Why is Bear Stearns Trading at $5?

Bear Stearns shares are now trading at $5 apiece: clearly there's a reasonably large constituency of investors who simply don't believe that it's going to be bought for $2 per share. This is definitely one of the weirder merger-arb situations I've seen. So what's going on?

Well, the deal is subject to shareholder approval. According to the merger agreement:

Stockholder Approval. Company shall call a meeting of its stockholders to be held as soon as reasonably practicable for the purpose of obtaining the requisite stockholder approval required in connection with the Merger, on substantially the terms and conditions set forth in this Agreement, and shall use its reasonable best efforts to cause such meeting to occur as soon as reasonably practicable. The Board of Directors of Company shall use its reasonable best efforts to obtain from its stockholders the stockholder vote approving the Merger, on substantially the terms and conditions set forth in this Agreement, required to consummate the transactions contemplated by this Agreement.

"As soon as reasonably practicable," however, could be a little while off yet - and in that time JP Morgan will have been aggressively deleveraging and downsizing Bear Stearns. Or, to put it another way, making Bear Stearns a much less risky proposition. Which means that come the date that shareholders have to approve the deal, JP Morgan is likely to be getting even more of a bargain than it is now.

So shareholders could vote against. If Bear Stearns then declared bankruptcy, the systemic consequences might be much smaller than if Bear declared bankruptcy today. The bank could possibly be liquidated in a relatively orderly fashion, and shareholders could end up with a lot more than $5 per share - eventually.

What about rival offers? Well, they're going to have to be unsolicited: the merger agreement basically says that Bear can't shop itself around, but it can consider other offers if and when they arrive. I'm pretty sure that Jimmy Cayne, as chairman of the bank, can't make a rival offer himself. But I'm unclear about the status of all the potential bidders who kicked the tires this weekend - did they sign something which precluded their making an unsolicited offer in the next few weeks?

On the conference call, JP Morgan's executives seemed pretty confident that the deal would go through at $2 a share, and that there wouldn't be any other offers. The reasons for that confidence, though, were not easy to discern. Anybody have any insight?