The $150m. settlement with the SEC over the Merrill Lynch acquisition is small potatoes compared to the complaint lodged by New York AG Andrew Cuomo against Bank of America, former CEO Ken Lewis, and current consumer banking chief Joe Price.

As we told you all of last year, Lewis and BAC simply cannot account for leaving shareholders in the dark about Merrill’s losses, not after Lewis went running to the feds for help in making the ML takeover work, citing massive Merrill losses. The 90-page complaint charges:

Having obtained shareholder approval for the deal, Lewis then misled federal regulators by telling them that because 50% of Merrill’s tangible equity had disappeared, the Bank could not complete the merger without an extraordinary taxpayer bailout. Lewis went on to say how the Bank needed to “fill the hole” left by the unprecedented losses, which contradicted his public statements to the effect that the Bank would not need additional capital.

Remarkably, between the time that the shareholders had approved the deal and the time that Lewis sought a taxpayer bailout, Merrill’s actual losses had only increased another $1.4 billion. The Bank’s management has not and cannot explain why they did not disclose to the Bank’s shareholders losses so great that, absent a historic taxpayer bailout, they threatened the Bank’s very existence.

Maybe Brian Moynihan — a lawyer by training — has kept a hole card these many months to block Cuomo’s attack. It would be a master-stroke if he has. But otherwise Moynihan has to cut his losses and settle this thing as quickly as possible — even if that leaves Lewis and Price twisting in the wind. What makes that even harder to pull off is that there is no guarantee that Cuomo is not prepping to come after Moynihan as well for his role in the ouster of former chief counsel Tim Mayopoulos.

Now maybe — maybe — BAC really wants to dispose Hank Paulson, Tim Geithner, Ben Bernanke, and the entire NY Fed to start mounting a defense. But I doubt it. Much of the upset about these charges spilling from BAC stems from the belief that BAC did a solid for government regulators and now has been stabbed in the back for it.

But as we’ve pointed out for months, it was the hubris of Lewis and crew which made them think they were doing another Countrywide deal, another regulator-favored takeover under the CRA as Hugh McColl did for a decade, which would save them from the reality of the losses. In essence, they thought they didn’t have to disclose ML’s losses because they were going into business with the biggest and best shareholder of them all — Uncle Sam.

I really do think that unless BAC puts this matter to rest in a matter of weeks it could get very, very ugly and expensive for the bank.

Update: Says here that Ken Lewis will waste no time in calling Paulson and crew to testify. Should be fun, but unclear how that helps with the issue of shareholder disclosure — unless tries to say (again) that the feds forced him to deceive to shareholders, which only works if you plan on going on the way to a hopefully sympathetic judge or jury. Lewis might have the time and money to do that. BAC does not.