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]