The guarantee of Bear Stearns’ liabilities from JP Morgan Chase wasn’t working. Although the banking giant had put its “full faith and credit” behind Bear’s liabilities, some of Bear’s largest customers were refusing to do business with it. Counter-parties were fleeing, and Bear’s collateral was being refused up and down Wall Street. The guarantee, which was intended to keep Bear in business, had failed to provide customers with enough assurance to prevent a second round of the run-on-the-bank that nearly bankrupted Bear, people recently familiar with Bear’s operations are saying behind the scenes. (Guess who those people are!)
Customers were concerned that working out the guarantee would take too long and involve too much uncertainty. People familiar with the operations of Bear say that many customers simply found it easier to take their business elsewhere. They feared that if Bear shareholders rejected the deal, JP Morgan’s guarantee would not get them a quick and “dollar-good” resolution to their trades.
Now JP Morgan is claiming—albeit off-the-record through prominent business reporters—that they were forced back to the negotiating table because of “mistakes” in the contract. The guarantee is alleged to have “inadvertently included” provisions that made it overbroad and survivable even after the rejection of the deal by Bear shareholders. But this is a cover-up, an attempt to take out a provision that at least some of the JP Morgan deal team fully understood. The reality seems to be that JP Morgan wants to rescind the guarantee because it could involve serious costs without achieving the customer-assurance benefits that provided its original rationale.
What’s worse, JP Morgan and Bear Stearns quickly realized that the survivability of the guarantee would allow dissident shareholders to seek other investors while Bear stayed in business under the cover of the guarantee. The provisions of the agreements between Bear and JP Morgan require Bear’s board to continue to cooperate with JP Morgan but do not bind outside shareholders. JP Morgan, which eagerly cooperated with the Fed to buy Bear, did not anticipate the danger posed by shareholders using the 12-month lock-up period to find alternative buyers. If there was a negotiating mistake, perhaps this oversight was it.
Posted by guest , Mar 24, 2008 3:53PM
some serious banana republic bullshit going here.
gross.
the government is going to get real pissed here soon and lots of people are going to go to jail.
just like a banana republic.
Posted by guest , Mar 24, 2008 3:57PM
did any person with higher than an 89 iq not realize that customers don't want to be involved in this nonsense and would take their business elsewhere?
like all of the customers?
you run a 500mm investment partnership and you're gonna cross your fingers and hope everything workd out o.k.??? /rhetorical
lol
wall street people really are mostly dumb.
Posted by guest , Mar 24, 2008 4:07PM
Think back to last sunday. The main thing on Fed's mind was the orderly handling of the BSC repo book. Not is BSC going to retain clients in HNW or prime brokerage. If monday morning came and there was no deal that repo book would have been dumped in an illiquid market, causing serious damage. So a quick deal was put together, which may or may not be unraveling, which in turn might or might not cause the good businesses within BS to unravel. But thats not really important to the Fed, cause their moves last weekend averted a liquidity crisis.
Posted by guest , Mar 24, 2008 4:08PM
We will see more "smartest guys in the room" fuck up as the credit crunch bounces here and there. More egg on faces. It is fun, fun, fun. Glory days, except that the working stiffs at these shops who knew they worked for greedy guys (greed blinds intelligence, I've seen it and it is weird) are getting fired.
Posted by guest , Mar 24, 2008 4:13PM
Good job Wachtell, really good job.
Posted by guest , Mar 24, 2008 4:14PM
I don't understand what @3:53pm is trying to say. I do think the federal government standing behind one party to a deal and insisting the deal go that party's way (or else) was perhaps a little heavy-handed for a capitalist democracy. But I don't get why 3:53 pm thinks "lots of people are going to go to jail." Is this just a general apocalyptic feeling?
I don't find it surprising that customers fled the whole scenario of JP Morgan guaranteeing Bear Stearns.
The most interesting issue now is how and when order is going to be restored.
Posted by guest , Mar 24, 2008 4:30PM
@ 4:14pm
the fed threatened bear management with the enron - worldcom hammer...and the hammer is a lot bigger now because of SOX.
bear is done. they don't even have a corporate headquarters anymore.
every broker and sales trader is getting poached.
every prime brokerage customer is leaving.
every b/d clearing client is leaving.
their ibank pipeline is shut down.
am i missing anything?
Posted by guest , Mar 24, 2008 4:32PM
@4:07
correct.
nobody is doing business with bear anymore and once everyone gets their money out there is no more counter party risk and then the fat lady sings.
my question is who's signing paychecks?
lol
Posted by guest , Mar 24, 2008 4:45PM
Just curious, but does the new deal still include an option on 383 if the deal doesn't close?
Posted by guest , Mar 24, 2008 5:49PM
Mighty clusterfuck. It would be interesting to peek behind the curtain to view the level of chaos, idiocy and Machivallian theory.
Posted by guest , Mar 24, 2008 6:52PM
Schwartz must wear diapers or be a closet felon. When someone offers me $2, two days after the markets rate me at $60, and I have $17B in cash, I tell him to pound sand. And that goes for the career suckup running the New York Fed, also. (The guy has never had a real job.) Bankruptcy is the preferred outcome.
ANYTHING, including bankruptcy, is better in this scenario than simply giving the bank to Dimon.
There must be some strange and secret criminal liability motivating the Bear board to give away their company.
Posted by Novice , Mar 24, 2008 7:31PM
@6:52 That "strange and secret criminal liability" is called being a rational actor. No one likes wiping out shareholder equity, but you'd have to be masochistic and a grade-A prick to destroy the company for the 2/3rds that will have jobs with JPM and your bondholders just to spite Jamie Dimon. Claiming that BSC was priced at $60 before counterparties have dreams of the insolvency fairy dancing around is kinda irrelevant.
The scorecard has this as a begrudging "best of a bad situation, I guess" for BSC, and an addendum warning against ever hiring someone who plays card games with old ladies from Dubuque.
Posted by guest , Mar 24, 2008 11:04PM
Guest @ 6:52 pm. Why would bankruptcy be preferable? Do you know how tortuous the bankruptcy process is?
Posted by guest , Mar 24, 2008 11:44PM
@4:07 Tell me more about this repo book. If the Fed was worried about BSC defaulting and collateral being dumped, why couldn't they have just entered the market to provide liquidity when the dumping commenced? Seems a lot simpler than this JPM clusterfuck.