Why Bulls Might Be Wrong About the Dow's Biggest Winner

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The Dow (INDEX: ^DJI) closed basically flat today, but once again, Bank of America (NYS: BAC) soared. The stock is now up 46% in 2012, making it the Dow's best-performing stock for the year so far.

A big part of the reason investors are so excited about B of A is optimism over the fate of a proposed 50-state settlement over allegations of widespread fraud among mortgage servicers. Between B of A, JPMorgan Chase (NYS: JPM) , Wells Fargo (NYS: WFC) , Citigroup (NYS: C) , and Ally Financial, we're looking at about a $25 billion settlement.

We've supposedly been close to a settlement for over a year now, but investors once again saw renewed hope on January 18, when Suan Donnovan, Secretary of Housing and Urban Development, announced that a deal was imminent. To be fair, the banks and the attorneys generals settling with them appear closer to settling than they have been before. Any settlement at this time can be presumed to be highly favorable to the banks, since the allegations are potentially far more serious than $25 billion, and attorneys generals haven't actually conducted a full investigation yet.

But the deal hasn't been signed yet, despite several deadlines coming and going. The sticking point appears to be that banks want New York Attorney General Eric Schneiderman to drop fraud charges he filed on Friday against three banks and MERS, the incredibly dodgy mortgage-tracking system many in the mortgage industry have been using for about a decade in place of properly recording mortgages with localities. Also, key states like California, Nevada, Florida, and Arizona are undecided.

The new deadline is tomorrow, so we should ostensibly have answers then. Unless, you know, the deadline gets moved again. But unless a very broad settlement is signed clearing up not just liabilities with the states, but also interfering with Schneiderman's and private investors' ability to sue, Bank of America and the rest of Wall Street won't be out of the woods with these fraud charges.

If you're looking for a safer stock than B of A, consider reading "The Stocks Only the Smartest Investors Are Buying." It details a bank much smaller than Bank of America that has some of the best operational numbers in the business. Check out the free report and find out its name.

At the time this article was published Ilan Moscovitzdoesn't own shares of any company mentioned. The Motley Fool owns shares of Bank of America, JPMorgan Chase, Wells Fargo, and Citigroup. The Fool owns shares of and has created a covered strangle position on Wells Fargo. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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