Haste makes waste

Several interesting revelations came out in today's NY Times story on JP Morgan's effort to increase the price it is paying for Bear Stearns shares from $2.00 a share to $10.00 a share. One might wonder why the buyer would try to increase the price it was paying. Part of the reason, of course, is to preserve the deal, since it has become clear there is a real possibility that the shareholders would reject the $2.00 deal (if they wouldn't have rejected before this article, they're sure to now). But, as it turns out, there's a very compelling reason why JP Morgan doesn't want the deal to fail -- they inadvertently guaranteed Bear's obligations regardless of whether the deal goes through or not.

JPMorgan and Bear were prompted to renegotiate after shareholders began threatening to block the deal and it emerged that several “mistakes” were included in the original, hastily written contract, according to people involved in the talks.

One sentence was “inadvertently included,” according to a person briefed on the talks, which requires JPMorgan to guarantee Bear’s trades even if shareholders voted down the deal. That provision could allow Bear’s shareholders to seek a higher bid while still forcing JPMorgan to honor its guarantee, these people said.

When the error was discovered, James Dimon, JPMorgan’s chief executive, who was described by one participant as “apoplectic,” began calling his lawyers at Wachtell, Lipton, Rosen & Katz to seek a way to have the sentence modified, these people said. Finger pointing over the mistakes in the contracts began as bankers blamed the lawyers and vice versa.

It's hard to believe anyone would sign onto such a deal -- accepting the liabilities without getting the assets to support them. It's hard to imagine how such language ever got into the drafts of the deal. Was this the Fed at work? Apparently the Fed is trying to block the price increase in order to preserve the appearance that they didn't bail out the shareholders. But, it is rather troubling that the Fed seems to think it can intervene in this way to punish the shareholders (many of whom had nothing to do with the company's failure) by robbing them of assets that might rightfully be theirs in a bankruptcy proceeding. We're treading into very murky water in this, and everyone should be uncomfortable.

Update: Mrs. Walldon just made an interesting observation after hearing this tale of PJMorgan. Maybe we could put our house on the market, get JPMorgan to assume responsibility for our mortgage, skip out of the deal to sell them the house while leaving them with the mortgage liability. And, with any luck, maybe we could also get them to guarantee the mortgage loan for our new house as well!