A report from Bear Stearns (BSC: sentiment, chart, options) that the bank's liquidity position has "significantly deterioriated" during the last 24 hours has sent stocks tumbling and market regulators scrambling. The investment bank has reached an agreement with J.P. Morgan Chase to provide a secured loan facility for up to 28 days, and Bear is working with J.P. Morgan on permanent financing or "other alternatives" to strengthen its liquidity.

The Federal Reserve's board of governors voted unanimously to approve the Bear Stearns/J.P. Morgan arrangement, and the Fed added that it is watching market developments closely in the wake of the announcement. The central bank stands ready to bolster liquidity as necessary in order to ensure that the market can function without major disruptions.

Treasury Secretary Henry Paulson gave his nod of approval to the Fed's leadership role in providing financing for Bear and "enhancing the stability and orderliness of our markets." The Securities and Exchange Commission has also jumped into the fray, noting that it has been in close contact with both the Treasury Department and the Fed to help maintain order and liquidity.

At last check, Bear Stearns shares have taken a 40% plunge, tanking to a new annual low of $26.85. The warning from Bear is also dragging down the broader market; the Dow Jones Industrial Average (DJIA 11,992) has shed its early upside bias to trade sharply lower. The blue-chip bellwether is down more than 150 points at last check.