Ambac (NYSE: ABK) saw a significant surge in its share price, rising by as much as 50% during trading on Tuesday, but declined significantly after JPMorgan (NYSE: JPM) said that Ambac’s common equity shares have “no value.”
Ambac is a mortgage insurance company which is considered to be near bankruptcy. The company’s stock priced surged in early trading on Tuesday after Jim Cramer told investors to “hold your nose” and buy Ambac.
JPMorgan reiterated its “underweight” rating of shares on Ambac. The company wrote in a research note, “In the 10-K, ABK stated that although it will have sufficient liquidity to pay debt at the HoldCo through 2Q11, it may decide prior to 3Q10 to not pay interest on its debt. This would cause a default on the HoldCo debt, and thus likely lead to a complete loss for all shareholders…ABK is battling to avoid an event of default, which would cause all of its insured contracts in CDS form to call for accelerated payment. This would lead to the equivalent of a bank run on the remaining capital in the Ambac Assurance OpCo, and would create a disorganized situation for all policyholders.”
Cramer wrote, “MGIC (NYSE: MTG) has rallied 400% during its extended period of “worthlessness.” I want some of that worthlessness. Radian’s (NYSE: RDN) up 600% during its “worthless” period. I would have liked a piece of that worthlessness. How about grabbing a hunk of the 800% rally in the “worthless” PMI (NYSE: PMI)? Wouldn’t that have been delicious? Do you hold your nose and buy ABK because of those rallies? I believe, oddly, yes… this is a game of performance, not a game of valuation. There are plenty of genuinely worthless stocks that have gone up huge…the !@#$% animal spirits have it going, and a worthless stock can be worth something if it moves up that much and starts offering equity or bonds against it.”
Ambac closed down 28% for the day at $0.63
