With Bear Stearns (BSC) currently trading more than three times the agreed upon buyout price from JP Morgan (JPM), there have been multiple reasons cited as to why the stock is trading so high. The first and most prominent theory concerns the potential for a white knight to come in and make a higher bid. In fact, this morning's New York Post suggests that Joe Lewis and Jimmy Cayne, who own 15% of the company, have been working the phones to try and get other bidders in play.
Other ideas as to why the stock is trading so high were brought up in Wednesday's WSJ. According to the article, some investors are betting that JPM will sweeten its bid in order to insure that the deal gets done. Others believe that BSC bondholders are buying the stock. The reason they would be buying the stock is that they are eager to see the deal get done rather than go through bankruptcy procededings.
One theory that we have yet to hear discussed might be that many holders of the stock simply can't sell it. The first of these holders consists of the hardest hit - the employees, who own over 30% of the company. While we do not have access to the exact numbers, generally speaking, most of the employee compensation at Wall Street firms is usually in the form of restricted stock. So even though they own the stock, most employees can't sell it until it fully vests.
The other group of large holders are State Street, Barclays, and Vanguard, which are essentially index funds. Collectively, this group owns another 10% of the company. So until BSC is dropped from the indices that it's in, index funds cannot sell.
If we add these two groups together, we get a large percentage of the float which essentially can't be sold. As of the end of February, short interest in BSC was 20% of the float. Given that things really got dicey in March, this number likely only increased since then. Combine these ingredients together and you get a situation where shorts need to buy and longs can't sell. For Bear Stearns employees, hopefully a higher bid is reached, otherwise watching the current premium slowly evaporate as the deal's closing date approaches will only pour more salt on the wound.