Lehman stopte miljarden in niet erkende dochteronderneming

[Cees Binkhorst]

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Luizen als kastelen?

While Hudson Castle appeared to be an independent business, it was
deeply entwined with Lehman.
“How can anyone — regulators, investors or anyone — understand what’s in
these financial statements if they have to dig 15 layers deep to find
these kinds of interlocking relationships and these kinds of transactions?”

Groet / Cees

April 12, 2010
Lehman Channeled Risks Through ‘Alter Ego’ Firm
http://www.nytimes.com/2010/04/13/business/13lehman.html
By LOUISE STORY and ERIC DASH

It was like a hidden passage on Wall Street, a secret channel that
enabled billions of dollars to flow through Lehman Brothers.

In the years before its collapse, Lehman used a small company — its
“alter ego,” in the words of a former Lehman trader — to shift
investments off its books.

The firm, called Hudson Castle, played a crucial, behind-the-scenes role
at Lehman, according to an internal Lehman document and interviews with
former employees. The relationship raises new questions about the extent
to which Lehman obscured its financial condition before it plunged into
bankruptcy.

While Hudson Castle appeared to be an independent business, it was
deeply entwined with Lehman. For years, its board was controlled by
Lehman, which owned a quarter of the firm. It was also stocked with
former Lehman employees.

None of this was disclosed by Lehman, however.

Entities like Hudson Castle are part of a vast financial system that
operates in the shadows of Wall Street, largely beyond the reach of
banking regulators. These entities enable banks to exchange investments
for cash to finance their operations and, at times, make their finances
look stronger than they are.

Critics say that such deals helped Lehman and other banks temporarily
transfer their exposure to the risky investments tied to subprime
mortgages and commercial real estate. Even now, a year and a half after
Lehman’s collapse, major banks still undertake such transactions with
businesses whose names, like Hudson Castle’s, are rarely mentioned
outside of footnotes in financial statements, if at all.

The Securities and Exchange Commission is examining various creative
borrowing tactics used by some 20 financial companies. A Congressional
panel investigating the financial crisis also plans to examine such
deals at a hearing in May to focus on Lehman and Bear Stearns, according
to two people knowledgeable about the panel’s plans.

Most of these deals are legal. But certain Lehman transactions crossed
the line, according to the account of the bank’s demise prepared by an
examiner of the bank. Hudson Castle was not mentioned in that report,
released last month, which concluded that some of Lehman’s bookkeeping
was “materially misleading.” The report did not say that Hudson was
involved in the misleading accounting.

At several points, Lehman did transactions greater than $1 billion with
Hudson vehicles, but it is unclear how much money was involved since 2001.

Still, accounting experts say the shadow financial system needs some
sunlight.

“How can anyone — regulators, investors or anyone — understand what’s in
these financial statements if they have to dig 15 layers deep to find
these kinds of interlocking relationships and these kinds of
transactions?” said Francine McKenna, an accounting consultant who has
examined the financial crisis on her blog, re: The Auditors.
“Everybody’s talking about preventing the next crisis, but they can’t
prevent the next crisis if they don’t understand all these incestuous
relationships.”

The story of Lehman and Hudson Castle begins in 2001, when the housing
bubble was just starting to inflate. That year, Lehman spent $7 million
to buy into a small financial company, IBEX Capital Markets, which later
became Hudson Castle.

 From the start, Hudson Castle lived in Lehman’s shadow. According to a
2001 memorandum given to The New York Times, as well as interviews with
seven former employees at Lehman and Hudson Castle, Lehman exerted an
unusual level of control over the firm. Lehman, the memorandum said,
would serve “as the internal and external ‘gatekeeper’ for all business
activities conducted by the firm.”

The deal was proposed by Kyle Miller, who worked at Lehman. In the
memorandum, Mr. Miller wrote that Lehman’s investment in Hudson Castle
would give the bank and its clients access to financing while preventing
“headline risk” if any of its deals went south. It would also reduce
Lehman’s “moral obligation” to support its off-balance sheet vehicles,
he wrote. The arrangement would maximize Lehman’s control over Hudson
Castle “without jeopardizing the off-balance sheet accounting treatment.”

Mr. Miller became president of Hudson Castle and brought several Lehman
employees with him. Through a Hudson Castle spokesman, Mr. Miller
declined a request for an interview.

The spokesman did not dispute the 2001 memorandum but said the
relationship with Lehman had evolved. After 2004, “all funding decisions
at Hudson Castle were solely made by the management team and neither the
board of directors nor Lehman Brothers participated in or influenced
those decisions in any way,” he said, adding that Lehman was only a
tenth of Hudson’s revenue.

Still, Lehman never told its shareholders about the arrangement. Nor did
Moody’s choose to mention it in its credit ratings reports on Hudson
Castle’s vehicles. Former Lehman workers, who spoke on the condition
that they not be named because of confidentiality agreements with the
bank, offered conflicting accounts of the bank’s relationship with
Hudson Castle.

One said Lehman bought into Hudson Castle to compete with the big
commercial banks like Citigroup, which had a greater ability to lend to
corporate clients. “There were no bad intentions around any of this
stuff,” this person said.

But another former employee said he was leery of the arrangement from
the start. “Lehman wanted to have a company it controlled, but to the
outside world be able to act like it was arm’s length,” this person said.

Typically, companies are required to disclose only material investments
or purchases of public companies. Hudson Castle was neither.

Nonetheless, Hudson Castle was central to some Lehman deals up until the
bank collapsed.

“This should have been disclosed, given how critical this relationship
was,” said Elizabeth Nowicki, a professor at Boston University and a
former lawyer at the S.E.C. “Part of the problems with all these bank
failures is there were a lot of secondary actors — there were lawyers,
accountants, and here you have a secondary company that was helping
conceal the true state of Lehman.”

Until 2004, Hudson had an agreement with Lehman that blocked it from
working with the investment bank’s competitors, but in 2004, that deal
ended, and Lehman reduced its number of board seats to one, from five,
according to two people with direct knowledge of the situation and an
internal Hudson Castle document. Lehman remained Hudson’s largest
shareholder, and its management remained close to important Lehman
officials.

Hudson Castle created at least four separate legal entities to borrow
money in the markets by issuing short-term i.o.u.’s to investors. It
then used that money to make loans to Lehman and other financial
companies, often via repurchase agreements, or repos. In repos, banks
typically sell assets and promise to buy them back at a set price in the
future.

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 investments
with a California property developer, SunCal, and those investments 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.

This article has been revised to reflect the following correction:

Correction: April 14, 2010

An article on Tuesday about Lehman Brothers’ relationship with a smaller
company, Hudson Castle, referred incorrectly to the status of a
California property developer, SunCal, which had joint investments with
Lehman. SunCal’s and Lehman’s investments collapsed; SunCal itself did not.

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