When people talk about the "shadow banking system" plaguing Wall Street, they are often referring to entities like Hudson Castle, a unit of Lehman Brothers (Lehman Brothers news) that seemingly existed to provide crucial financing to the firm while also masking problems by giving the bank a place to shift problem assets. 

The New York Times reports that the company created at least four separate legal entities to borrow money by issuing short-term notes and using the proceeds to make loans to Lehman and other financial companies, often via repurchase agreements, or repos. In repos, banks typically sell assets and promise to buy them back at a set price in the future. These types of vehicles are common on Wall Street still.

Hudson Castle's board was controlled by Lehman, which at one point reduced the number of director slots to one. The proposal to buy the bank came with a memo noting that such an entity could reduce "headline risk." This will no doubt generate a lot of regulatory interest. Other banks will likely be called on to reveal similar arrangements. The role of auditors and credit raters may well be questioned also.

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