Lehman Brothers may have exerted an unusually strong influence over a firm that it sold assets to and then used to obtain funding from third-parties according to a New York Times article today. The piece attempts to have a sort of "aha!" flavor to it, pointing out the fishy relationship between the bank and the firm Hudson Castle. But does the article deliver enough evidence to indicate clear wrongdoing?
First, it's important to understand what was going on. Here's an example explained through a diagram provided by the Times:
A simplified explanation: Lehman sold assets to a Special Purpose Vehicle ("Fenway"), which was owned by Hudson Capital. It then sold commercial paper to Lehman, which Lehman used as collateral for a loan from JPMorgan. That provided Lehman with cash the needed.
Things would have been much simpler if JPMorgan had just loaned Lehman money based on Lehman's own assets, but JPMorgan didn't want to take on risk associated with the troubled bank. However, JPMorgan didn't mind being exposed to Fenway, because it didn't realize that some portion of Fenway's assets (it's unclear how much) were actually Lehman's.
There are two potential problems with this relationship:
First, JPMorgan was presumably unaware that Fenway's commercial paper was tied to Lehman. Whether or not Lehman did anything wrong here, however, depends on the circumstances. If the now-failed bank intentionally misled JPMorgan or withheld information, then Lehman acted improperly. But if JPMorgan just failed to do its own due diligence, then it only has itself to blame.