Hey, how come that hedge fund got bailed out and I didn't?

Bear Stearns has always been the pesky, streetwise, kid brother in the Wall Street family—smaller, younger (it was founded in 1923), and less polished. Bear lacks Goldman Sachs' tradition of public-minded financiers, the brand name of Merrill Lynch, the proud WASP lineage of Morgan Stanley, or the overwhelming size of Citigroup and Chase. Bear Stearns' market capitalization is a measly $21 billion, less than one-tenth that of Citigroup. CEO Jimmy Cayne isn't a Harvard MBA; he's a former scrap-iron salesman who didn't complete his studies at Purdue. Bear Stearns confirmed its outsider status in 1998 by refusing to participate in the Wall Street-orchestrated bailout of faltering hedge fund Long Term Capital Management.

But now Bear Stearns has finally joined the club. Last month, facing a crisis at two large hedge funds run by its asset management unit, Bear Stearns agreed to bail out one of the funds (and its many creditors) by providing a $1.6 billion line of credit. The move, intended to spare Bear Stearns embarrassment and protect the reputation of its asset management business, also had a take-one-for-the-team result. It insulated fellow Wall Street firms from losses and prevented widespread damage to similar hedge funds.

The details of the Bear Stearns rescue may fascinate only those who devour the Money & Investing section of the Wall Street Journal.But because it reinforces the notion that the big boys get pampered when their investments go bad, the bailout should resonate.

The two Bear Stearns hedge funds ran into trouble by borrowing heavily to invest in CDOs (collateralized debt obligations), investment vehicles that hold bits and pieces of subprime mortgages. (Wall Street's Jungle-esque food-processing machinery chops and dices mortgages like clams, into strips, bellies, and other parts, and peddles them to investors with different appetites for risk.) This year, the value of many of the assets in CDOs has fallen as delinquency rates on subprime mortgages have risen to record levels. According to the Mortgage Bankers Association, in the first quarter of 2007, 5.1 percent of subprime loans were in foreclosure and a whopping 15.75 percent were delinquent.

The falling prices of the securities backed by such loans spelled trouble for the Bear Stearns hedge funds, and for gigantic Wall Street firms like Merrill Lynch, which had extended billions of dollars in credit to them. Falling returns could push investors to ask for their money back, which could force the funds to liquidate. To protect themselves, lenders could effectively foreclose on the fund—grab the assets posted as collateral and sell them. In June, Merrill Lynch seized some $850 million in assets from the Bear Stearns funds. Not surprisingly, Merrill had a hard time getting a good price for them. After all, these were distressed assets in a distressed market. Had other firms followed Merrill's lead and dumped billions of dollars of securities onto the market, it would have thrown the whole subprime mortgage-backed securities market into chaos. By selling them at fire-sale prices, the firms would have forced all the other hedge funds run by their colleagues, friends, and customers, which held similar assets, to mark down the value of their subprime CDO assets.