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Why WaMu Stock Has Soared: It's a 'Cheap Lottery Ticket'

Washington Mutual, known mostly as the biggest bank failure in US history, also has been a darling of stock market gamblers.

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Though taking a beating in Wednesday trading, WaMu shares have soared over the past month and year despite existing as a zombie corporation—no assets or business to speak of—since being swallowed by JPMorgan Chase in 2008.

WaMu shares have risen 181 percent in the past month and 1,760 percent in the past year—good news if you've been speculating on the stock during that time but bad if you bought in when it was trading at $2.26 when it first entered bankruptcy and even worse if you came in at historical highs of $46 a share in 2003.

It's been some feat, though, for a former banking titan and now bankrupt company that came to represent the worst of bank risk-taking during the collapse of the nation's financial system.

Traders optimistic over a series of court battles to recover value for common shareholders have been at the center of the stock's improbable rise.

"It's a cheap lottery ticket if there somehow miraculously is a payoff to the common shareholders," said Kevin Starke, an analyst at CRT Capital Group in Stamford, Conn. who has been following the WaMU situation closely. "That is one element you see in bankruptcy situations generally."

Starke thinks investors who believe that common shareholders will recoup value are probably kidding themselves. Holders of corporate bonds and preferred shares will be first in line should JPMorgan return money to investors, with common shareholders a distant third.

Still, trading in the zombie or near-zombie stocks has been a popular sport on Wall Street since the financial industry tanked. Shares of the holding company representing deceased Wall Street titan Lehman Brothers , for instance, have soared 135 percent in the past month and 432 percent in the past year.

"At this point it really looks like everyone is leaping onto any type of risk they can," said Yousef Abbasi, financial desk analyst at Execution Noble in New York. "People are using it as a trading vehicle."

Indeed, traders have coalesced around WaMu, which now trades over the counter on the pink sheets but is moving this week at volumes more closely affiliated with market giants like Bank of America .

WaMu volume hit a post-bankruptcy high Tuesday of 141 million shares.

Other financials that got hit during the crisis have gained this week, among them Citigroup and American International Group, as the sector has seen wildly volatile trading lately. Speculation that the government was going to prevent short-selling in companies in which it has an ownership stake sparked a wave of short-covering from investors speculating the stocks would go down.

The legal battles between WaMu and JPMorgan revolve around two issues: A dispute over a $3.7 billion bank deposit and a related contention from some investors that the company has as much as $12 billion above and beyond what it owes creditors.

Some believe that WaMu was the victim of a bank run and dispute the validity of the FDIC shuttering the institution and brokering the deal with JPMorgan.

CRT's Starke said the hopes are being perpetrated on Internet message boards from those trying to manipulate stock prices by pumping up hopes for a JPMorgan payout to common shareholders.

"That is likely to be proven untrue and fraudulent," he said of the rumors.

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