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JP Morgan’s “Overbroad” Guarantee: Why It Was Necessary.

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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.