Fresh from the revelations about Lehman Brothers' Enron-style financial shenanigans, stuff I looked at in my piece here we now have disclosures about the way the firm used a "debt mule" to shift billions of dollars of investments off its books.
The New York Times reports that Lehman used a firm Hudson Capital to transfer its exposure to risky investments tied to subprime mortgages and commercial real estate. Basing its report on an internal Lehman document and interviews, the New York Times finds that other other banks have been doing the same thing.
All of which raises an important question: how can anyone understand what's going on in financial statement when you have a shadow system of accounts that leave you digging and no closer to the truth? More to the point, what's protecting us from another meltdown when we don't understand the circular relationships between investment banks and their investment vehicles.
Try getting your head around this: "One of the vehicles that Hudson Castle created was called Fenway, which was often used to lend to Lehman, including in the summer of 2008, as the investment bank foundered. Because of that relationship, Hudson Castle is now the second-largest creditor in the Lehman Estate, after JPMorgan Chase. Hudson Castle, which is still in business, doing similar work for other banks, bought out Lehman's stake last year. The firm's spokesman said Hudson operated independently in the Fenway deal in the summer of 2008. Hudson Castle might have walked away earlier if not for Fenway's ties to Lehman. Lehman itself bought $3 billion of Fenway notes just before its bankruptcy that, in turn, were used to back a loan from Fenway to a Lehman subsidiary. The loan was secured by part of Lehman's investment in a California property developer, SunCal, which also collapsed. At the time, other lenders were already growing uneasy about dealing with Lehman. Further complicating the arrangement, Lehman later pledged those Fenway notes to JPMorgan as collateral for still other loans as Lehman began to founder. When JPMorgan realized the circular relationship, "JPMorgan concluded that Fenway was worth practically nothing," according the report prepared by the court examiner of Lehman. "
In other words, it's a hall of mirrors that had Hudson Castle borrowing short and then lending that money out to banks like Lehman, which would post securities as collateral. But because of the incestuous relationship between Lehman and Hudson – Lehman owned 25% of the firm, was on its board and the firm was staffed former Lehman honchos – those securities were worth zip.
The frightening part is these incestuous systems are used by other banks. That suggests there is little hope of preventing another meltdown.
no comment untill now