More than one year ago, in September 2008, Lehman Brothers, one of the fourth largest investment banks in the United States, filed for Chapter 11 bankruptcy. The resulting collapse emanated mostly from its hold on positions in subprime and other lower-rated mortgage tranches. Lehman Brothers' lost $2.8 billion in the second fiscal quarter of 2008, largely due to losses in the lower-rated mortgage-backed securities. Lehman stock subsequently lost 73% of its value and on September 9th its shares plunged 45%. The resulting collapse left many investors questioning their investments with Lehman Brothers. Specifically, investments that were sold during Lehman Brothers' last few months to conservative investors as “safe investments."
Lehman Brothers was one of the major issuers of Principal Protected Notes (PPN). PPNs are fixed-income securities, which guarantee a minimum return that is equal to the investor's initial investment, or the principal amount. PPNs are a combination of bonds, stocks, commodities, currencies, and derivatives. This type of combined investment is beneficial for investors who are risk-averse – they are safe investments.
Lehman Brothers PPN notes were sold to investors with the guarantee that at maturity, the investor would receive a cash payment equal to at least 100 percent of the principal. In addition, the notes were advertised as having a significant appreciation. The notes promised investors an opportunity to increase in value if the value of the Standard & Poors 500 also increased. Thus, to an individual investor PPNs seemed to be a safe investment. They were guaranteed a return of their initial investment, and even had to opportunity to increase the value. However, the situation that occurred with Lehman Brothers' PPN was vastly different than what was promised.
While the notes appeared to be safe investments to the conservative investor, they ultimately were risky, especially considering the pending demise of Lehman Brothers. As stated in a brochure issued to investors, ‘an investment in the notes will be subject to the credit risk of Lehman Brothers." This risk became apparent in 2008 with Lehman Brothers as the guarantor of the notes. With the fall of the company, investors became subject to the credit risk of Lehman Brothers and were left with worthless investments. Since the demise of Lehman Brothers, the Principal Protected Note holders are left waiting in line to collect amongst the other senior unsecured creditors.
