Ambac Financial Group, Inc. (NYSE: ABK) is neither a company nor a stock that is without controversy.  It has a lot of fans who have been buying shares before and after it became a penny stock.  It also has many foes, and many think it could be one of the next casualties of the financial meltdown after the company’s disclosures that it could be forced to file for bankruptcy protection.  The news flow of late has actually been on the favorable side, and shares are recovering in part from new buyers and in part from short sellers getting out of the way.  Today’s headlines stress how much troubled companies can rise  on any hints of good news.

Ambac shares rallied some 32% to $0.78 today on more than 50 million shares after reports that Ambac was withdrawing more than $6 billion in claims that the company had filed against Lehman Brothers (LEHMQ).  There are still no assurances that it survives per our prior comments, but the news flow is currently acting more in favor of Ambac rather than against it.

Last week the company filed suit against Bank of America Corporation (NYSE: BAC) and its Countrywide unit over mortgage-backed security losses.  The mortgages were over $16.7 billion in mortgage-backed securities with allegations that Countrywide fraudulently induced Ambac to insure the mortgages.  Ambac’s ground for claims: 97% of about 6,500 loans reviewed that were spread over 12 different securitizations did not conform to the lender’s underwriting standards as many of those loans were made to borrowers who had limited or no ability to pay their mortgages.  All those liar loans and NINJA loans.  That suit against BofA did not bring about any solid gains, and shares were around $0.56 on September 29.

An issue still against Ambac from last month is that Freddie Mac reportedly joined a group of hedge funds in litigation as creditors against Ambac with claims that it owns about $4.5 billion of mortgage-backed securities that are insured by Ambac.

Frankly, getting sued by Freddie Mac (or Fannie Mae) is something that seems a sham on the surface.  Everyone from the borrowers to the lenders to the regulators and politicians all had their hand in the housing bubble.  Bond insurers and bond ratings agencies ended up offering little of value, but hearing that either Fannie Mae or Freddie Mac are getting involved now is almost ludicrous.  If anyone on the institutional side of the equation has the most blame of all, it would be a close race over whether it was Fannie or Freddie as the first and second catalyst as the endless enablers and promoters.

Today’s news alone did not save Ambac and there have to be many more stars that align for Ambac to be able to even attempt a real recovery or turnaround, but this is proof in the world of trading that even a hint of good news can cause one massive rally in a company this troubled.

JON C. OGG

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