And Yet, No One is In Jail

Best and the brightest:

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.

Look- I know I’m just a layman, but this sounds like EXACTLY what Andrew Fastow, the Chief Financial Officer at Enron, did for years before Enron finally crashed and burned. He’s in jail.

But these guys raped everyone, walked away with millions, and are probably thick as thieves with a new crowd in some other organization where we are told it would be Stalinesque to tax their bonuses.

56 replies
  1. 1
    WereBear says:

    Bonus for what?

    It’s like the Mafia handing out bonuses for Most Guys Whacked This Year. Or Most Improved Intimidation.

    Actually, I guess they do. But it’s wrong!

  2. 2
    PaulW says:

    Who do we call to arrest them? Who would answer the call?

  3. 3
    David in NY says:

    Oh, but Fastow called his off-the-books entities “Raptors” which shows that they were really bad. Who could complain about something called “Hudson Castle”? /stupidity

    In other words, I too thought of Enron when I read this article this morning.

  4. 4

    More fun busting a stoner with an ounce of pot than a bankster, apparently.

  5. 5
    Legalize says:

    But if we put these fellas in jail this will make it harder for the Big Very Important Investment Firms to attract top flight crooks talent!

  6. 6
    Zifnab says:

    @PaulW: The SEC? The IRS? The FBI? Hell, local law enforcement should be rounding these yucksters up and frog marching them into court.

    But who is going to arrest the rich guy, amirite? They’ve got lawyers and Senators to defend them, paid for with all the money they stole from you. So… :-p

  7. 7
    AnotherBruce says:

    Yes, these crimes financial matters are way too complicated for us simple laymen to understand.

  8. 8
    Luthe says:


    Who do we call to arrest them? Who would answer the call?


    @David in NY:

    Who could complain about something called “Hudson Castle”?

    A confused stoner in search of a greasy cheeseburger?

  9. 9
    mr. whipple says:

    C-span 3 has the Senate Gvt Affairs Subcmte hearing on WaMu.

  10. 10
    cleek says:

    big company uses satellite company to avoid regulators ?

    i do not like it, Sam I Am.

  11. 11
    burnspbesq says:

    No one is in jail because an article in the NYT, no matter how well researched and written, is not the same as admissible evidence that proves every element of a criminal offense beyond a reasonable doubt. The criminal justice system moves at its own pace, and the reasons why it moves slowly are essential to the preservation of our Constitutional scheme of ordered liberty.

    I assume y’all know that and are just venting an entirely understandable frustration. Surely you’re not seriously suggesting that we treat these Wall Street types the same way the previous Administration treated ignorant peasants mistakenly scooped up from Afghan battlefields.

  12. 12
    ricky says:

    @David in NY:

    Perhaps they should have just called it “Stickup…Everybody Freeze.”

    Of course Fastow was profiting directly off the Raptors. Perhaps the Lehman boys just did thier laundry in the Castle.

  13. 13
    Brian J says:

    I understand the difficulty in trying to keep up with the many different ways corporations try to evade regulations, but if congress really wanted to put its foot down, why can’t it just try to constantly chase them? If it’s never possible to get ahead, why can’t it always be right behind, the point where it becomes frustrating to try to game the system?

    Or, barring that, why not just tax these guys, either at the institutional level or at the individual level? Supposedly, President Obama is against a stock transaction tax, but it’s not clear, to me at least, whether this is ideological, or simply because he feels it’s not going to pass. If it’s the latter, he needs to gather Pelosi and Reid and tell them to get it done. He need to draw a line in the sand and inform any Democrats that if they vote against this, they will receive no funds from any sort of Democratic campaign office. A simple, confident explanation that this isn’t trying to drive the industry out of business, just to correct some imbalances and/or end excesses, would almost certainly be well supported by the public.

  14. 14
    Keith G says:

    Remember boys and girls, laissez-faire capitalism is god’s dearest gift to human kind.

  15. 15
    SGEW says:

    “We must look forward, not backwards.”

