Who's Right On Ambac (ABK) - JP Morgan or Jim Cramer?

Ambac (NYSE: ABK) - the mortgage insurance company that is near its death bed. Jim Cramer says "hold your nose" and buy, JP Morgan says "ABK equity has no value" - sell.

So who do you believe?

Well lets look at the arguments and analysis:

JP Morgan: "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." More here.

Jim Cramer: "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."

So looking at the facts, Ambac is on the precipice of defaulting on its debt and JP Morgan makes a pretty clear argument that the end game is that the common is worthless.

Cramer thinks you should buy the stock 'just cuz' of the f-ing animal spirits.

Looking at the above reasoning, JP Morgan wins my vote.

But that's not to say that there is a 10% chance that the common will still have value after everything is said and done. But should you really be speculating in a stock that could collapse any day?

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