CREATIVE ACCOUNTING

Lehman Used ‘Alter Ego’ in Final Years

In a bit of Wall Street sleight of hand, Lehman Brothers spent years moving risk off its books to a small company named Hudson Castle, its "alter ego," before its ultimate collapse, according to The New York Times. Lehman technically owned a quarter of Hudson Castle, but the board was controlled by Lehman and the firm was full of Lehman employees, all just out of regulators’ sight. Quite simply, Hudson Castle turned some of Lehman’s riskier investments into cash—in this case, many were related to subprime mortgage exposure—artificially boosting the state of the bank’s finances since 2001. But they did it in the most complicated ways that hinged on subtle, creative bookkeeping. “Lehman wanted to have a company it controlled, but to the outside world be able to act like it was arm’s length,” one former employee told The Times.