Ambac, CIT, MBIA: Collateral Damage

NEW YORK (TheStreet) -- Ambac (ABK Quote), CIT Group (CIT Quote), and MBIA(MBI Quote) all posted huge gains Tuesday on no news, and I think misguided optimism on AIG (AIG Quote) is the culprit.

I write "culprit" because I suspect these rallies will end in tears. AIG was also spiking higher until Jim Cramer wrote on RealMoney that the giant corporate scandal sponge should issue some equity, providing a clue to how fickle the share movements are.

AIG's run-up began in early August and it was showing signs of petering out this month. Then on Monday, the shares jumped 23% after Bloomberg News reported that Rep. Edolphus Towns (D., N.Y.), chairman of the Oversight and Government Reform Committee, wants to ease the terms of AIG's bailout.

Never mind that AIG shares are very likely worthless, this news was enough to send them surging upward. Though I was unable to find a substantive reason for the big rally in Ambac and MBIA Tuesday, Rob Haines, a CreditSights analyst I quoted in the story, said he thought shares of those companies were also effectively worthless without a government bailout.

So perhaps speculators are theorizing that if Rep. Towns wants to go easier on AIG, he may next want to bail out the bond insurers. Never mind that Rep. Towns, while chair of a congressional committee, is not exactly Zeus. Never mind that even if he gets the Treasury Department to give him what he wants, AIG's shares are still probably worthless. Never mind that he has not uttered a peep about MBIA or Ambac. Buy, buy, buy, buy! Strange days, indeed.