Q&A | Bear Stearns bailout: What, or who, is next?

NEW YORK — After Bear Stearns said Friday it will have to borrow money through JPMorgan Chase, backed by the New York Federal Reserve, investors are curious: What does this mean for other banks, and who might be next?

Q: Is this going to happen to other investment banks?

A: Nobody knows for sure, but it could. Until proven otherwise, the market will probably act as if there are more near-collapses to come — just as it did on Friday.

Q: Which other institutions might need funding?

A: Bear Stearns has been the weakling among the five reigning Wall Street investment banks: Bear, Merrill Lynch, Morgan Stanley, Lehman Brothers and Goldman Sachs. Many market watchers will recall that last spring, Bear was the first of these institutions to reveal big problems with mortgage-linked debt when it had to pump cash into two hemorrhaging hedge funds.

Also, Bear is the smallest of the five big investment banks and the least diversified.

But Lehman Brothers Holdings appears to be an investment bank that investors are very worried about right now — mainly because it is the investment bank that is most similar to Bear in structure and exposure. Its stock dropped more than 14 percent Friday.

Other banks certainly have their own troubles — Merrill Lynch, for one, wrote down more than $14 billion in the fourth quarter as the value of bonds and debt backed by souring mortgages fell.

Q: What will happen to Bear Stearns?

A: Few industry experts believe the 28-day loan will be enough for Bear to become liquid on its own again — most are viewing it as delaying tactic as Bear and the Fed figure out how to proceed.

It is possible Bear will be bought, perhaps by JPMorgan.

If that happens, the buyer would have take over Bear Stearns' $176 billion worth of distressed securities and its $42 billion in loans — not a rosy prospect for even a healthy bank.

Furthermore, there are regulatory issues that may arise if a commercial bank wants to buy Bear's troubled assets.

Another scenario is that the Fed attempts to organize an orderly winding down of Bear Stearns into a much smaller company by selling off its assets.

Q: How is Bear's loan different from other steps troubled financial institutions have taken?

A: Bear Stearns is not the first company to seek out cash — Citigroup, Merrill Lynch and Morgan Stanley have pulled in several billion dollars by selling stakes to outside investors, including foreign governments, while the bond insurer MBIA sold a significant stake in itself to JPMorgan, Lehman Brothers and other investors.

But Bear Stearns' agreement with JPMorgan is not a stake sale — it's financing planned and backed by the U.S. government.

Q: Why can't the Fed let Bear Stearns collapse?

A: Typically the Federal Reserve bails out struggling commercial banks, but because Bear Stearns is inextricably linked to a huge number of institutions, a failure could cause "a ripple effect." said Ali Samad-Khan, head of operational-risk-management consulting for the Enterprise Risk Management practice at Towers Perrin.

"They probably fall into the too-big-to-fail category," he said. "The fact is, they recognized that this is an important enough issue for them to get involved in."

Bear Stearns is interconnected with other banks, hedge funds and investors that are its "counterparties."

Essentially, if Bear can't meet obligations to these counterparties, those counterparties will lose their money.

Big banks like Citigroup could see big losses but are probably large and diversified enough to survive them.

But smaller players on the edges — particularly hedge funds — are at risk of going under if Bear can't repay them.

A Carlyle Group fund has already said it is near collapse. Failing hedge funds could be another hit to major banks, who have lent huge amounts of money to the funds.

Associated Press business reporter Leslie Wines contributed to this article.