    And always twirling, twirling, twirling towards freedom.

  16. 16
    Brian J says:


    I don’t think anybody here is suggesting anything like that. It’s just that, time after time, we keep seeing articles that make us go, “Well, what the fuck?” in regards to what the financial industry has been doing. I don’t know about anyone else, but I’m willing to reserve judgment until I learn more about it. But even that said, as I follow financial blogs, I see some of the well informed writers having similar reactions. Take a look at this blog post from Ryan Chittum, who was a reporter at The Wall Street Journal, from The Audit, CJR’s financial blog. Like John Cole, he reads the article from The Times and thinks “Enron.”

  17. 17


    I assume y’all know that and are just venting an entirely understandable frustration. Surely you’re not seriously suggesting that we treat these Wall Street types the same way the previous Administration treated ignorant peasants mistakenly scooped up from Afghan battlefields.

    You should not assume that on my account. I would have no problem whatsoever having these hideous jackal renditioned to Gitmo and the ensuing “drownproofing” placed on pay-per-view. (Got to recoup those costs some way!)

  18. 18
    Napoleon says:


    At this point in the Savings and Loan crisis several hundred people had already been convicted. Compare that to today, nearing 2 years in and yet no one has even been charged.

  19. 19
    Rosalita (Formerly GReynoldsCT00) says:

    Surely you’re not seriously suggesting that we treat these Wall Street types the same way the previous Administration treated ignorant peasants mistakenly scooped up from Afghan battlefields

    I guess you have a point, but it would make us feel better!


  20. 20
    Felix Holt (formerly McGeorge Bundy) says:

    This is only tangentially related to the topic at hand, but tonight’s new FRONTLINE episode is entitled “Obama’s Deal,” all about behind-the-scenes dealmaking, lobbyists, etc. during HCR negotiations. Trailer can be seen here:

    Disclaimer: I don’t work for PBS.

  21. 21
    WereBear says:

    @Brian J: I’m willing to reserve judgment until I learn more about it.

    Then you’re a better man than I am, Gunga Din. There’s been plenty of outright admissions of chicanery, which they have excused as “it wasn’t illegal!”

    That can be corrected.

  22. 22
    Tokyokie says:

    @David in NY:

    Hudson Castle? Sounds a whole lot like Castle on the Hudson, which is a reference to the maximum-security prison in Ossining, N.Y.

  23. 23
    El Tiburon says:

    That’s exactly what I was thinking Cole, sounds exactly like Enron sans the Star Wars-themed names for all of the secret companies and deals.

    Don’t worry, Obama and Dodd are on it. They will make it so these “too large to fail” institutions will only make a few billion instead of a lot of billions.

  24. 24
    RareSanity says:


    While everything you stated is undeniably true, there is larger statement going unsaid.

    Even though it is blatantly obvious to anyone looking that lying and stealing is going on, there does not exist a set of laws to prosecute this behavior.

    Laws need to updated to include measures for “fraud by obfuscation”. Simply defined, a transaction, or series of transactions where the only benefit of the transaction is to obfuscate negative financial information.

    The other thing that needs to happen is the term “white-collar” crime needs to purged from the vocabulary of the justice system. Theft is theft, fraud is fraud, criminal conspiracy is criminal conspiracy. Let a couple of board members find themselves in a cell next door to some incarcerated mobsters and see how quickly the rest start to get their act together.

    It would go without saying that once any fraud is uncovered, the “corporate wall” is removed any executive involved in planning or furtherance of the fraud should be prosecuted under RICO statues, with RICO penalties. A company that engages in institutionalized thief is a criminal enterprise, period.

  25. 25
    John Cole says:

    @burnspbesq: When you are done here, you going to go help OJ look for the real killers?

  26. 26
    chowkster says:

    I used to work for these assholes (as a lowly programmer). So glad I got out before the bankrupcy.

