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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.

Entities like Hudson Castle are part of a vast financial system that operates in the shadows of Wall Street, largely beyond the reach of banking regulators. These entities enable banks to exchange investments for cash to finance their operations and, at times, make their finances look stronger than they are.

Critics say that such deals helped Lehman and other banks temporarily transfer their exposure to the risky investments tied to subprime mortgages and commercial real estate. Even now, a year and a half after Lehman’s collapse, major banks still undertake such transactions with businesses whose names, like Hudson Castle’s, are rarely mentioned outside of footnotes in financial statements, if at all.

The Securities and Exchange Commission is examining various creative borrowing tactics used by some 20 financial companies. A Congressional panel investigating the financial crisis also plans to examine such deals at a hearing in May to focus on Lehman and Bear Stearns, according to two people knowledgeable about the panel’s plans.

Most of these deals are legal. But certain Lehman transactions crossed the line, according to the account of the bank’s demise prepared by an examiner of the bank. Hudson Castle was not mentioned in that report, released last month, which concluded that some of Lehman’s bookkeeping was “materially misleading.” The report did not say that Hudson was involved in the misleading accounting.

At several points, Lehman did transactions greater than $1 billion with Hudson vehicles, but it is unclear how much money was involved since 2001.

Still, accounting experts say the shadow financial system needs some sunlight.

“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?” said Francine McKenna, an accounting consultant who has examined the financial crisis on her blog, re: The Auditors. “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.”

The story of Lehman and Hudson Castle begins in 2001, when the housing bubble was just starting to inflate. That year, Lehman spent $7 million to buy into a small financial company, IBEX Capital Markets, which later became Hudson Castle.

From the start, Hudson Castle lived in Lehman’s shadow. According to a 2001 memorandum given to The New York Times, as well as interviews with seven former employees at Lehman and Hudson Castle, Lehman exerted an unusual level of control over the firm. Lehman, the memorandum said, would serve “as the internal and external ‘gatekeeper’ for all business activities conducted by the firm.”

The deal was proposed by Kyle Miller, who worked at Lehman. In the memorandum, Mr. Miller wrote that Lehman’s investment in Hudson Castle would give the bank and its clients access to financing while preventing “headline risk” if any of its deals went south. It would also reduce Lehman’s “moral obligation” to support its off-balance sheet vehicles, he wrote. The arrangement would maximize Lehman’s control over Hudson Castle “without jeopardizing the off-balance sheet accounting treatment.”

Mr. Miller became president of Hudson Castle and brought several Lehman employees with him. Through a Hudson Castle spokesman, Mr. Miller declined a request for an interview.

The spokesman did not dispute the 2001 memorandum but said the relationship with Lehman had evolved. After 2004, “all funding decisions at Hudson Castle were solely made by the management team and neither the board of directors nor Lehman Brothers participated in or influenced those decisions in any way,” he said, adding that Lehman was only a tenth of Hudson’s revenue.

Still, Lehman never told its shareholders about the arrangement. Nor did Moody’s choose to mention it in its credit ratings reports on Hudson Castle’s vehicles. Former Lehman workers, who spoke on the condition that they not be named because of confidentiality agreements with the bank, offered conflicting accounts of the bank’s relationship with Hudson Castle.

One said Lehman bought into Hudson Castle to compete with the big commercial banks like Citigroup, which had a greater ability to lend to corporate clients. “There were no bad intentions around any of this stuff,” this person said.

But another former employee said he was leery of the arrangement from the start. “Lehman wanted to have a company it controlled, but to the outside world be able to act like it was arm’s length,” this person said.

Typically, companies are required to disclose only material investments or purchases of public companies. Hudson Castle was neither.

Nonetheless, Hudson Castle was central to some Lehman deals up until the bank collapsed.

“This should have been disclosed, given how critical this relationship was,” said Elizabeth Nowicki, a professor at Boston University and a former lawyer at the S.E.C. “Part of the problems with all these bank failures is there were a lot of secondary actors — there were lawyers, accountants, and here you have a secondary company that was helping conceal the true state of Lehman.”

