JPMorganChase Quietly Drops The Idea That The First Bear Stearns Guaranty Was A Mistake Bank Admits The Real Problem Was That The Guaranty Wasn’t Working

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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.

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