The bankers behind the deal for J.P. Morgan Chase to acquire Bear Stearns are quietly admitting that the deal was not reworked because lawyers mucked up the documentation, a claim that the New York Times prominently featured.

On March 24th, the second Monday following the initial announcement of the deal, a story in the New York Times reported that people involved with the takeover talks were claiming that the rushed preparation of the deal documentation had led JP Morgan to sign a guaranty agreement that went further than it ever intended. In the guaranty agreement signed in connection with the merger, J.P. Morgan agreed to "unconditionally" guarantee "the due and punctual payment" of all of Bear's "covered liabilities" for a period of time starting March 16, 2008, and seeming to last in perpetuity.

A little more than a week later, JP Morgan was floating the idea that the guaranty was never meant to last beyond the rejection of the deal by Bear Stearns shareholders. But this was nothing more than a cover-up meant to conceal the more frightening reality that Bear Stearns was once again teetering on the edge of bankruptcy, with brokerage clients fleeing for the exits, as DealBreaker’s analysis showed later that day.

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.

Bear Stearns' latest proxy statement, filed last week with the Securities and Exchange Commission, confirms our analysis. (Fortune magazine's Roddy Boyd has a good description of the dramatic renegotiations in the face of bankruptcy pressure here.) The proxy statement explains:

At the time of execution of the merger agreement, Bear Stearns and JPMorgan Chase hoped that execution of the merger agreement and the guaranty would stabilize Bear Stearns’ liquidity position by providing assurances to Bear Stearns’ customers, counterparties and lenders that JPMorgan Chase was standing behind Bear Stearns’ obligations. However, following the announcement of the transaction on March 16, 2008, Bear Stearns’ customers continued to withdraw funds, counterparties remained unwilling to make secured funding available to Bear Stearns on customary terms, and funding (other than from JPMorgan Chase and the New York Fed) was not available. JPMorgan Chase and Bear Stearns believed that the continued loss of customers and the continued unwillingness of counterparties to make secured funding available on customary terms was a result of, among other things, concerns that the merger would not be completed and the JPMorgan Chase guaranty would terminate, and perceived deficiencies and uncertainty on the part of Bear Stearns’ customers, counterparties and lenders regarding the scope and terms of the guaranty.

The proxy statement makes no mention of missteps in documentation. That contention has simply been dropped in favor of vaguer talk about negotiations to “clarify” the JP Morgan guarantee. It seems that the bankers who anonymously fed the “misstep” story to journalists weren’t willing to risk the legal consequences of repeating it to the SEC. This amounts to a tacit admission that the story was bunk from the get go.

When Bear Stearns looked like it would go for $2 a share, there was a lot of sympathy for investors who stood to lose tremendous amounts. Employees—who own about a third of Bear—faced not only losing their jobs but their savings as well. So when they gnashed their teeth and hollered that their firm was being stolen by a conspiracy led by the Fed and carried out by JP Morgan Chase, it was just plain polite not to point out that their firm was on the verge of bankruptcy, that its failures had arguably put the larger financial system at risk and that what little they were getting was the result of a government-led bailout.

But now that the price of the deal has risen to ten dollars and shares are trading even higher than that, the backlash has begun. Writing for Smart Money, James Stewart writes that the protests against the rescue of Bear Stearns from insiders are “galling.” What’s more, it shows the Wall Street is all too willing to seek a government safety net when it stumbles on its free-market high-wire act, he argues. The profits from risk are private, but the losses are all too public.

Having artfully solved a thorny problem a week ago, the government has now embraced a deal whose terms reek of the bailout it was at such pains to avoid. If the government is willing to bestow such a windfall on a James Cayne, where will it it stop? Why should other financial firms reduce risk and shore up their capital? What discipline will the market ever be able to impose? Future disasters will only be worse, which will dwarf the immediate cost of the current rescue.

Yves Smith at Naked Capitalism is even more blunt, and he criticizes the media for being too sympathetic to Bear’s employees and investors. “Bear was going to fail as of Monday,” he writes. “Bye bye equity and many if not most jobs. How hard is this to understand? I thought anyone who was remotely financially literate understood what bankruptcy means. The employees should be grateful to get anything. But no, the media slavishly accepts their sense of entitlement.”

