Much of the information following was taken mostly from three articles: one at Bloomberg.com,  one at the NY Times, and one at the Wall Street Journal:

From the NY Times:

From the WSJ:

The government sought a low sale price for Bear Stearns Cos. to send a message that taxpayers wouldn't bail out firms making risky bets, a top Treasury Department official testified, as regulators offered Congress the first detailed explanation of the unprecedented rescue.

"This would have been far more, in my opinion, expensive to taxpayers had Bear Stearns gone bankrupt and added to the financial crisis we have today," said J.P. Morgan chief executive James Dimon. "It wouldn't have even been close."

Since the Federal Reserve made the deal possible with a $30 billion loan, critics have questioned whether the government was creating "moral hazard" -- encouraging Wall Street firms to take big gambles on the assumption that they could get a taxpayer-funded rescue if the bets went sour.

(By the way, JP Morgan-Chase takes the first $1 billion in losses, if there are any, BEFORE the Fed's $30 billion "kicks in.")

Interesting reports, complete with political posturing, $4 million made in a weekend by the Fed. and many allusions to the Bank Panic of 1907 that led to the creation of the Fed in December of 1913.

An aside, it was JP Morgan himself (with his wealth) that backed the Knickerbocker Trust in 1907, preventing the total collapse of the U.S. banking system.  Congress back then decided that rather than one person backing the U.S. banking system, we needed a central bank to be the lender of last resort.  Thus we now have the Federal Reserve System, created in December 1913.

The lending discussed here is not totally precedent setting as the Continental Illinois Bank was bailed out in 1984, however that was a bank, Bear Sterns is a brokerage firm.  Also note that not until 1933 did the Glass-Steagall Act separate banks and brokerages, and now that act has been repealed (in 1999).  So are banks to be handled differently from brokerages?  I would say "not now!"

The political posturing in the Senate committee - (from the FT):

"I want to hear from our witnesses why they thought it was necessary to stop the invisible hand of the market from delivering discipline,'' said Senator Jim Bunning, a Kentucky Republican. "That is socialism.''

Dimon and others testified to Congress on Thursday (in the U.S.):

The testimony provided the most extensive account yet by participants in the largest U.S. rescue of a securities firm. Dimon, New York Federal Reserve President Timothy Geithner and Fed Chairman Ben Bernanke defended the bailout while some lawmakers said it only rewarded risky market bets. The officials compared the turmoil they feared that weekend to the Panic of 1907 and the Great Depression-era run on banks.

The Anatomy or how the rescue proceeded (according to the testimony and Bloomberg.com):

Geithner heard on a conference call with the Securities and Exchange Commission on March 13 that 85-year-old Bear Stearns was ready to file for bankruptcy. The firm had appealed for emergency funding to JPMorgan, its clearing bank.  Dimon, celebrating his 52nd birthday that day, called the New York Fed.

Bernanke, Treasury Secretary Hank Paulson and Geithner agreed on a 5:30 a.m. conference call the next morning that the Fed would make an emergency loan to Bear through JPMorgan.

Bear Stearns executives thought they had at least 28 days to consider options, including finding a buyer, CEO Alan Schwartz told the committee. By Saturday, the Fed insisted the situation would have to be resolved over the weekend, surprising Schwartz, he said. Officials expected panic selling when Asian markets opened, according to Geithner.

"The sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and would have severely shaken confidence,'' Bernanke said.

...........

No Takers

[No one wanted to take the risks involved with Bear Stearns assets.]

On that Sunday morning, New York-based JPMorgan balked too. Dimon told Schwartz, Geithner and Paulson that the risks were too high.

"This wasn't a negotiating posture,'' Dimon said. ``It was the plain truth.''

Geithner urged Dimon to reconsider. The Fed's other options were even less attractive, he said.

The government didn't want to guarantee Bear's assets. If it bought time by loaning more money through JPMorgan, the Fed would have had to keep pouring funds into a company that was bleeding customers and cash, Geithner said. Taking an equity stake in Bear or JPMorgan wouldn't be legal.

The Fed could lend against collateral, Geithner said. That was the option the bank chose, agreeing to loan as much as $30 billion in exchange for Bear securities.

Panic of 1907

In his testimony, Geithner reached back to the Panic of 1907, when a run on the Knickerbocker Trust set off a wave of selling that convulsed the New York Stock Exchange.

"Are there risks here?'' the New York Fed chief said. "Yes, but the risks are modest in comparison to the substantial damage to the economy.''

Over the following week, the parties would refine the deal, with JPMorgan raising its bid to $10 a share from $2 and agreeing to take on the first $1 billion in Bear's losses.

Belying regulators' fears of a selloff, the Standard & Poor's 500 Index fell less than 1 percent the day after the deal was announced. Since March 10, the index has rallied 7.5 percent.

That Monday, Geithner said, the Fed also got back the $13 billion it had loaned JPMorgan in the emergency funding measure -- with weekend interest of $4 million.

Further from the WSJ:

Along with the sale announcement on March 16, the Fed announced that it would lend directly to investment banks from its discount window, a historic reversal of its longtime policy of lending only to banks. While some have said that Bear Stearns could have avoided a sale if it had had access to the new lending program, Mr. Geithner said that wasn't feasible.

"We only allow sound institutions to borrow against collateral," he said. "I would have been very uncomfortable lending to Bear given what we knew at that time."

HOW did this happen, from another bloomberg.com article:

Bear Stearns helped trigger a Wall Street credit crunch after two of its hedge funds, which had invested in securities linked to subprime mortgages, collapsed in July. Bear Stearns's fourth-quarter loss of $854 million was the first in its 85-year history.

``The reason Bear Stearns failed was because they invested in highly risky subprime investments,'' said Lynn Turner, a former U.S. Securities and Exchange Commission chief accountant. ``While the Fed making a loan available sooner might have helped, it wouldn't have resolved what caused the failure of this institution.''

STAY TUNED - New Regulation has been proposed - a whole new Fed.?!!?