#1 - Possible, even Likely
#2 - Probable Urban Legend only
I rate #1 as "Possible/Likely" as I personally watched a friend pull a cat out of the Mississippi that was 2 inches "taller" than me - and I was 6'2" then. This was back in the mid 60's, and was an accident; Jack had a new deep-sea rig he was learning to use and was fooling around with practice casts near the railroad bridge. His family was taking a vacation in Florida and he wanted to get a sailfish (or marlin, or whatever). When that cat hit his flasher we all thought he'd snagged a tree stump on the bottom - until the "stump" started moving to the right, which was upstream.
After an hour or so (no watches, we had been playing in the water) Jack got it up near the boat and we saw what he had. Un-bleeping-believable!! We had all heard of cats that big, but had never really believed it. Bernie got a few quick pictures and then the cat decided it had had enough and went for the bottom again; straightened a stainless steel hook and just disappeared.
At the time we thought we had a Big Story and rushed to get the pictures developed, but the story never happened. Everyone at the newspaper and TV stations thought we had faked the photos, and since the only ones who had seen the beastie were six teen-age boys it was written off as a hoax. The only ones who believed us were the divers who had recently inspected the bridge footings; they had seen several huge cats down there. When we asked them to corroborate our story they refused; they had never mentioned anything because one of their buddies did say something at another dive site, and was fired for being obviously drunk on the job.
But what we saw that day was a catfish (Channel Cat, I believe) that was at least six feet four inches in length, that had been laying alongside the concrete footings of the CB&Q railroad bridge. Bernie died in 'Nam and I don't know what happened to the pictures so there's no way to prove any of this. But I know what we all saw that day was a catfish, not an illusion or an Urban Legend.