No Tears for Mr. Cayne [Smart Money]
Bear: Did the Fed and Treasury Push Too Hard? [NakedCapitalism]

Did JP Morgan Chase inadvertently include an overbroad guaranty in its deal to acquire Bear Stearns? That's what unnamed sources were telling journalists over the weekend. The idea was that the rushed preparation of the documentation had led JP Morgan to sign a guaranty agreement that went further than it ever intended. And when the new documentation for the raised bid emerged, that story seemed to gain credibility because the new guaranty agreement was dramatically cut back.

But was it a misstep in the original documentation or is this story spin meant to provide cover for a rethinking of the guarantee? Yesterday we spent a good part of the day explaining that the available evidence indicated that the original, broader guarantee reflected the deal that was described on the conference call a week ago last Sunday. We were lonely voices on this point, as most of the financial media seemed to have contracted acute amnesia about that conference call. Fortunately, as the day passed, the media seem to have recovered.

In this morning's Wall Street Journal, Ashby Jones pretty much shoots down the "mistake" spin. After noting that some lawyers had "surmised" the broader guarantee was an "oversight" by JP Morgan and its lawyers at Wachtell Lipton, Jones says, "But other lawyers said the wording was in line with the intentions of at least one decision maker at the bank at the time the deal was struck, public comments suggest."

Steve Black, the co-head of J.P. Morgan's investment-banking division, appeared to address the issue in a March 16 conference call with analysts.

"The guarantee applies to all transactions on the books today and any transactions that are entered into while that guarantee is in place," he said. J.P. Morgan didn't respond to a request for comment.

The measure "seems rational," given the circumstances at the time, when J.P. Morgan was trying to signal to the market that it would stand by Bear's obligations, says Lawrence Cunningham, a law professor at George Washington University. "Bear was fighting for its life and a handful of forces were at play and it makes sense that J.P. Morgan would want to add credibility to the deal by giving a big guarantee." Observers add that J.P. Morgan might not have anticipated the shareholder resistance that surfaced to the original deal.

Over at the Conglomerate, law professor Gordon Smith agrees. He wonders how apoplectic JP Morgan head Jamie Dimon really was over the broad guarantee.

"I don't doubt that he presented the case in this way, but forgive me if this sounds like a bit of buyer's remorse," he writes. :In other words, Dimon's indignation at his lawyers looks like a pretext for another problem with the original deal, namely, that Morgan no longer wanted the deal to stay open for a whole year if Bear's shareholders rejected it."

Did Deal Overexpose J.P. Morgan? [Wall Street Journal]
The Morgan Guarantee [Conglomerate]

Earlier this afternoon Bear Stearns has posted to its Web site the amended merger and guaranty agreements in connection with the renegotiation of JP Morgan’s purchase. Some quick takes:

• As has been widely reported, the new price works out to around $10 per share. Speculators, bond-holders and dissident shareholders have been greatly rewarded for owning BSC. People who bought credit default insurance, and wanted to vote against the deal hoping Bear would default on its bonds, were smart if they bought BSC as a hedge.

• The Fed’s role in all this has changed. Now the Fed is taking control of $30 billion collateralized by illiquid assets from Bear in exchange for its $30 billion liquidity loan. The portfolio will be managed by Blackrock, so now Merrill Lynch (which owns about half of Blackrock) is in on the deal. JP Morgan is on the hook for the first $1 billion in losses on the portfolio.

• Did the Fed fix the $2 bear price? The controversy continues. This morning Andrew Ross Sorkin said yes, while Steve Liesman said no. This morning Liesman backed off, saying his sources were giving him conflicting reports on the Fed’s role in the pricing.

• The higher price is already leading some to refer to this as a bailout. Henry Blodget reads the tea leaves and says even bigger bailouts are on the way.

• Prices for BSC blew right past that $10 price tag, and now the action is in $15 calls.

