Did JP Morgan Understand The Bear Stearns Guarantee?

The New York Times is suggesting that JP Morgan’s agreement to guarantee Bear Stearn’s liabilities is much broader than intended. According to Andrew Ross Sorkin’s story on the front page of this morning’s Times, JP Morgan executives were angered to discover that the guarantee would stay in place even if the Bear Stearns shareholder voted down the deal. This is being blamed on the lawyers—and on the rushed pace of putting together the deal so quickly. The Deal Professor at DealBook describes this as an “apparent oversight” this morning. (Here’s a link to the guaranty agreement, courtesy of the New York Times.)

As we pointed out this morning, we don’t think it was an oversight. On the conference call on the Sunday night the deal was announced there was a lot of discussion of the guarantee. Some of it was confusing, as much of what happens on public conference calls is often confusing. But it seems pretty clear that JP Morgan fully understood that it’s guarantee would cover Bear liabilities even if the deal was rejected.

After the jump, we present an excerpt from the transcript of the Sunday night conference call. In the excerpt, Steve Black, the co-head of JP Morgan’s investment banking division, is asked by an analyst about the guarantee. He clearly says that it will cover Bear liabilities already entered into and those entered into prior to closing or rejection, but not those entered into after the rejection.

Mitch [Northern – Q Investments]: With regard to the guarantee of trading, if the merger is not completed what happens to the full facing credit of JP Morgan? Is that still behind Bear Stearns?

Steve Black: First of all the guarantee applies to all transactions on the books today and any transactions that are entered into while that guarantee is in place. We have every expectation that Bear Stearns shareholders will approve this deal. I think we are offering the best alternative that they got at this point and I would be surprised if a better alternative came along. If in the future the shareholders do fail to approve the transaction, then our guarantee would no longer apply prospectively. Of course everything that was on the books up to and to that point would be covered by the guarantee.

Later in the transcript, the questioners try to get JP Morgan to elaborate on the guarantee and the answers become less clear. But its hard to read this exchange as not anticipating the broad guarantee that survives the rejection of the offer that actually made it’s way into the guaranty agreement.

What’s undeniable, however, is that JP Morgan now wants the world to believe they didn’t mean the guarantee to cover what Steve Black says it will cover. The question is why they want to spin it this way.