  27. 27
    Zifnab says:

    @burnspbesq: While all of this is absolutely fascinating and insightful, the banking malfaesance dates back to 2005 and earlier. The fallout began in 2007 and continues to this day. The bad business practices – as far as I can tell – are still legally permissible if not actively employed by the remaining firms.

    If this was a pot bust, the busted dealer would be half way through the 10 year prison sentence by now. Assuming someone eventually does get busted for the Lehman / Bear Sterns / WaMu / etc mess, he’ll be looking at time inconvenienced.

  28. 28
    BenA says:

    The only two people I know that went after these guys regularly was Spitzer, who we can’t have in politics because he’s a Democrat who was shtupping a prostitute… if he was a Republican he’d still be Gov. of NY and Blumenthal who is running for Senate in CT.

    Of course that might just be the easiest way to make a political career for an AG in NY or CT pay off just pick off some low hanging fruit… while ignorning the real problems.

  29. 29
    Brian J says:


    I don’t mean to suggest that these guys should be let off, only that because I don’t know the financial industry that well, what sounds funny to me might be because I don’t know it that well. Like me, I think most people are willing to wait before they shoot. The problem is, even people who are far more knowledgeable than me and most others are now seeing what’s happening and are expressing horror.

  30. 30
    chowkster says:

    These guys should be dealth with the same way FBI deals with the mob. Find one guy who knows where the bodies are burried; work on him until he breaks and then go after the rest of them.

  31. 31
    soonergrunt says:

    If you want to get an inkling as to just how pervasive the fraud, theft, incompetence, magical thinking, and all the other bad shit associated with this mess is and was, you should be listening to This American Life.
    Their series over the last year has been amazing.

  32. 32
    RareSanity says:


    I just realized that I said “statues” instead of “statutes”, my bad…

    Although, I do wonder what a RICO statue would like like…Tony Soprano?

  33. 33
    MattR says:

    @RareSanity: I am more curious about a statue of limitations.

  34. 34
    cfaller96 says:

    John, you’re only citing the most visible part of this problem. Lehman’s $50 billion Enron-esque fraud story broke a few weeks ago, and both the financial press and industry basically shrugged their shoulders and kept walking. To reiterate- of those who should be most disturbed by a $50 billion dollar fraud, no one was even surprised.

    The only conclusion to draw from this is that Enron accounting was/is a normal part of business on Wall Street. Massive fraud is common practice in our banking industry.

    That is a big fucking deal.

  35. 35
    burnspbesq says:

    @John Cole:

    John, you’re either for the rule of law or you’re not.

    Which is it?

  36. 36
    Ash Can says:

    @John Cole: I would expect you of all people to understand that shooting the messenger doesn’t solve the problem.

    Enron collapsed in 2001. Fastow was sentenced five years later. Burnspbesq is right. The American justice system moves slowly, as it should.

    ETA: The italicized phrase above contains a link to the 9/26/06 Houston Chronicle article about Fastow’s sentencing.

  37. 37
    Joshua says:

    Reagan’s DOJ sent hundreds of people to jail when S&L fell apart and it got criticized for not sending more.

    So far almost 2 years after the crash exactly zero people have been sent to jail and nobody cares.

    This country has degraded over the past 20 years. Rapidly and noticeably.

  38. 38
    John Cole says:

    @burnspbesq: I’m for it. Let’s start applying it.

  39. 39
    Mike Kay says:

    @Felix Holt (formerly McGeorge Bundy): Ironic. PBS was created by wheeler-dealer Lyndon Baines Johnson, and now PBS is gonna dump on horse trading.

    And if Obama didn’t do any bartering, they would have been calling him another failed Utopian, who didn’t learn from LBJ.

  40. 40
    Mike Kay says:

    @Joshua: Obama inherited the greatest justice department ever. High marks to Alberto Gonzalez and how he built up the department that was left in tatters by Janet Reno.

    Unraveling credit default swaps and derivatives are no different than passing a bad check – easy as pie, a cave-man can do it.