• The Deal Professor has a good summary of the changes in the agreements. Unfortunately, he’s still buying the line that the guarantee was inadvertently broad. “The amendment makes clear that JPMorgan didn’t get the guarantee they wanted on the first bite,” he writes. Don’t you believe it. The changes really suggest nothing more than that the guarantee wasn’t getting the job done and they didn’t see any need to keep it out there.

Despite reports to the contrary on CNBC and the New York Times, there is no precedent in Delaware law that allows a company to sell up to 40 percent of their shares without shareholder approval. Rather, there is a rule-of-thumb employed by lawyers advising clients incorporated in Delaware that tells them deals shouldn’t lock-up a sale of more than 40% of the shares if they don’t want to risk the wrath of the courts. But the rule is cobbled together from reading a variety of Delaware cases, and it has never been tested in the courts.

At issue, as Gordon Smith explains on The Conglomerate, is whether a deal will be seen as coercive or precluding minority shareholders from exercising their franchise. In one early case, the Delaware Supreme Court struck down a deal in which 65 percent of the shareholders agreed to vote for a transaction in advance of the shareholder vote. In a later case, a lock-up deal was upheld by the courts when it required the final approval by a majority of the outside shareholders to approve the deal. Lawyers put the two together and came up with the rough-and-ready rule of thumb that if you didn’t lock-up more than 40% of the shares before the shareholder vote, you’d probably be okay.

“The bottom line is that JP Morgan is trying to lock up the acquisition of Bear, but it can't be too aggressive without triggering the wrath of the Delaware courts,” Smith writes. “39.5% plus the shares of the Bear directors who ‘have indicated that they intend’ to vote for the revised deal should get them to about 45%, and that may be enough to bring the deal home.”

This has important implications for Bear shareholders and may explain why the deal has progressed the way it has. Bear’s board had promised to sell JP Morgan 20% of the company, even if Bear’s shareholders rejected the deal. The fact that they didn’t promise more may well indicate that they didn’t feel comfortable with going as high as the 40% rule would presumably allow.

With a much higher bid in their pocket, however, they now have a better story to sell to shareholders—we got $1 billion more by just promising another 20% of the company—and, if necessary, to the Delaware courts. The board no doubt hopes that these facts will make it look as if it was acting in the interests of shareholders throughout the negotiations.

39.5%? [The Conglomerate]

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.

One reason many people are so ready to believe JP Morgan’s line that the guarantee agreement was accidentally overbroad is that they don’t understand why JP Morgan would ever intentionally agree to the broad version. Why would JP Morgan want it’s guarantee to survive even if Bear Stearns’ shareholders reject the takeover offer? This sets up a seemingly perverse situation where Bear’s shareholders could seek a higher bid while still forcing JPMorgan to honor its guarantee. Clearly JP Morgan couldn’t have wanted this, right?

If the survivability of the guarantee seems outlandish now, it didn’t seem so outlandish last week. At that time, Bear was facing a modern day version of a run on the bank, with customers and counterparties fleeing for every available exit. In order to slow the exodus, Bear’s counter-parties needed strong reassurance that their trades with Bear were good and that it was safe to continue to do business with Bear. A temporary guarantee contingent on Bear shareholders accepting $2 per share might not have been acceptable to counter-parties. It may not, that is, have kept Bear in business.

And, as most accounts of the high pressure dealings of that weekend make clear, keeping Bear in business was one of the primary motivations of announcing the deal before the markets opened up in Asia. In fact, one of the first comments made by JP Morgan investment banking co-head Bill Winters emphasized that this was the purpose of the guarantee.

“Bear Stearns is absolutely open for business,” he said. “That is the purpose of the guarantee that we’ve put in place that should give ever body in the market complete comfort that when dealing with Bear Stearns you are backed by the full faith and credit of JP Morgan. So Bear is open for business today with all the credit backing that we can provide and intends to remain completely in the market up to and through the day when we complete the acquisition and obviously then afterwards as a part of JP Morgan.”

Now JP Morgan is singing a different tune but claiming it’s been the same old song all along. But those of us who were at the ball on Sunday night know better.

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.

