Tags: Banks | Hide | Risky | Investments

Banks Continue to Hide Risky Investments in Independent Entities

By    |   Tuesday, 18 May 2010 01:40 PM

Major banks still use ostensibly independent entities to hide their bad investments, a practice which helped cause the financial crisis.

Before its collapse, Lehman Brothers used a small company named Hudson Castle to park its dangerous holdings in subprime mortgage and commercial real estate securities.

The company was supposedly independent but was actually Lehman’s “alter ego,” a former Lehman trader told The New York Times.

For years, Lehman controlled Hudson Castle’s board of directors and owned 25 percent of the firm outright. Hudson Castle also employed numerous Lehman staffers.

Banks seldom mention the obscure companies’ names outside of their footnotes and sometimes keep quiet about them all together.

“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?” Francine McKenna, an accounting consultant, told the Times.

“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.”

Most of the deals are legal, though a bank examiner says Lehman’s crossed the line.

Some experts say banks are now fully recovered.

But Elizabeth Warren, chairwoman of the Congressional Oversight Panel for the bank bailout, told CNBC more needs to be done on mortgages.

"We have to sober up on this and say, 'Look, it's time to get realistic ... about doing some principal writedowns."

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Major banks still use ostensibly independent entities to hide their bad investments, a practice which helped cause the financial crisis. Before its collapse, Lehman Brothers used a small company named Hudson Castle to park its dangerous holdings in subprime mortgage and...
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Tuesday, 18 May 2010 01:40 PM
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