Bear Stearns (NYSE: BSC) can handle the credit markets but rumors are another story. Rumors surfaced early this week that the investment bank was facing liquidity concerns and shares fell sharply. The next day, CEO Alan Schwartz told CNBC that the rumors were absolutely not true and the company had sufficient liquidity. Unfortunately, shareholders failed to believe the firm and shares dropped over 30 percent today- sparking some very real liquidity concerns.

The dramatic drop in Bear Stearns share price forced the firm to seeking backing in the event that it has a real liquidity crisis. The firm announced that it reached an agreement with J.P. Morgan (NYSE: JPM) and the Federal Reserve that will provide it with secured funding for an initial period of up to 28 days. J.P. Morgan also said that it is working closely with Bear Stearns on securing permanent financing or other alternatives for the troubled Bear Stearns.

“Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity,” said Schwartz. “We have tried to confront and dispel these rumors and parse fact from fiction. Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations.”

Investors and analysts remain divided as to whether or not there are really problems at Bear Stearns. Some view this new plan as a bailout and a last-ditch effort to save the investment bank. Meanwhile, the firm itself insists that it is simply securing additional funds just in case its share price keeps dropping and it experiences a liquidity crisis. The truth is that it is a little bit of both. The rumors turned out to be the cause of the problems.

Investment banks rely on their own stock to secure loans in swap agreements while they leverage their market cap to obtain financing. Now that Bear Stearn’s stock is in the poor house, the loans they backed with stock in the past may now need some hard cash. These additional capital requirements may be too much for the firm to handle, which is why it was forced to seek this additional line of credit from J.P. Morgan and the Federal Reserve.

In the end, this story goes to show just how powerful some rumors are in the marketplace as they can actually turn into fact. The one thing investors can look forward to at this point is that rumored buyout- now that BSC stock is so cheap it could be much more likely at these levels. Combined, these factors make BSC a stock worth watching!