Everyone's talking about Andrew Ross Sorkin's blockbuster piece in the New York Times which claims that JPMorgan is negotiating to raise its bid price for Bear Stearns in an effort to win over reluctant shareholders. A lot of people who bought shares above the supposedly locked-in sale price last week are smiling today.

One part of the story, however, doesn't make sense. JP Morgan is apparently now claiming, behind the scenes at least, that the original merger contract included several mistakes, including the clause that allows JP Morgan's guarantee of Bear's trading position to survive a vote against the deal by Bear Stearns shareholders. Jamie Dimon is reportedly "apoplectic" that this provision was "inadvertently" included in the deal.

This story can't be right. We were on that conference call on Sunday night, and this provision got a lot of attention on that call. The JP Morgan bankers were very clear that the guarantee would survive a negative vote by Bear Stearns shareholders. The guarantee would survive the life of the guaranteed transactions, JP Morgan's bankers said on the call.

There was a bit of confusion on the call about this provision, so that those on the call had to ask about it several times. But clearly everyone involved was focussed on it. So why are we suddenly being fed a different story through Andrew Ross Sorkin?

JPMorgan in Negotiations to Raise Bear Stearns Bid [New York Times]

"The funny part is, getting a position as an analyst at JP Morgan was far easier than becoming a hack," a JP Morgan analyst tells Time Out New York this week. It's their "secret lives" issue, detailing the various double lives of New Yorkers. There's the happily married guy who loves the happy-ending, the lawyer chick who is a go-go dancer and, of course, the banker with a secret life.

The JP Morgan analyst explains how he left Yale for a life in the city but landed two jobs at once: driving a cab and working at JP Morgan. He describes his JP Morgan position as a "no show job," which will break the hearts of lots of overworked analysts. Ordinarily, we'd ask you to guess who the banker was. But we like this guy. So instead we're asking the opposite: everyone keep this totally secret.

But remember that the analyst with the dark rings under his eyes might not be tired from spending all night working on the pitch book. He might just be the under-cover cabbie.

I am a... cabbie / JPMorgan analyst [Time Out]

A last minute change in a software industry group’s meeting has raised questions about whether famed and infamous tech stock analyst and Silicon Alley Insider founder Henry Blodget may have a highly placed enemy among the traders at JP Morgan.

Shortly after noon today, the New York Software Industry Association changed the location of its monthly meeting from JP Morgan’s headquarters at 270 Park Avenue to 277 Park Avenue, a building that is also occupied by JP Morgan and is directly across the street. An email from the NYSIA said the meeting was being moved “due to a flood at the JPMorgan HQ at 270 Park.” But a JP Morgan spokesperson denies that there has been a flood at the building. Others at JP Morgan also said that they hadn’t heard anything about a flood.

So if the flood hadn’t occurred, why was the meeting being moved? JP Morgan Chase didn’t offer any further comment on the subject, and NYSIA did not immediately return our call. But some of the emails recipients have begun to speculate that the meeting may have been moved because Blodget, who was accused of securities fraud in connection with his stock recommendations in the 1990s and was scheduled to speak at the monthly meeting, could be persona non grata at 270 Park Avenue.

“I'd wonder if maybe some high-up didn't want Blodget around,” a person familiar with the situation told DealBreaker.

The meeting has been moved from one JP Morgan office to another, which might imply that it is a very particular group or person within JP Morgan who has declared the premises off-limits to Blodget. Although a variety of units within JP Morgan Chase are scattered throughout it’s various Park Avenue offices, the 270 Park is home to a large number of its traders while 277 Park is home to many investment bankers. So does some high level trader have a problem with Henry Blodget?

Our research couldn't produce a credible account of who might be feuding to Blodget or why. Many in the securities industry, however, still resent what they see at Blodget's role in besmirching their business. Blodget's first book, The Wall Street Self-Defense Manual, did not paint Wall Street in a particularly flattering hue.

Neither Henry Blodget nor JP Morgan Chase could be reached for comment on this important question irresponsible speculation.

Bear Stearns has more than $1 billion of short positions on subprime, up $400 million from the end of November, Bloomberg reports. Of course, since Bear Stearns got the subprime trade so wildly wrong last year, people are already wondering if this might be a signal that it is time to go long subrime.

