Bank of America Will Skip a Foreclosure Deal Rally (Update 1)

Bank of America story updated to include information on a class action lawsuit in second to last paragraph.

NEW YORK ( TheStreet) -- Bank of America ( BAC) bulls are hoping a $25 billion deal with the Obama administration and attorneys general across the U.S. will help the bank get some of the baggage of the housing crisis off its back, but a deal won't shut the door on the bank's housing-related headache.

Bank of America and other giant lenders, including JPMorgan Chase ( JPM), Wells Fargo ( WFC), Citigroup ( C) and Ally Financial are reportedly planning to settle a wide-ranging investigation into foreclosure-related abuses by attorneys general in all 50 states. A deadline for a deal came on Monday, but it was not clear late in the day whether one had been reached.

Past efforts to reach agreement have been held up as attorneys general in several key states, including California, New York, Massachusetts and Delaware, have expressed dissatisfaction with the direction of the talks. Though a report in The New York Times on Monday indicated California and possibly even New York might be warming to a deal, that would not be as significant for the banking industry as it might appear at first. That's because, according to the same report, "New York has been most interested in preserving its ability to investigate the root causes of the financial collapse."

Indeed, in an editorial in Politico in November, New York Attorney General Eric Schneiderman and his counterpart in Delaware, Beau Biden, wrote that the negotiations between the banks and the attorneys general are limited in their scope and that they would not sign on to any deal that prevented them from going after other alleged misdeeds by the banks related to the housing crisis.

In case anyone had any doubts about Schneiderman's resolve, he put them to rest on Friday when his office filed a lawsuit against Bank of America, JPMorgan, Wells Fargo and an electronic record-keeping business called Mortgage Electronic Registration Systems Inc. (MERS), arguing that the creation and use of MERS by the banks and other servicers has "resulted in a wide range of deceptive and illegal practices," including "foreclosures being filed against New York homeowners where the foreclosing party lacked the authority or standing to sue."

Schneiderman and Biden have also signaled their intention to pursue other areas of inquiry against the banks, including one that could potentially invalidate more than $1 trillion worth of mortgage securities at Bank of America alone. Bank of America is widely understood to have the most exposure to the legal fallout from the housing crisis among its banking industry peers.

Also being investigated by Schneiderman and Biden is alleged misconduct by banks and other originators of home loans in the years leading up to the crisis.

If it seems excessive to highlight the efforts of just a few attorneys generals to inflict more pain on the banks, it is worth remembering that New York's Schneiderman was recently named by President Obama to head up a task force of state attorneys general to look into mortgage-related abuses.

Never mind that Obama had already announced a similar task force in an earlier speech, or that Schneiderman was already working his hardest to punish the banks for mortgage-related misdeeds. Obama's highlighting of Schneiderman demonstrates that the President will give him the political backing he needs to go after abuses.

And even leaving out Schneiderman and other tough-minded attorneys general, Bank of America, Wells Fargo, JPMorgan and Citigroup have plenty of other things to worry about, such as a massive antitrust lawsuit that could costs tens of billions annually in lost credit card revenues, or new challenges from the Federal Housing Administration over problem mortgages --another issue that analysts believe could cost in the tens of billions of dollars.

Further trouble for Bank of America came late on Monday, when U.S. District Judge Kevin Castel in Manhattan granted class action status to a group of investors who argue Bank of America management failed to inform them about the extent of losses at Merrill Lynch ahead of their vote to approve Bank of America's acquisition of Merrill.

A settlement with attorneys general that grants broad immunities to the banking industry was on the table at one time, but bank bulls have had a hard time keeping in mind that it is no longer on the table. The $25 billion price tag once thought unthinkably high by the banks now appears to be a somewhat meaningless number, as it buys them no security whatsoever.

-- Written by Dan Freed in New York. Follow this writer on Twitter.

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

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