Until 2004, Hudson had an agreement with Lehman that blocked it from working with the investment bank’s competitors, but in 2004, that deal ended, and Lehman reduced its number of board seats to one, from five, according to two people with direct knowledge of the situation and an internal Hudson Castle document. Lehman remained Hudson’s largest shareholder, and its management remained close to important Lehman officials.

Hudson Castle created at least four separate legal entities to borrow money in the markets by issuing short-term i.o.u.’s to investors. It then used that money 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.

One of the vehicles that Hudson Castle created was called Fenway, which was often used to lend to Lehman, including in the summer of 2008, as the investment bank foundered. Because of that relationship, Hudson Castle is now the second-largest creditor in the Lehman Estate, after JPMorgan Chase. Hudson Castle, which is still in business, doing similar work for other banks, bought out Lehman’s stake last year. The firm’s spokesman said Hudson operated independently in the Fenway deal in the summer of 2008.

Hudson Castle might have walked away earlier if not for Fenway’s ties to Lehman. Lehman itself bought $3 billion of Fenway notes just before its bankruptcy that, in turn, were used to back a loan from Fenway to a Lehman subsidiary. The loan was secured by part of Lehman’s investment in a California property developer, SunCal, which also collapsed. At the time, other lenders were already growing uneasy about dealing with Lehman.

Two submarines and eight vessels were spotted on Saturday about 140 km (90 miles) southwest of Okinawa, the first time Japan has confirmed the presence of Chinese submarines and such a large number of vessels in the area, defence ministry officials said.

“Such a situation has not happened before and we will investigate this, including whether (China has) any intentions against our country,” Japanese Defence Minister Toshimi Kitazawa told reporters.

The energy crisis outlined in a Joint Operating Environment report from the US Joint Forces Command, comes as the price of petrol in Britain reaches record levels and the cost of crude is predicted to soon top $100 a barrel.

“By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day,” says the report, which has a foreword by a senior commander, General James N Mattis.

It adds: “While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. Such an economic slowdown would exacerbate other unresolved tensions, push fragile and failing states further down the path toward collapse, and perhaps have serious economic impact on both China and India.”

The US military says its views cannot be taken as US government policy but admits they are meant to provide the Joint Forces with “an intellectual foundation upon which we will construct the concept to guide out future force developments.”

The warning is the latest in a series from around the world that has turned peak oil – the moment when demand exceeds supply – from a distant threat to a more immediate risk.

The Wicks Review on UK energy policy published last summer effectively dismissed fears but Lord Hunt, the British energy minister, met concerned industrialists two weeks ago in a sign that it is rapidly changing its mind on the seriousness of the issue.

The Paris-based International Energy Agency remains confident that there is no short-term risk of oil shortages but privately some senior officials have admitted there is considerable disagreement internally about this upbeat stance.

Future fuel supplies are of acute importance to the US army because it is believed to be the biggest single user of petrol in the world. BP chief executive, Tony Hayward, said recently that there was little chance of crude from the carbon-heavy Canadian tar sands being banned in America because the US military like to have local supplies rather than rely on the politically unstable Middle East.

But there are signs that the US Department of Energy might also be changing its stance on peak oil. In a recent interview with French newspaper, Le Monde, Glen Sweetnam, main oil adviser to the Obama administration, admitted that “a chance exists that we may experience a decline” of world liquid fuels production between 2011 and 2015 if the investment was not forthcoming.

Lionel Badal, a post-graduate student at Kings College, London, who has been researching peak oil theories, said the review by the American military moves the debate on.

“It’s surprising to see that the US Army, unlike the US Department of Energy, publicly warns of major oil shortages in the near-term. Now it could be interesting to know on which study the information is based on,” he said.

“The Energy Information Administration (of the department of energy) has been saying for years that Peak Oil was “decades away”. In light of the report from the US Joint Forces Command, is the EIA still confident of its previous highly optimistic conclusions?”

The last time we heard about cellphones and terrorism, it was an appeal from the NYPD to shut off cell communication during an attack. Now, Homeland Security’s Science and Technology Directorate want to use cellphones to detect the very threats that might be coordinated using wireless chit-chat. Their new program, called Cell-All, would embed inexpensive, chemical-sniffing microchips into cellular telephones. If a dangerous level of air-based toxin is detected, the phone would issue a warning ring (or vibration) to alert the owner and send a message to a centralized military monitoring station.