Over at The Big Picture, Barry Ritzholz writes, “While I do not expect us to be done with the subprime slime yet, I do get a ‘Is this a bottom indicator?’ sense from Bear on this.”

JPMorgan Chase, which emerged relatively unscathed from the credit market debacle, is apparently taking the opposite position. Yesterday Jamie Dimon was reported to have said that the bank plans to expand its role in the subprime mortgage business. Goldman is also rumored to have reversed it’s position on subprime, taking a net long position.

Bear Stearns Is `Short' Subprime Mortgages $1 Billion [Bloomberg]

Yesterday we heard two discordant voices on the possibility of the monolines getting downgraded. Jamie Dimon, the chief executive of JPMorgan Chase, said that he does not think downgrades of the insurers would be “a big deal.” Deutsche Bank chief Josef Ackerman, however, described the potential downgrades as “a tsunami-like event comparable to subprime.”

So who is right? Well, maybe both chiefs are. As Yves Smith has explained, the European banks were major buyers of CDOs and RMBS. Operating under Basel II, which links reserve requirements to the riskiness of a bank’s investments, the Euro banks were able to treat triple A paper as basically risk free investments they could hold without impacting their reserve requirements. But a downgrade of the insurance on this paper could result in the banks having to bolster their reserves, possibly worsening the credit crunch or requiring a firesale of the CDOs

“A downgrade to AA increases the reserve requirements markedly, and CDOs are generally downgraded more than a mere grade or two when they fall (I wish I could be more crisp here, but Basel II makes matters more complicated). Thus a loss of the bond guarantor AAA has a quick and nasty impact on bank capital adequacy,” Smith writes.

Which is to say, because Basel II requires banks either to hold highly rated (and, on paper at least, less risky) portfolios, or to hold high levels of capital in reserve, the banks could be forced to slow lending in order to accumulate capital, go hunting for additional capital injections or sell off their now risky CDO portfolios.

In the US banks had less incentive to invest in highly rated paper because they have been required to hold the same amount of capital against AAA-rated paper as they do against BBB-rated paper. This is the most likely explanation for why the European banks are more worried about a downgrade of the monolines than their US counterparts.

Deutsche Bank CEO: Bond Insurer Downgrade Will Create Debt " Tsunami" [Naked Capitalism]

In the latest round of bonus wipe-outs, it seems the JP Morgan’s structured credit group is feeling the pain of the credit crunch in its bonus numbers this year. Nearly every member of the small group will see it’s bonuses decline this year as compared to last year, with the total year end incentive pay for the group declining by more than 40%, according to information obtained by DealBreaker. While salaries for the group were slightly higher this year than last, the year end incentive pay numbers are dramatically lower, meaning that nearly every member of the team will receive less total compensation this year. (Two lucky souls, who are not among the top paid members of the structured credit group, are receiving more this year than last year.)

Keep in mind that these compensation numbers are provided by readers. We want more! Please email us your bonus information or just the latest bonus rumors! Send it to tips@dealbreaker.com. JP Morgan would not comment on compensation numbers.

JPMorgan has named Barry Zubrow chief risk officer, the bank announced today. It's a job no one's done in almost a year, since Don Wilson retired, which would be hilarious if we were talking about Merrill or any of the other shit for brains banks on the street, but we're not. I guess the only funny thing to say is that the new guy's name reminds me of Barry Zuckercorn, who I am more or less dying to run a pic of with this post but won't, because I see things to their completion. Speaking of people whose faces I'm jumping out of my skin to put on the site, Bar was an adviser to Jon Corzine when the big guy worked at Goldman Sachs. That wasn't an attempt to inject more hilarity into this racket, just a bit of info that warms my heart of stone, and and the game-winning answer to tomorrow's trivia night. (You and your teammates can thank me later.)
JPMorgan Appoints Barry Zubrow as Chief Risk Officer [Bloomberg]

We’re back on the Amaranth beat this morning, and as long-time readers know, once we get our jaws around something, it takes awhile for us to let it go. After writing a bit about Amaranth’s lawsuit against JP Morgan this morning, we decided to take another look at an item published on the suit by BreakingViews, a subscription-only financial news site. It’s written as if it’s uncovering a new strategic mistake by Amaranth but we can squint our eyes a little bit and see it as a bold attack on JP Morgan.

