The financial world is basically about money transferred between entities. A large part of this is lending by banks and other investment institutions. What is common is that these institutions lend more money than they have, this is known as leveraging.
Recently, because of lack of regulation, this leveraging has increased to levels that were " neither responsible nor prudent", Ben Bernanke, American Federal Reserve Chairman.
The rule used to be that these institutions face either a profit or loss on their investment which they alone bear. The Federal Reserve has now changed the rules for some of these banks. They have decided that one or two of these banks, outside their regulatory framework, are now so important they cannot be allowed to fail. Bear Stearns is one of these.
And so, by changing the rules, the financial system is now faced with ‘moral hazard’. This is when an individual or institution does not bear the full consequences of its actions. It therefore has a tendency to act less carefully than it otherwise would, leaving another party - the Federal reserve - to bear some responsibility for the consequences of those actions.
Martin Wolf, at the Financial Times, goes so far as to say that when this happened, "the dream of global free-market capitalism died."