While it is clear that many — dare I say most — subprime loans did not follow the spirit of the law, it appears that soon enough we will find out if they followed the letter of the law. And of the two, it is always better off following the letter of the law.

As officials in all 50 states and the District of Columbia are now wading through questionable foreclosure policies by the major banks, we have additional news this week that Bank of America (NYSE: BAC) has a gargantuan claim by PIMCO, BlackRock (NYSE: BLK) and the New York Federal Reserve to take back $47 billion worth of repackaged mortgage loans that were improperly originated.

I don’t want to speculate what type of loss that would generate for BAC shareholders, but I don’t want to touch that stock with a 10-foot pole. The recent heavy-volume selling after the shares had already declined from near $20 in April to under $12 now suggests to me that there is more downside in the stock. Ultimately, you have to take into consideration that the shares declined all the way down to $2.56 in 2009 — that remains a good long-term target for the stock.

So banks not only allegedly made illegal loans to buy impossible-to-afford properties, but they also allegedly foreclosed illegally on those same impossible-to-afford properties!

This is why I would not own a single large Western financial — I am not signaling only U.S. banks here — other than for relatively short-term trades.

Instead, I prefer BRIC (Brazil, Russia, India and China) banks where such questionable activities are not a systemwide phenomenon, not to mention that the economies there are growing much faster. This is why HDFC Bank (NYSE: HDB) is up 36.7% year-to-date, while BAC is down 24.2%. If you look at better-managed U.S. financials like Warren’s beloved Wells Fargo (NYSE: WFC) and JP Morgan (NYSE: JPM), they are still down 3% and 9%, respectively.

This is a good time to update a table of promising financials that I first discussed when I mused in July that it is possible — even with this spectacular mess in the Western financial system — to be a buy-and-hold investor in select banks that keep making all-time highs.

As you can see, my favorite HDFC Bank is certainly not an outlier, and the vast majority of emerging market financials I mentioned at the time have done spectacularly well, with Argentina, Colombia, Chile and India being standouts.

I think that we will keep seeing the same process of BRIC bank outperformance for a long time. Just look at what Japanese “zombie” banks have done since 1988. I expect that similar is probably in store for U.S. banks.

The old game of shuffling ever-rising amounts of debt in the financial system is over. So, if there is no credit growth in the U.S. — hint: there isn’t any — how are those banks going to grow their earnings in this embedded deflationary (soon to become inflationary) trend we have at the moment?

From a top-down macro perspective — when you pick the best economies and stock markets, then the best sectors, then the best stocks — the only financials that you can buy and hold, even with Western world-induced volatility, are banks in organically-growing emerging markets.