others evaluating its books.

Transactions between Lehman and Hudson exceeded $1 billion at points, and Lehman executives sat on Hudson Castle’s Board of Directors. The article describes a whole industry of shadow companies operating outside of financial regulation and oversight. The whole arrangement brings back memories of Enron, and its attempt to hide its financial situation from accountants and others examining its books.

Economic matters can seem very complex at times, and I don’t understand all the machinations described in this article. But the situation should be familiar to anyone cognizant of the human condition, the tendency for greed and corruption, and the ingenuity of lawyers and financiers to find loopholes for their clients.

In effect, Hudson Castle was used as a subordinate company in a financial shell game. It was not reported anywhere other than a footnote here and there in voluminous reports. While no laws may have been technically broken, the use of Hudson represented an attempt to defraud Lehman’s investors by preventing an accurate portrayal of its true, precarious hold on solvency.