Bear Stearns (NYSE:BSC)was sold to J.P. Morgan Chase (NYSE:JPM)over the weekend for $2 per share in stock. The Federal Reserve also provided substantial financing to J.P. Morgan Chase to facilitate the transaction. This is quite incredible since Bear Stearns stock traded over $60 per share last week and over $100 per share late last year.

The Federal Reserve also announced additional measures to provide liquidity to the market. It lowered the discount rate by 0.25% to 3.25%, reducing the discount window penalty to 0.25% from 0.50%. It also established a lending facility for primary dealers directly as opposed to through banks.

What do we make of all this? The Fed has established that it will not allow the system to fail. It understands the risk that a bankruptcy from a major bank or brokerage firm would cause and will not allow this to occur. This could cause a breakdown of the financial system on a global scale. A similar credit crisis occurred after the Crash of 1987.

On the other hand, this seems to indicate that shareholders will not receive a bailout. The Fed is essentially saying to a non-bank player, such as Bear Stearns, if you get into trouble which endangers the financial system, we will arrange for an orderly pre-packaged bankruptcy. Our concern is the financial system, not your survival. In essence, if you come to us, we are concerned that death occurs in an orderly manner.

This is very similar to the Fed takeover of Continental Illinois in the mid 1980's. This bank was considered too large to fail. The Fed took over, and shareholder value was eliminated.

Any actual bailout will probably be limited to banks that are regulated by the Fed. However, there will be no free lunch. The Fed is concerned with market stabilization now. In the future since these institutions are under the regulation of the Fed, the costs of this bailout will then be accessed on them. If you want to look at precedent for such a situation, the early Chrysler bailout is a good example.

The Fed has indicated that it will not allow the system to fail. However, the penalty for those who put the system in danger will be severe, quite possibly fatal.

Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com, an independent research firm focusing on investment strategies using the Federal Reserve's impact on the stock prices. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.