The fifth largest investment bank, Bear Stearns, has been bailed out by JP Morgan and the Federal Reserve to prevent its collapse. Stearns was caught in the situation where it couldn't meet requests by clients to withdraw funds.

The Wall Street Journal reports that Fed officials, including New York Fed President Timothy Geithner, Fed Vice Chairman Donald Kohn and Chairman Ben Bernanke, talked with Treasury Secretary Henry Paulson and the Securities and Exchange Commission to find a solution for Bear Stearns' dire situation on Thursday. Friday morning, with no solution readily at hand, they conferenced again at 5 a.m. and called President Bush at 7 a.m.

The only solution was for the Federal Reserve to invoke a Depression-Era 1932 law by which it had the authority to lend to nonbanks, but has been reluctant to use it. However, at least five of the Fed’s seven governors must ordinarily vote in its favor to enable using this special authority. Two seats are vacant and one governor was on a flight back from Europe, which meant that another section of the law had to be used to enable the loan.

The crisis is not over yet, but Bear Stearns stands much better chances. While the other helping party, J.P. Morgan Chase & Co., is the conduit for the loan, if Stearns stumbles it will be the Federal Reserve, not JP, the one which takes the hit. Bear Stearns was bailed out for the next 28 days at least because its fall might generate a domino effect. However, many analysts have said they now believe that the fall of at least one of the major banks is almost inevitable.

Meanwhile, the NYT reports that Royal Bank of Scotland Group Plc and J.C. Flowers & Co. are interested in buying Bear Stearns Cos. Meetings between Bear Stearns and prospective suitors have allegedly already begun. Bear Stearns was founded in 1923 by Joseph Bear, Robert Stearns, and Harold Mayer as an equity trading house. It has around 13,000 employees.