) -- Mortgage settlement talks between banks and the 50 states, expected to be completed over the next few weeks, may yet breakdown and disappoint bank stock investors once more.

California officials are refusing to sign the deal, according to an

Associated Press

report Wednesday evening.

"We've reviewed the details of the latest settlement proposal from the banks, and we believe it is inadequate for California," said Shum Preston, a spokesman for attorney general Kamala Harris.

Harris had already said that she believed that the settlement may not be onerous enough to preclude her from pursuing independent investigations against the big banks over their faulty mortgage practices.

But her latest rejection, seen in addition to President Obama's announcement of a proposal to set up a special investigative task force to investigate fraudulent mortgage practices, suggests that the settlement, if one is reached, might not be too sweet a deal for banks.

A deal without California, which was at the center of the housing bubble and bust, might be worthless. And, it looks like banks will have a tougher time getting a broad release from future claims from the states, something they have wanted in exchange for agreeing to reduce the principal on mortgages for a million homeowners.

Bank of America

(BAC) - Get Report


JPMorgan Chase

(JPM) - Get Report


Wells Fargo

(WFC) - Get Report

, Ally Financial and


(C) - Get Report

are the five biggest banks engaged in the talks.

The stocks have been rallying on hopes that the banks will be able to put some of their legacy issues behind them. However, with the negotiations now running into their second year, investors are wary that the settlement will ever get done.


Federal Reserve

published for the first time on Wednesday its forecasts for short-term interest rates. The central bank now expects to keep short-term rates near zero till late 2014. Earlier, it had indicated that it won't hike rates until mid-2013.

Stocks and treasuries rallied on the news. The yield on the 10-year Treasury note was below 2% on Thursday morning.

An extended period of low interest rates is a negative for banks, who make money by borrowing at low rates and lending at higher rates. In the past, banks have tried to lower their exposure to interest rates fluctuations by deriving a greater portion of their revenues from fee-based services.

However, several regulations including the Durbin Amendment, which limits fees banks can collect from merchants for processing debit card transactions, have hurt this revenue stream.

Some of the larger banks including Wells Fargo performed better-than-expected on the margin front in the fourth quarter, thanks to healthy loan growth.

Investors will be looking for signs that the recent pickup in commercial lending and other categories is sustainable.

Greece will try to restart negotiations with private investors Thursday in an effort to avoid a "disorderly" default that could seize European bank lending.

Greek Prime Minister Lucas Papademos will meet with the managing director of the Institute of International Finance (IIF), Charles Dallara, and a representative of the French bank

BNP Paribas

later Thursday in order to continue discussions, according to a report from the

Associated Press


The IIF represents the private investor community -- including banks -- in their negotiations with the Greek government.

A statement by Dallara on Wednesday said that the IIF would "send a team of experts to Athens" to continue negotiations on a Greek debt deal. "The goal is to agree on all outstanding legal and technical issues as soon as possible," the statement said. "Following discussions with the leadership of Greece, the Co-Chairmen will return to Athens tomorrow for informal discussions."

Any deal would include having investors swap existing Greek government bonds for new paper with lower interest rates and face value. A key to negotiations is the amount of the "haircut", or loss, investors would be willing to take.

Negations took on a new urgency on Wednesday as financiers attempt to contain the Eurozone crisis. Facing its own growing debt crisis, Portugal saw the yield on bonds in the secondary market reach new records -- the yield on 3-year notes skyrocketed as 19% -- as traders began to worry that the lack of progress in Greece would quickly spread throughout the region.

-- Written by Shanthi Bharatwaj in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.