I used to work in the industry, so I will take a stab at explaining this: Bear was overleveraged. The summer of 2007 saw the failure of two internal hedge fund

I used to work in the industry, so I will take a stab at explaining this: Bear was overleveraged. The summer of 2007 saw the failure of two internal hedge funds at the company, a confidence crusher. As 2007 wrapped up, the subprime issue spread to other credit markets, effectively freezing the financial system. Bear found it more and more difficult to obtain short-term funding to cover their existing debt that was coming due. Last week, the CEO came on CNBC and stated that there was no liquidity problem at that time. I don't doubt that statement. Then came Thursday morning. A fund at the Carlyle Group failed, and Bear had a lot of business with the Carlyle group. It was the failure at Carlyle that finally TKOd Bear, but it was only a matter of time before it did indeed happen. Now, had Bear declared bankruptcy, which they would have had it not been for JP Morgan, a panic none of us have seen in our lifetime would have ensued. Bear would have been forced to dump all of its assets on the market, even the ones that Wall Street doesn't even know how to price. A complete breakdown of the US financial system would have ensued, and there would have likely been a run on not just an investment bank, but a retail bank as well. The Federal Reserve is not in the business of bailing out companies that mismanage their businesses, but they are in the business of maintaining an orderly market (in addition to their mandate to control the money supply). When Bear went to the Fed on Friday, the Fed knew they'd have to find someone willing to take Bear. JP Morgan was the company best situated to buy Bear; JP Morgan had the capital and was looking for a prime brokerage division and better clearing operations. While Bear provided both of those, there is a large set of unknowns on Bear's balance sheet, and had the Fed not offered to cover up to $30 billion of the more illiquid assets, the deal would have fallen through. Part of the taxes you pay will be used to eat any losses the Fed takes.