If anyone wants to write a strike the market makers will create one. They don't care, they can delta-hedge in the cash and cover themselves readily. The demand was created by the fact Bear CDS contracts were trading at default levels. Yes the equity market was oblivious - it often is. There is practically always smarter money in credit and smarter money still in the derivatives than in the cash, in all markets.
The whole premise that the bank would have been sound if only it hadn't been sold is false start to finish. The CDS market correctly saw significant risk of default because people asked to take a company's debt *if and only if it defaults* are hyper-sensitive to the actual probability of default. Common stockholders who are there because it has some index position or the PE looks low compared to other banks in classic "value trap" fashion, are not. Guess who was right?
There’s no question (to me) that the credit markets are minimally 3x smarter than the equity market. No question at all.
Personally, I don’t believe BSC got anything different than what it deserved. It was levered far beyond any reasonable extent. But it was not levered that much more than any of its’ compadres, and had the misfortune of being the first sacrifice. Bear just had the misfortune of having its’ lines wired with “off” switches in the circuit and probably believed that it was TBTF along with Goldman and JPM, and at that point even LEH.