Two of this year’s most powerful stock-market rallies have occurred on rumors that bond-insurer Ambac Financial Group was about to be bailed out. But isn’t it a little late to be talking about rescuing a company whose stock has shed 95 percent of its value since July?  Ambac’s chart (below) suggests that it should be given a decent burial, not the heart-liver-lung transplant needed just to get it crawling again. And to what end?  The goal all along, of course, has been to preserve Ambac’s surreal, triple-A credit rating. But does this look like the chart of a company that deserves to be categorized with the bluest of blue chips?  Of course, that was never the point; it was only the legal veneer of creditworthiness that had to be preserved at all costs. That’s because Ambac’s ostensibly flawless credit is what has allowed institutions that hold bonds insured by the firm to carry them as though they were as good as gold. Not any more, though. The firm’s announcement yesterday of a $1.5 billion stock offering laid an egg, sending ABK shares down $2.32, or nearly 22%. A classic example of “buy the rumor, sell the news.”

(Click on chart to enlarge)

Nazi propagandist Joseph Goebbels famously said that if you tell a lie big enough and keep repeating it, people eventually will come to believe it. If the steep and relentless decline of Ambac shares is any indication, though, the tactic doesn’t seem to be working. But even if no one actually believed that Ambac’s triple-A rating could be “preserved,” the charade has served to distract us from a lie so outrageous that even Goebbels would have been challenged to make it fly. That lie would have us believe that the financial system is fundamentally sound, as policymakers continue to insist. In plain fact, the world’s credit markets are as deeply rotted as Ambac, and pretending otherwise will only delay the catharsis needed to return the economy to solid ground.