And, since the vast majority of Americans carry cellphones wherever they go, the program would use aggregated reports of toxin detection within a small area. If hundreds of cellphones in one location start flooding the alert system, the military knows they’ve got a serious threat to contend with. Detection, transmission and analysis would take around 60 seconds, according to a press release from the Directorate.

Given that terrorist attacks are usually launched in highly populated areas — subways, malls, office buildings — the idea of crowdsourcing the detection of toxic terror threats makes a lot of sense, and using a built-in cellphone app would give the military the ability to detect threats in every corner of the country.

Except that, for now, the program’s manager is describing the initiative as “opt-in.”

“Privacy is as important as technology,” Stephen Dennis said. “After all, for Cell-All to succeed, people must be comfortable enough to turn it on in the first place.”

That’s good news for privacy zealots and conspiracy theorists, but bad news for the program’s potential effectiveness, given that crowdsourced intelligence depends on knowing that there’s a crowd to be sourced in the first place.

Gulab Mangal, who is the governor of Helmand, said those held were planning attacks in Lashkar Gah, the province’s main city, “and the number one target was myself”.

He said that the alleged operation, by the three Italians and six Afghans, was funded by the Afghan Taliban based in Pakistan.

Suicide bomb vests, hand grenades, pistols and explosives were found in a hospital storeroom where the three worked, which is run by the Italian charity Emergency.

Police were tipped off about a plot to kill Mangal, a government spokesman, said.

Speaking from Milan, Cecilia Strada, the head of Emergency, told Al Jazeera that this was a completely groundless claim.

“It sounds quite ridiculous that they would be involved in any plot. They have spent the last few years in Afghanistan, helping and treating people for free.

“We ask that you respect their rights, first of all, the right to communicate with us and let us know where they are and what their condition is.”

Raid video

The Associated Press obtained a video of the raid that shows British troops accompanying Afghan police, soldiers and government officials to the hospital.

In a storeroom, boxes are opened containing what appear to be bullets, pistols, hand grenades, and bags of explosives.

A British soldier is heard saying that an explosives-disposal unit was on its way when the explosives were found.

Whether Kissinger played a role in blocking the delivery of the warning against assassination to the governments of Chile, Argentina and Uruguay has long been a topic of controversy.

Discovered in recent weeks by the National Security Archive, a non-profit research organization, the Sept. 16, 1976 cable is among tens of thousands of declassified State Department documents recently made available to the public.

In 1976, the South American nations of Chile, Argentina and Uruguay were engaged in a program of repression code-named Operation Condor that targeted those governments’ political opponents throughout Latin America, Europe and even the United States.

Based on information from the CIA, the U.S. State Department became concerned that Condor included plans for political assassination around the world. The State Department drafted a plan to deliver a stern message to the three governments not to engage in such murders.

In the Sept. 16, 1976 cable, the topic of one paragraph is listed as “Operation Condor,” preceded by the words “(KISSINGER, HENRY A.) SUBJECT: ACTIONS TAKEN.” The cable states that “secretary declined to approve message to Montevideo” Uruguay “and has instructed that no further action be taken on this matter.”

“The Sept. 16 cable is the missing piece of the historical puzzle on Kissinger’s role in the action, and inaction, of the U.S. government after learning of Condor assassination plots,” Peter Kornbluh, the National Security Archive’s senior analyst on Chile, said Saturday. Kornbluh is the author of “The Pinochet File: A Declassified Dossier on Atrocity and Accountability.”

Jessica LePorin, a spokeswoman for Kissinger, says that the former secretary of state dealt many years ago with questions concerning the cancellation of the warnings to the South American governments and had no further comment on the matter.

Kissinger has dealt with the issue indirectly. Writing in defense of Kissinger in 2004 when the issue arose, William D. Rogers, Kissinger’s former assistant secretary of state, said Kissinger “had nothing to do with” a Sept. 20, 1976 cable instructing that the warnings to Chile, Argentina and Uruguay be canceled. Rogers died in 2007.

“You can instruct” the U.S. ambassadors “to take no further action” on the subject of Operation Condor, said the Sept. 20 cable by Harry Shlaudeman, assistant secretary of state for Inter-American affairs, to Shlaudeman’s deputy.

