I heard about this when playing cards with friends last night.
A couple of freinds who were in the market were discussing its implications when we were hanging out. I sat there listening to them for about 5 minutes with a look on my face that was probably best described as "dog being shown magic trick." I had to cut in and admit my complete ignorance, and had them explain it to me.
Basically what this means is that there were rampant rumors Monday that Bear would not be able to pay on contracts. Basically, that it would go bankrupt (one friend said that based on the price of insurance on contracts with Bear, the market put the chances of total collapse at 16%). The price we're talking about here is the price of "credit default swaps." Bear has billions in assets, but they don't just trade on that. They make many many more billions in trades than they have actual money in the bank (just like your local bank will have a reserve of only 10% of all [EDIT bank deposits it holds], the rest of the money is used to lend to other people for their mortgages [EDIT: and small business loans, commercial development, etc...]). Credit default swaps are a way of spreading risk around. I could say "hey I've got a contract with Bear that will pay me 1,000 one year from now, and you have a contract with Goldman that will pay you 1,000 one year from now. I'll guarantee your contract with Goldman (i.e. I will pay you if they can't) and in exchange you guarantee my contract with Bear." (thus Credit Default Swap) This works fine if both banks have similar credit ratings. If one has a worse credit rating, then obviously I'd have to throw in something (money) to make it worth it for you to take it.
That's what's happening. Swaps for Bear contracts are becoming less valuable, thus Bear or people who have contracts with Bear must pay higher rates to insure their risk.
Photo by Flickr user Aussiegal used under creative commons license.
Edited to include corrections
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