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Since the elimination of the Glass-Steagall Act in 1999 -- a move that broke down the wall separating commercial and investment banks that had existed since the 1930s -- the Federal Reserve never changed its discount lending policies. In other words, until Sunday night, when Bear Stearns was already destined for the dustbin, the Fed was able to make loans to commercial banks like JPMorgan Chase, but not directly to brokers like Bear Stearns.
Throughout the credit crisis, which dates back to last summer, the Fed's discount lending to banks was supposed to trickle down to brokers. But it never really did. Big banks either horded their cash or spent it for their own various purposes. As one Bear Stearns official noted to me, this is the first credit and lending crisis since the end of Glass-Steagall. And the consequences for Bear Stearns were catastrophic. While the Fed announced a $200 billion auction lending facility for both banks and brokers last Tuesday, that facility won't be activated for a couple more weeks. So no help there.
But if the Fed had changed its discount polices to reflect the post-Glass-Steagall era, Bear Stearns could have accessed short-term Fed loans, even for a few days. That could have made all the difference in the world.
The fact that JP Morgan has upped the price of it's offer means that Bear Sterns was in better shape than everyone thought. 