Buffett Is Betting Against Eric Schneiderman

NEW YORK (TheStreet ) -- Is Warren Buffett banking on another round of bailouts?

Perhaps. But, if so, the next time banks get government help won't go down like it did last time.

Warren Buffett announced Thursday he will take a stake in Bank of America, paying $5 billion for 50,000 cumulative preferred shares, each with a liquidation value of $100,000.

This investment has already raised red flags in the investment community, with the announcement coming days after Bank of America CEO Brian Moynihan vehemently denied that the bank needed capital. Also, the terms of the deal -- specifically the outsized dividend -- have led at least one prominent analyst to declare: "There's no way the bank can make money."

So what exactly are Bank of America(BAC) and Warren Buffett up to?

They're betting against New York Attorney General Eric Schneiderman.

Schneiderman is investigating the foreclosure practices of major banks; opposing any mortgage/foreclosure settlement that gives banks a release from criminal investigations in exchange for civil fines.

In this sense, he's a lone wolf, getting booted from multi-state mortgage-settlement talks while facing pressure from the Obama administration to accept "blood money" in exchange for banker immunity.

The proposed settlement of $20 billion would protect mortgage servicers such Bank of America, Wells Fargo(WFC), JPMorgan Chase(JPM), Citigroup(C) and Ally Financial from further mortgage investigations. For perspective, the laughably small settlement is less than a single year's Wall Street bonus pool.

If major banks did commit financial crimes, Buffett, Obama and the banks all stand to benefit greatly from sweeping things under the rug (or, more aptly, buying a "get out of jail free card").

But, for now, Schneiderman is the thorn in everyone's side, posing a threat to Buffett's investments, Obama's campaign coffers and the very viability of too-big-to-fail banks.

If you care to drop him words of encouragement, you can use this online form.

If you wish to send Buffett a note, you might have trouble reaching him -- he's busy organizing a fundraiser to benefit President Obama's re-election bid.

-- Written by John DeFeo in New York CityFollow @johndefeo

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