>95% off notes

[Ran]

There is a guy or probably a few guys buying out 95% off notes at Folio, including the famous Chapter 7 bankruptcy notes.
Are those guys finding something new regarding Chapter 7 recovery rate or they are just plain dumb.
I lost a lot of fun(really) when everything got cut off 95%.

[New Jersey Guy]

Ran.....Like Big Foot and UFO's, this has been a P2P mystery that has been discussed before and really never solved.

Most of the speculation has been based on the buyers not bothering to read the log.

I will also admit that there have been several times where I pushed the wrong button on Interest Radar ending up with a BK note. 

Other than that, I cannot think of any advantage of buying a BK-7 note.

[lcdude]

It's a tax strategy.

[New Jersey Guy]

It's a tax strategy.

You'll need to explain that one in more detail.

[core]

I think it would be best if he didn't.

[dontvote]

I suppose there is a possibility of a tax loss harvesting strategy here but it is far from passing a basic 'smell test'. Where's AmCap when you need him?

dontknowmuchbiology...

[Bohb Daishi]

There is a guy or probably a few guys buying out 95% off notes at Folio, including the famous Chapter 7 bankruptcy notes.

Caught me red handed. 

[Bohb Daishi]

Seriously though, there is an actual strategy with these. A few months ago I had a note where the bankruptcy was dismissed and the borrower made a payment. That was a very rare event, however.

Because there is very limited risk (i.e. there will always be a sucker buyer at >95%), you can normally get out of the note at about the same price you paid. The true risk comes in when LC decides to charge off the notes a month or two before they normally would. The other risk is that you simply forget about the note and it ends up charging off at the normal time, preventing you from selling.

So on average, your profit might be a few pennies per note, after commissions. But when you are only spending $1.00 on a note, an 8-cent profit is an 8% gain. Multiply that by the handful of notes a day that show up on the market and you could make a few bucks a month. Enough for a Big Mac and large fries. But in all honesty, you would make a lot more money working at McDonald's for minimum wage than you would for spending the same amount of time trading these bankrupt notes.

[Ran]

Seriously though, there is an actual strategy with these. A few months ago I had a note where the bankruptcy was dismissed and the borrower made a payment. That was a very rare event, however.

Because there is very limited risk (i.e. there will always be a sucker buyer at >95%), you can normally get out of the note at about the same price you paid. The true risk comes in when LC decides to charge off the notes a month or two before they normally would. The other risk is that you simply forget about the note and it ends up charging off at the normal time, preventing you from selling.

So on average, your profit might be a few pennies per note, after commissions. But when you are only spending $1.00 on a note, an 8-cent profit is an 8% gain. Multiply that by the handful of notes a day that show up on the market and you could make a few bucks a month. Enough for a Big Mac and large fries. But in all honesty, you would make a lot more money working at McDonald's for minimum wage than you would for spending the same amount of time trading these bankrupt notes.

I'd love your comment on this.

[New Jersey Guy]

If you had the fortitude, I bet you could make money buying late notes with the intention of letting them default.

Not sure how many people would want to hold a folder of intentional defaults.

[core]

If you had the fortitude, I bet you could make money buying late notes with the intention of letting them default.

"Make" money?  How so?  Is this anything like the stock picking strategy of trying to lose as much money as possible?  Don't laugh, it's not quite as crazy as it sounds.  Wouldn't really work for Folio though.

How about this one:  As we know, your Lending Club balance reflects the full value of each note even though they may all be seriously late.  By buying these -95% notes, for just pennies on the dollar you could rack up quite a sizable account value... at least on paper.  You may ask, for what purpose?  Say you are getting ready to divorce your wife.  Have your attorney arrange to give the wife the "huge" LC account while you keep everything of real value.  If it's in an IRA it can't be liquidated on Folio, and hopefully her attorney isn't bright enough to know that it's just paper money. 

Or maybe you need to inflate your net worth temporarily for whatever reason.  Bank loan, cash bid on real estate that you can't pay for, etc.  Maybe the IRS is about to seize your accounts.  I can think of lots of fun to be had with these notes.

[Rob L]

Ponzi scheme anyone? Nah; go directly to jail, do not pass go, do not collect $200.

[New Jersey Guy]

"Make" money?  How so?

Go look at your charge-offs and look at your recoveries.

I had 26 charge-offs in 2013.  Surprisingly, a lot of them are making some sort of payment.  Granted, there were a small few that went BK-7, but I've received $25 back so far on those 26 loans.  Obviously, I am not even close to breaking even because of what I paid for those. 

But, what if I had only paid $26 ($1 ea.) for those notes?    I'd have $26 dollar invested against $640 of potential principle.  Nothing you can do but let them sit and hope they pay.  But, isn't that what we do every time we pay $25 for a new issue?  Hey, at least you won't have to worry about them defaulting.   

I think over a 3-5 year period you have a pretty good chance of making a decent return on a small investment.

[core]

That seems like a real dicey strategy to me.  Even -95% seems like too high of a price to be able to make any money.  You have to hope some deadbeat pays up years down the road (but before 5 years) and hope that LC's flaky software decides to properly give you the money after all that time.  (I don't know which of those two events are more unlikely.)  We've already used 'Toilet note strategy' on another one of your strategies, but this one is even more sewerish.  Maybe 'festering effluent strategy' would be appropriate.  I guess I'd have to see some long term numbers.

The one thing I can say about this approach is it would be a very good way to hide some assets.  Hidden so well you can't even get to them.  But you can count on it slowly being released back to you over time, all the while your balance is showing $0 and safe from creditors, ex-wives, BK court, etc.

[New Jersey Guy]

'festering effluent strategy'

Oh, without a doubt!  Could you imagine having 100, 300 or even 500 notes getting charged off within the next year!  How would that look on your account page NAR?  Then you have a folder of things just "Festering" away as you put it.

I think it can be done.  There's even a good chance you might get some payments before they all go south.  You may even get a couple of lump sum payoffs here-and-there.  Great place to stash some BK-13's if you can get them. 

Guys, go look at your recoveries.  Post your recoveries, number of charge offs, outstanding principle.
IE:
$25 recoveries, 26 notes, $640 outstanding principle.

In the meantime, Core!  Create a new folder, take $1000 and start buying the absolute worst notes known to mankind.  Let's hope for quick defaults so we can get this ball rolling!