  41. 41
    ThatLeftTurnInABQ says:


    John, you’re either for the rule of law or you’re not.

    As John so succinctly notes in #38, having a little bit of rule o’law would be a nice change of pace. How is this going to happen when the malefactors are orders of magnitude larger and more complex than the investigators? At the time of the Treasury Dept imposed stress tests on the banks which were carried out last year Yves Smith pointed out that the number of forensic accountants being deployed to test the top 10 banks alone was barely sufficient to even begin the task of looking through the books of just a single firm. Where is the DOJ or the FBI or the SEC going to get the hordes of people with the technical skills needed to investigate and prosecute our shadow banking crime lords? If there has been a massive increase in staffing, I must have missed the news story about it. Without the numbers of skilled auditors needed for this task, we might as well be hitting the Normandy beaches with the US Army circa 1940. So the status quo is that there aren’t going to be any investigations and prosecutions, except for perhaps one or two showpiece efforts that will be little better than kabuki, because we have not invested in the resources to make it happen otherwise. In this case Too Big to Fail has morphed into Too Big to Investigate.

  42. 42
    Shygetz says:

    @burnspbesq: Actually, NYT articles are admissible as evidence. The rule of law explicitly requires that the law be consistently applied to all classes of society in order to achieve justice. Are you asserting that this is the case? If not, then the rule of law has already been disregarded, and we must seek justice elsewhere.

    Unless you happen to like feudal caste systems. Maybe we should start a “Divine Right of Bankers” philosophical movement?

  43. 43
    slippy says:

    @burnspbesq: We’re way past the unneccessary detention and harassment engaged in by official government employees and we’ve slid down the ladder a few rungs to the Marie Antionette there’s no bread let ’em eat cake kind of slow burning rage.

    The teabaggers, bless their ignorant little hearts, have plenty of reasons to be the angry people that they are — if they only knew to be angry at the correct people. But since the assjacks who raped our economy and murdered our future and left our nation for dead have still not even been lightly slapped on the wrist the rage will continue even if it’s focused on the wrong targets and it will eventually explode.

    Slow justice in this case may mean no justice at all and instead a long period of civil unrest. In addition to heavily incarcerating most of Wall Street the few honest or at least not completely blackened with sin souls who remain need to have an example set for them of what happens when you deliberately shipwreck the economy in order to cash in on some fucking derivatives scheme that 99% of the country doesn’t understand and that 100% of everyone would readily agree does not count as useful work or in fact any kind of contribution to society whatseover.

  44. 44
    Brian J says:


    This is a side concern, to be sure, but you’d think that with so many people unemployed who would have some relevant experience in finance and accounting or something similar, they wouldn’t have to beg to hire. Giving those people jobs would, in fact, act as a stimulus.

  45. 45
    eastriver says:

    This is exactly what Fastow and Enron did with the Raptor and LJM funds. As soon as collusion is proven between Lehman and Hudson, indictments will follow. And it won’t take 5 years, like Fastow. The Feds will use the Fastow prosecution playbook against Hudson.

    I can’t wait to find out if Kyle Miller, the Fastow of Hudson/Lehman, made the same kinds of outrageous money Fastow did ($60m+). I’m guessing not.

  46. 46
    ThatLeftTurnInABQ says:

    @Brian J:

    FYI, here is the article last year (April 9, 2009) where Yves Smith compared the number of examiners to the scale of the problem

    Quelle Surprise! Bank Stress Tests Producing Expected Results!


    We said from the beginning the stress tests were a complete sham. Just look at the numbers. 200 examiners for 19 banks? When Citi nearly went under in the early 1990s, it took 160 examiners to go over its US commercial real estate portfolio (and even then then the bodies were deployed against dodgy deals in Texas and the Southwest).

    Extrapolating from those numbers, it looks to me like at a bare minimum the DOJ or FBI are going to need hundreds of examiners just to perform an investigation of a single bank, and scale that up to thousands if they want to go thru the dirty laundry of the industry as a whole just at the level of the top players.

