It seems Bear Stearns (BSC: chart, web, Y!) is in a bit of a pickle. At one point today they were staring their largest one-day percentage drop since the October 1987 stock market crash in the face. Why? Exposure to mortgage securities.

The stock fell 7.4% to $57 but traded as low as $50.48, representing a decline of more than 16%. The last time the Wall Street firm’s shares had a bigger one-day percentage loss than that was Oct. 19, 1987.

They’re also worried about margin calls on mortgage-backed securities, most notably Carlyle Capital Corp. (who is acknowledging that lenders are going to take possession of Carlyle’s remaining assets) and, you guessed it, Thornburg Mortgage (TMA: chart, web, Y!). Carlyle Capital is near collapse, its assets, which consist of AAA-rated mortgages from Fannie Mae and Freddie Mac are being seized by creditors.

I’m seeing a trend here.

No one is safe from mortgage securities, and Bear Stearns has already been hit big time by mortgage induced write downs already. With it’s own credit in the tubes, its going to be difficult to borrow money at manageable rates, and to be sure, stronger brokerage firms are going to jump on every opportunity to garner a TKO on the big bear.

What’s really working against Bear Stearns is their original business plan. They built a huge portion of their business by originating mortgages and the repackaging them into mortgage-backed securities and debt obligations. This worked great so long as the real-estate finance boom was in full swing. Now? Not so much.

So what are mortgage-backed securities?

A mortgage-backed security is an asset-backed security (for instance a bond or note based on pools of assets) whose cash flow is backed by the principal and interest payments of mortgage loans.

So when people quit paying their mortgages, the cash flow dries up and the asset-backed security basically becomes worthless.

The rumor mill is churning as to whether or not Bear Stearns will continue to be liquid. Further more, some speculate that it will take a failure of a major financial player (or more) to before we can look to a bottom of this bear market.

Tags: BSC | Carlyle Group | mortgage backed securities | TMA

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