The Wall Street Journal has the inside scoop on how the Bear Sterns deal went down. They make a case for the Fed’s 28-day liquidity lifeline actually being the straw that broke Bear’s back, causing such a wave of doubt about their ability to continue, that it started a run on the bank. What was supposed to create a window for Bear to find a buyer (still planned to be JP Morgan), actually made it necessary to slam through a 24-hour emergency deal to prevent the US economy from collapsing on Monday.

[The illusion of stability] was shattered Saturday morning, when [Treasury Secretary] Paulson was deluged by calls to his home from bank chief executives. They told him they worried the run on Bear would spread to other financial institutions. After several such calls, Mr. Paulson realized the Fed and Treasury had to get the J.P. Morgan deal done before the markets in Asia opened on late Sunday, New York time. “It was just clear that this franchise was going to unravel if the deal wasn’t done by the end of the weekend,” Mr. Paulson said in an interview yesterday.

If the article is to be believed, fast action by the current administration may have prevented a run on the banks/institutions like we haven’t seen since the great depression. The article also points out that the $2/share price that I mentioned earlier (and in common use by most publications), won’t be the final purchase price.

J.P. Morgan would be willing to buy Bear Stearns, subject to the conclusion of due diligence, [Mr. Black] told Mr. Schwartz. The J.P. Morgan executives didn’t set a specific price, instead providing a dollars-per-share range, according to people familiar with the matter. At the high end was a figure in the low double digits, these people say.

This was no normal negotiation, says one person involved in the matter. Instead of two parties, there were three, this person explains, the third being the government. It is unclear what explicit requests were made by the Fed or Treasury. But the deal now in place has a number of features that are highly unusual, according to people who worked on the transaction.

In addition to its option to purchase Bear’s headquarters building, J.P. Morgan has the option to purchase just under 20% of Bear Stearns’s shares at a price of $2 each. That feature gives J.P. Morgan an ability to largely block a rival offer, says a person with knowledge of the contract.

It also explains why the Fed agreed to essentially guarantee $30 billion of bad Bear debts. JP Morgan hasn’t done any due diligence and the Fed wasn’t talking to anybody else–they drove a hard bargain and set their price high. The Fed was so worried about the Asian markets opening on Sunday that they didn’t have time to shop the deal around. And the 20% at $2/share guarantee from Bear guarantees it won’t be shopped around after the fact either.