  47. 47
    Brian J says:


    Yikes. That’s all I can say.

    Want to know what I find really scary? The thought of McCain being president right now, with Bible Spice possibly having a seat at the table. As much as I admire Obama, I’m disappointed, to say the least, that he hasn’t taken a harder line with the financial industry. But would there have been any hope, at all, that McCain and the Republicans would have been better? I’d guess not.

  48. 48
    Remember November says:

    We need someone like Elizabeth Warren on SCOTUS to cock punch these clowns and say “it’s NOT OK to grift the American people!” THe TP anger needs to be directed at these people, not healthcare!

  49. 49
    burnspbesq says:

    @John Cole:

    Cool. How about orchestrating a public outreach campaign, similar to what we recently did contacting Congresscritters about HCR, directed at the U.S. Attorney for the Southern District of New Yorl and the head of the Enforcement Division of the SEC? Let them know that you’re watching, and that you expect them to do their jobs.

  50. 50
    Maude says:

    The Republicans have been blocking appointments at the agencies that need the people to look into the investment banking, hedge funds etc doings.
    These cases are very hard to investigate. After the S&L crisis, they got better at hiding things. Also the deregulation is a concern now.
    It will take time. They have gotten some hedge fund guys.
    If it’s done wrong, they get off.
    I’d like to see them swing, but it’s a long haul to catch these frauds.

  51. 51
    J. Michael Neal says:


    At this point in the Savings and Loan crisis several hundred people had already been convicted. Compare that to today, nearing 2 years in and yet no one has even been charged.

    Charged with what? Tell me the crime they committed. Not the evil they committed. Not the economic destruction they caused. Neither of those are in dispute. However, if you want someone charged, you have to have a specific crime that you believe they committed.

    A lot of people here are arguing that this is exactly what Enron did. Well, maybe. It looks to me like it served roughly the same purpose, but I’d bet that it was structured differently. The excerpt says that Lehman had 25% of the equity. With that in mind, my guess is that they accounted for it with the equity method. Whether or not they should have consolidated depends entirely upon exactly how it is structured. It is hard to know whether a subsidiary firm owned at less than 50% qualifies as a variable purpose entity when it is complex and designed specifically with avoiding consolidation in mind. Frankly, this is another one of those places where the rules are extremely hard to write and are always going to be evadable. As a general rule, investments with less than 50% equity should be accounted for with the equity method, so you can’t just say that everything should be consolidated; that would be nuts.

    And, if you didn’t really follow that last paragraph, you probably shouldn’t be arguing that we should be prosecuting here, because you don’t know. I know the rules, but without looking at the actual structure of Hudson Castle, I don’t have any idea whether or not laws were violated, either.

  52. 52
    J. Michael Neal says:

    @Brian J:

    This is a side concern, to be sure, but you’d think that with so many people unemployed who would have some relevant experience in finance and accounting or something similar, they wouldn’t have to beg to hire. Giving those people jobs would, in fact, act as a stimulus.

    Raises hand. Though, my actual experience auditing is zero. However, I do have a bachelor’s degree in statistics, will have a master’s in accounting in four weeks, and worked in the finance industry.

    The Office of the Comptroller of the Currency rejected me.

  53. 53
    El Cid says:

    It would be my guess that given 30 years of deregulating, anti-regulatory leadership, legal department strategy research, and political leaders willing to restrain prosecutions, either no serious laws were broken (i.e., we helped make the thieves’ work legal) or there is little to no likelihood of criminal investigation or prosecution.

    That’s a political guess, not a legal analysis.

  54. 54
    mclaren says:

    PETA organizes demonstrations against vivisection, but I’m firmly in favor of it…for corrupt CEOs who pull this kind of shit.

  55. 55
    Batocchio says:

    It is exactly like what Enron did, or so close the distinction doesn’t matter.

  56. 56
    jack says:

    To the guy who mentioned Frontline… why mention it if you don’t take the second to post a link to the actual video.

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