Stocks plummeted more than 200 points early this morning after news of an unprecedented bailout of embattled Bear Stearns (NYSE: BSC) hit the wires last last night. J.P. Morgan (NYSE: JPM) announced that it would purchase Bear Stearns for a mere $2 per share with $30 billion in financing provided by the Federal Reserve. The disappearing act that wiped out billions of dollars worth of value in a matter of days has investors on edge now more than ever.

The problems at Bear Stearns began when speculation of a liquidity crisis at the company hit the market. The rumors turned to reality when the steep drop in the company's shares caused many of its creditors to ask for more collateral that the highly leveraged firm didn't have available. The emergency bailout now involves J.P. Morgan guaranteeing all of these trading obligations and was designed to reduce the risk of the broader financial system freezing up even more.

Some Bear Stearns shareholders are also looking at the possibility of additional bids from other interested parties that could include private equity firms like J.C. Flowers & Co. and Kohlberg Kravis Roberts & Co. Currently, shares are trading well above the $2 per share buyout price despite many analysts now saving that there is zero possibility of any additional bidders. The reason is that nobody knows the extent of the damage while J.P. Morgan actually plans to lose $6 billion on the transaction.

Unfortunately, many other vulnerable investment banks took a major hit on the news and could suffer as a result. Lehman Brothers (NYSE: LEH) lost nearly a third of its value so far today while even strong companies like Goldman Sachs (NYSE: GS) took a nearly 10 percent hit. Not all of these investment firms have material liquidity problems, but the steep drop in share prices could force margin calls and cause some major problems.

In the end, Wall Street is still trying to come to grip with the fact that a major investment bank trading at over $57 per share days ago could lose so much value so quickly with a mere whisper of liquidity concerns. Today's bailout will keep the larger financial system liquid, but the future now looks more cloudy than ever as the body count from the mortgage meltdown and credit crisis keeps increasing on a daily basis.

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