Lehman: A Frog Turned Prince In the Making

There's a very fine line between love and hate. Back in the day, when AMD was sitting near its 52 WL for an exteded period, I hated it with every fiber of my being. Then, it all changed as the magic of high beta touched its soul and AMD turned from a frog into a prince. I had been in AMD for at least a year and a half - perhaps two. Then, over the course of a few months, it practically tripled in price and I got out at exactly the right moment. Fact! No need to downplay such an accomplishment especially when I was wrong for two years to begin with.

Now I get the feeling that my Lehman bonds will enjoy a similar fate one day. Lehman and JP Morgan have reached a deal for billions on claims. As part of the deal, Lehman will receive $9 billion worth of illiquid securities whilst JPM gets $557 million in cash and keeps $7.7 billion in collateral. This is fantabulous news for any Lehman bondholders. But I think it's also fantabulous news for JPM, which would have kept all of the most valuable assets, leaving the Lehman estate with the less valuable ones, since it is one of the smartest banks on the planet. This is the part that's unfair and let's hope that Lehman's lawyers are worth their weight in gold diggin'. The major bit of good news out of this deal is that the $29+ billion proof of claims that JP Morgan filed will be obliterated.

Either way, the market is in a different place now. The $9 billion worth of illiquid securities will have a better recovery rate now than it did in 2008/2009.

I have implemented a contingency plan for my Lehman bonds by paying up for a smaller position in a bond issue that is supposedly higher quality in an effort to recoup my investment should the sub bonds become worthless. However, I am fairly optimistic that there's going to be value left after the battle's over.

Initially, I started with a lot of sub bonds in Lehman. Recall I bought these bonds up starting from several weeks after Lehman filed for Chapter 11 through to about the present moment. Looking back, I made a fatal mistake by not buying higher quality bond issues because my knowledge was limited. I only purchased sub bonds in 2008, but the market was flooded with all types of Lehman bonds and I could have probably paid the same amount for a higher quality issue had I known about it.

I promised to post my bond ladder here, so here goes...


5249087M6
524908UB4
524908UB4
524908R44
524908R36
524908R44
524908R36
524908BF6
52517PNZ0


Junk bonds are not all fun in the sun, though. Recently, my Ion Media bond issue got obliterated in the reorganisation process. Figuring out the details that make a bond issue work vs. just blindly buying based on the premise/promise of value is the fundamental diva dilemma. Is there really value here? Based on my previous conservative estimate, if Lehman is able to collect all its receivables, then bondholder value is $0.35 on the dollar. So, for me, any higher quality issue that can be obtained for $0.25 on the dollar or below would be a good buy. I have to consciously limit my investment. I don't want to go too OTT and get over-excited about this and get left with half a carrot.