Saroff's Rule, Once Again

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Saroff's rule: If a financial transaction is complex enough to require that a news organization use a cartoon to explain it, its purpose is to deceive

The New York Times has a description of how Lehman Brothers used a front company to obtain credit and conceal debt:

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.

Not surprised about their doing this, though I am surprised that this is, at least nominally, legal.