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Lehman Trade A Gift That Keeps Giving For Paulson To King Street

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Almost six years after Lehman Brothers Holdings Inc. filed for the largest bankruptcy in history, triggering a global market meltdown, hedge funds are still feeding on its remains.

A small group of firms that waded into the morass in the aftermath of the financial crisis, including Paulson & Co., King Street Capital Management LP, Varde Partners Inc., Halcyon Asset Management LLC and Solus Alternative Asset Management LP have made billions of dollars trading in the debt. As claims are being paid out, often at a multiple of initial estimates, investors that have spent years analyzing the bankruptcy are ploughing money back into newly available loans, such as those between the investment bank’s Hong Kong and U.S. units, fueling a rally unmatched by stocks and high-risk bonds.

“A little of a surprising aspect is that there’s still this much return left in it this far along,” according to Marcia Page, co-chief investment officer of Varde, which oversees $8.5 billion and has been buying Lehman claims since 2008. “There’s just so much debt.”

The investments have been a bright spot in a world of increasingly expensive securities because they are complicated to analyze, partly hinge on decisions made by judges and may take a long time to pay out, which reduces the pool of buyers to those who have adequate resources and available capital.

The assets meanwhile have surged in value after the bank’s trustees settled litigation at better-than-anticipated terms, and as central banks’ unprecedented stimulus to rescue the financial system from the global credit seizure caused by the bank’s failure pushed up prices of everything from real estate to derivatives.

Keeps Giving

Lehman has been “the trade that keeps on giving,” John Paulson, whose firm has made more than $1 billion on its investment, told clients on a conference call last month. Lehman debt has risen about 11 percent this year through the first quarter and 45 percent since the beginning of 2013, Paulson & Co. said in a first-quarter letter to investors, a copy of which was obtained by Bloomberg News.

Bailout capitalism at work. I wonder how valuable this debt would have been if the financial system hadn't received a global bailout via the worlds central banks.

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