The thrust of the BreakingView’s piece was that Amaranth had blundered by using JP Morgan as its principal broker.

“In the wake of the 1998 near-collapse of hedge fund Long-Term Capital Management, many funds that used only one prime broker found those banks pulled their credit lines, forcing the funds out of business,” Breaking Views explains. “It’s now standard practice to use several prime brokers in the hope of avoiding such a fate, and to ensure no one institution can see a fund’s entire trading strategy. Amaranth itself had a dozen prime broker relationships. But it put the bulk of its trades for its main energy strategy through only one.”

Relying too heavily on JP Morgan may well have been a mistake on Amaranth’s part. But we expect that’s not an argument that JP Morgan’s prime brokerage business would like to hear made too loudly. After all, they hardly market themselves to clients with the warning: don’t give us too much business or we’ll hold you hostage and capitalize on knowledge of your strategies. But that’s exactly the danger Breaking Views is saying Amaranth ought to have recognized.

Double whammy [BreakingViews; subscription required]

We noted in yesterday’s Opening Bell that Amaranth had filed a lawsuit against JP Morgan, claiming the bank undermined its efforts to stave off collapse. We’re late to the details of the lawsuit because we were overtaken by events yesterday but we’ve now had a chance to review the lawsuit.

Amaranth’s main claim is that JP Morgan interfered with Amaranth’s negotiations with Goldman Sachs and Citidel, forcing Amaranth to cut a more expensive deal with JP Morgan. According to Amaranth’s lawsuit, Goldman had agreed to take over its money-losing positions in the natural gas market for a $1.85 billion payment from Amaranth. But JP Morgan, which as acting as the hedge fund’s clearing broker, refused to execute the transaction and Goldman walked. The suit also claims that Citadel initially to assume the positions $1.85 billion but the JP Morgan executives talked Citadel out of it, according the lawsuit.

With nowhere else to turn, Amaranth ended up selling its positions to JP Morgan—which took them over in exchange for a $2.5 billion payment.

JP Morgan is denying any wrong doing, of course, and calls the lawsuit “baseless.” But there have long been questions about the many roles JP Morgan played in the collapse of Amaranth. At the very least, JP Morgan’s role as Amaranth’s broker gave it insider knowledge of Amaranth’s trading strategies—which may have allowed its traders better access to information than some of the outside bidders. In the months after Amaranth’s collapse, several top energy traders were left the bank under somewhat murky circumstances. And from what we know about lawsuits, this may well be just the start of things. Amaranth could use this lawsuit to start a discovery process that would include depositions of JP Morgan executives and review of internal documents in hopes of uncovering even broader wrong-doing.

Amaranth’s Dream-Team Law Firm: Beck, Webb & Boies [LawBlog]
Amaranth's lawsuit [Wall Street Journal]
Amaranth's letter to investors regarding the lawsuit [Wall Street Journal]
Amaranth Sues JPMorgan for Disrupting Transactions [Bloomberg]

The "worst year ever" for layoffs in finance just got a little bit worse. This morning JP Morgan cut a number of bankers in its loan structuring group, according to a source at the bank. The cuts are said to have hit “expensive people” hardest: three out of four vice-presidents are said to be gone and at least two associates were let go. The most junior employees, the analysts, have “not yet” been let go.

Although the number of jobs lost is not high in absolute terms, they amount to between ten and twenty percent of the large loan structuring group, the source says. This would put the number at the high end of JP Morgan’s claim that it planned to cut "less than 10 percent" of its fixed-income division .

There have also been cuts in the commercial mortgage backed securities conduit origination group and the underwriting group, the source reports. As with many of the recent cuts on Wall Street, these have hit in operations closely connected to the weakest areas of the debt market.

JP Morgan could not immediately be reached for comment on the layoffs.

