In this video, Sal Khan states, "If you really thought that Lehman Brothers in the long term was going to come back, what you might want to do is somehow try to become one of its bondholders, and then when it goes through bankruptcy, on the other side of the bankruptcy, you might end up in shares of the new bank, whatever it's called, you know, Goldman Brothers, or whatever."

My understanding is that, minor secondary market factors aside, you could only break even or lose via this strategy. If the assets of the company being restructured were truly worth less than its liabilities, then the owners of each tranche of those liabilities would receive shares worth at most the value they were owed, and at least the equity tranche would receive less. How could this be a profitable strategy?


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There are experts in distressed debt. They buy the debt at a deep discount to face value, with the belief that the salvage value is greater than what they paid.

To do this successfully, knowledge of how bankruptcy works is required. Different types of debt have different priorities in bankruptcy. In most cases, bonds are deeply subordinated, and so often have extremely low recovery rates versus senior debtors.


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