Bear Stearns made its money through arrogant leveraging. They borrowed low-interest short-term money in a volume of 30 times their capital. Then they lend this money out for higher rates and for long term mortgages. The mortgages were decalred 'assets' and pledged as collataral against the borrowing.
When the people who gave money to Bear Stearns found out that many of the mortgages would likely default, they asked for more collateral or early payback of their loans to Bear Stearns. With the missmatch in maturity and a defunctional market of mortgage papers, Bear Stearns could neither give more collatoral, nor pay back what they had borrowed.
That's when the Fed stepped in Thursday and gave them unknown billions for shabby collatoral. It did so again last night.
With $2 a share Bear Stearns now has capital of some $300 million. The Fed yesterday pledged to lend another $30 billion for Bear Stearns.
The company is thereby now leveraged at at least 100 to 1, more likely at 450 to 1, without any of its problems solved. It is bankrupt. I wonder how JP Morgan thinks it can survive the deal it just made.
There are many more candidates out there with the same problem. Lehman, Citibank, Washington Mutal ...
They should be either let fall down or nationalized without paying one cent to the shareowners and with their management fired immediately without compensation. Anything else is socialism for the rich. Taxpayer money pledged to hold up the wealth of billionaires.
Just don't expect the NYT to tell you that.