Bear Stearns

On Thursday, two Bear Stearns executives surrendered to federal agents over charges that they had misled investors about the state of Bear Stearns hedge funds.

As night follows day, arrests follow financial scandals. Investors in those funds can't be unhappy about seeing their managers doing the perp walk. And the evidence certainly seems damning. Days before they delivered an upbeat assessment to their investors, the two execs were exchanging worried e-mails about the state of the funds. "I think we should close the funds now," one wrote. Instead, they reassured their worried customers. Only a month later came the now-infamous meltdown that eventually led to the fire sale of their 85-year-old firm.

Investment firm Bear Stearns ran out of money, and the Federal Reserve stepped in to save it from ruin.

Bear Stearns, the smallest of New York's bulge bracket banks, has been the hardest hit by the subprime crisis, and speculation about its balance sheet has been floating for months. Liquidity problems in credit markets have made things worse. This week, worries turned to fears, as rumors made other financial institutions reluctant to do business with the ailing bank. In finance, expectations -- even false ones -- can rapidly become realities: If no one will loan you money or trade with you because your firm might go under, your firm will go under. MORE