Bloomberg: Lehman 100% Protection = Pennies

Lehman's `100% Principal Protection' Means Pennies for Notes
By Bradley Keoun

Sept. 29 (Bloomberg) -- A brochure pitching $1.84 million of notes sold by Lehman Brothers Holdings Inc. in August, a month before the firm filed for bankruptcy, promised ``100 percent principal protection.''

Buyers had ``uncapped appreciation potential'' pegged to gains in the Standard & Poor's 500 Index, the brochure said. In the worst case, they would get back their $1,000-per-note investment in three years. Only the last in a list of 15 risk factors mentioned the biggest danger:

``An investment in the notes will be subject to the credit risk of Lehman Brothers.''
Lehman's Sept. 15 bankruptcy leaves holders of the notes waiting in line with other unsecured creditors for what's left of their money. The collapse has rattled Wall Street's $114 billion structured-notes business, which Lehman, Merrill Lynch & Co., Morgan Stanley and Goldman Sachs Group Inc., all based in New York, used to raise cheaper funding as the credit crisis drove bond yields higher. About three-fifths of the $68.1 billion sold this year were bought by individual investors, according to data compiled by mtn-i, a London-based firm that tracks the market.

``Investors are going to be a lot more concerned about the credit of the issuers of these notes,'' said James Angel, an associate professor of finance at Georgetown University in Washington. Until recently, ``the buyers may have been mesmerized by the bells and the whistles,'' he said.
The market for structured notes -- constructed by Wall Street firms from a combination of bonds, stocks, commodities, currencies and derivatives -- has mostly avoided fallout from the slump in sales of mortgage-backed collateralized debt obligations and auction-market preferred securities.

For the full article from Bloomberg, click here.