Other people did a good job explaining the basics. The issue is about book value and the complexity of the risk. The risk is similar to what the firm Citadel di

Other people did a good job explaining the basics. The issue is about book value and the complexity of the risk. The risk is similar to what the firm Citadel did with E*Trade. The risk on the books of Bear Stearns can't be fully calculated and JP Morgan is assuming that risk, hence the low price. The Fed is possibly going to limit the downside risk of JP Morgan to keep stability in US financial markets, though they are not putting up any additional capital upfront. Roger Ehrenberg has some great blog posts on the topic (he used to run a big hedgefund and now has an NYC startup called Monitor110): http://www.informationarbitrage.com/2008/03/the-bear-facts.html http://www.informationarbitrage.com/2008/03/the-bear-facts.h... http://www.informationarbitrage.com/2008/03/i-bear-ly-knew.html http://www.informationarbitrage.com/2008/03/i-bear-ly-knew.h...