The next day, on Sept. 21, 1976, agents of Chilean Gen. Augusto Pinochet planted a car bomb and exploded it on a Washington, D.C., street, killing both former Ambassador Orlando Letelier, and an American colleague, Ronni Karpen Moffitt. Letelier was one of the most outspoken critics of the Pinochet government.

Nearly a month before the blast, the State Department seemed intent on delivering a strong message to the governments engaged in Operation Condor.

An Aug. 23, 1976 State Department cable instructs the U.S. embassies in the capitals of Chile, Argentina and Uruguay to “seek appointment as soon as possible with highest appropriate official, preferably the chief of state.”

The message that was to be conveyed: the U.S. government knows that Operation Condor may “include plans for the assassination of subversives, politicians and prominent figures both within the national borders of certain … countries and abroad.”

“What we are trying to head off is a series of international murders that could do serious damage to the international status and reputation of the countries involved,” Shlaudeman wrote in a memo to Kissinger dated Aug. 30, 1976. That memo is referenced in the newly disclosed Sept. 16, 1976 cable containing Kissinger’s name.

Concerns among the ambassadors may have led to cancellation of the planned warning.

It’s all part of the recent explosion of work in an area of physics known as random matrix theory. Originally developed more than 50 years ago to describe the energy levels of atomic nuclei, the theory is turning up in everything from inflation rates to the behaviour of solids. So much so that many researchers believe that it points to some kind of deep pattern in nature that we don’t yet understand. “It really does feel like the ideas of random matrix theory are somehow buried deep in the heart of nature,” says electrical engineer Raj Nadakuditi of the University of Michigan, Ann Arbor.

All of this, oddly enough, emerged from an effort to turn physicists’ ignorance into an advantage. In 1956, when we knew very little about the internal workings of large, complex atomic nuclei, such as uranium, the German physicist Eugene Wigner suggested simply guessing.

Quantum theory tells us that atomic nuclei have many discrete energy levels, like unevenly spaced rungs on a ladder. To calculate the spacing between each of the rungs, you would need to know the myriad possible ways the nucleus can hop from one to another, and the probabilities for those events to happen. Wigner didn’t know, so instead he picked numbers at random for the probabilities and arranged them in a square array called a matrix.

The matrix was a neat way to express the many connections between the different rungs. It also allowed Wigner to exploit the powerful mathematics of matrices in order to make predictions about the energy levels.

Bizarrely, he found this simple approach enabled him to work out the likelihood that any one level would have others nearby, in the absence of any real knowledge. Wigner’s results, worked out in a few lines of algebra, were far more useful than anyone could have expected, and experiments over the next few years showed a remarkably close fit to his predictions. Why they work, though, remains a mystery even today.

What is most remarkable, though, is how Wigner’s idea has been used since then. It can be applied to a host of problems involving many interlinked variables whose connections can be represented as a random matrix.

The first discovery of a link between Wigner’s idea and something completely unrelated to nuclear physics came about after a chance meeting in the early 1970s between British physicist Freeman Dyson and American mathematician Hugh Montgomery.

Montgomery had been exploring one of the most famous functions in mathematics, the Riemann zeta function, which holds the key to finding prime numbers. These are numbers, like 2, 3, 5 and 7, that are only divisible by themselves and 1. They hold a special place in mathematics because every integer greater than 1 can be built from them.

In 1859, a German mathematician called Bernhard Riemann had conjectured a simple rule about where the zeros of the zeta function should lie. The zeros are closely linked to the distribution of prime numbers.

Mathematicians have never been able to prove Riemann’s hypothesis. Montgomery couldn’t either, but he had worked out a formula for the likelihood of finding a zero, if you already knew the location of another one nearby. When Montgomery told Dyson of this formula, the physicist immediately recognised it as the very same one that Wigner had devised for nuclear energy levels.

To this day, no one knows why prime numbers should have anything to do with Wigner’s random matrices, let alone the nuclear energy levels. But the link is unmistakable. Mathematician Andrew Odlyzko of the University of Minnesota in Minneapolis has computed the locations of as many as 1023 zeros of the Riemann zeta function and found a near-perfect agreement with random matrix theory.