Monday, March 24, 2008

Bear saga not over yet ?

It appears the Bear saga is not over yet. JP Morgan is said to be willing to raise its offer price for Bear's shares from $2 to $10. The offer was prompted by the possibility of Bear shareholders moving to block the deal.

One detail that caught my eye in an FT report was about a clause in the deal announced last week that says that JP Morgan will guarantee Bear's trades even if the deal was voted down! How on earth was such a clause include or overlooked?

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 honour 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.


Anonymous said...

Hmm, those brainiacs at Wachtell, Lipton better come up with a legal theory to put this on Uncle Sam. I dunno, contract of adhesion (unequal bargaining power), alternately, collateral estoppel-- whether or not there's a valid written contract between JPMorgan and Bear, there's also an (unwritten) agreement between JPMorgan and the US government. Since JPMorgan has fulfilled its end of the bargain to its detriment, Uncle Sam is obligated to cover JPMorgan's losses related to the contract. Estoppel damages are limited to restitution of costs incurred, unlike an ordinary contract suit for expectancy damages (the profits JPMorgan expected to make from the deal).

Finally, since JPMorgan has committed to the deal and promised to perform but Bear has no commitment and has made no promises yet, you could argue that Bear has been given a "free option" and since no consideration has been given for this option, there is no valid contract.

An exchange of promises is a binding contract. When one side has made a promise and the other side has not (shareholder approval being necessary for that here), that's an option contract. An option premium must be paid for it to be binding.

Yeah, this whole mess is gonna end up in bankruptcy court eventually.

T T Ram Mohan said...

Beowulf, very interesting, the legal tangles you mention. I still think it 's unlikely to go to bankruptcy court because the Fed has enough muscle in a situation like this- can't see too many people taking on the Fed when push comes to shove.


Krishnan said...

The Fed says "$2/share and we will advance you $30 billion using your collateral even though we may lose" - Bear Stearns throws a fit, JP Morgan says "OK, OK - We'll give you $10/share and take on responsibility for $1 billion of the $30 billion" - Attorneys, share holders, employees all scream and yell and demand more ... Perhaps the Fed will cave in and be held hostage to the theory that "failure is not an option" and so will dump more money to rescue bad deals gone wrong. Of course some of the people responsible for the mess will walk away with millions of dollars of public money and leave the tab to the tax payers since "failure is not an option" ... It is abominable that reckless behavior is not held accountable. It is one thing to keep adding grease so the financial markets will function and not choke up - it is quite another to bail out investors/companies that made poor choices and now want to drink from the public trough.

I see that happening with HomeBuyers also. People recklessly purchased homes expecting that they can flip it to the next sucker, take their money and run. When the bubble burst, they started wailing. Yes, there are many who for no fault of their own got caught in the mess, but many, many more simply took their money when the going was good and ran ... and are still running.

Hilary Clinton wants the Congress to pass legislation to release/use atleast 30 billion dollars to help the "poor homeowners". A billion here, a billion there - soon it adds up to real money. What the heck, it is political season here and soon we will see even more money being thrown around.