Almost lost among the widespread relief that JP Morgan Chase didn't suffer a Citigroup or Bank of America like third quarter was the poor performance of the bank's commodities trading operations.

It's hard to believe, but it was just last year that Jamie Dimon was telling analysts that bulking up its commodities and asset-backed securities trading would diversify the banks trading business and smooth out volatility. In March of this year, JP Morgan's co-head of investment banking, William Winters, was telling investors that the bank expected energy trading to add somewhere between $100 million and $160 million in annual earnings in 2007. As late as June, JP Morgan was announcing plans the expand its commodity-trading staff by more than 30 percent, or 40 more people.

The plan hasn't quite worked out, and now might be a good time to ask what happened. Last year, the plan seemed to be working. The bank scored a windfall by scooping up the assets of Amaranth and then flipping them to Citadel. But shortly afterwards it lost several top commodities traders.

Parker Drew, who was recruited in 2005 to run the gas trading business after his own hedge fund folded, left the bank at the end of 2006. George Taylor, who ran the bank's energy business, left in May 2007, and shortly after words Trevor Woods, who had replaced Drew, left. Three others also followed Taylor out the door.

At the time of these high level departures, there was a lot of speculation that they were connected to the bank's role in the collapse of Amaranth. JP Morgan’s was the clearing firm for energy traders at Amaranth, and it's margin calls reportedly helped bring the hedge fund down. When the bank then bought Amaranth's positions as it struggled to meet margin calls and return money to investors, many raised an eyebrow at how the bank seemed to be profiting from the troubles of its client. There was speculation that the bank may have decided that some of its traders were on too many sides of Amaranth's collapse.

This was hardly an undisputed position, however. The bank said the departures had nothing to do with Amaranth. Others say the traders left because they were unhappy with their compensation following the massive profits the desk made for the bank in 2006.

In June, the bank hired Foster Smith from Deutsche Bank to head U.S. power and natural-gas trading. Deutsche was tied with JP Morgan as the fifth largest energy trading bank in 2006. It's clear that the energy trading operation's performance has been a huge disappointment for the bank, and that Smith seems to have stepped into a mess. We haven't found solid numbers on the energy trading performance, but JP Morgan describes it's commodities trading performance—a broader category—as "weak." That's still not much solid guidance about what went wrong but it's a starting place.

(Just kidding about that whole bribing o’ analysts thing but with everyone—including Can’t Do Anything Right Citigroup—“beating” analysts’ “expectations,” doesn’t seem so crazy, does it? You’d be surprised how far a free dinner at the Hawaiian Tropic Zone will get you with an analyst at UBS AG. Lloyd Blankfein knows what we’re talking about.) Anyway, JP Morgan’s third-quarter net income rose 2.3 percent to $3.4 billion (97 cents/share), up from last year’s $3.3 billion (92 cents/share). Analysts had previously forecast earnings at 90 cents a share. This was exciting, because it made the $1.64 billion in write-downs on leveraged loans and collateralized debt obligations (which caused investment banking profits to fall 70 percent to $296 million) not seem as bad. With the exception of Goldman, JP Morgan handily won the Q3 pissing contest, with Merrill Lynch expecting to lose tons of money in the quarter on account of $5.5 billion in write-downs, and Citigroup’s triumph over analysts’ expectations earlier this week, which saw the behemoth posting a 57 percent decline on fixed-income losses. Though, to curb JPM’s enthusiasm only slightly, one might note that Citigroup has been on the receiving end of a golden shower, and pretty much drowning in it, for some time now. Still, unworthy an adversary as the C might be, it’s nice to see Jamie Dimon wiping the floor with the firm that pushed him out the door instead of naming him CEO, as Deal Journal notes this morning. Also, Meg McMullen, chief of New England Research & Management called Jamie Dimon “a smart cookie,” and, to be honest for a sec? We kind of dig the soccer mom-ness of it all. Like she's the antidote to our golden shower or something.

JPMorgan Third-Quarter Profit Rises, Beats Estimates [Bloomberg]
Dimon to Chuck Prince: Watch and Learn [Deal Journal]
JPMorgan Profit Rises, Despite Writedowns [CNBC]