Do you get what's going on here? The retail unit has the FDIC as a backstop (paid for with our money); Merrill doesn't. So BoA shifted who-knows-what-kind of toxic paper from one division to another, et voilà! Instant respectability. And, "Because of the favored treatment of derivative contracts in receivership, it appears highly likely that losses on derivatives would result in losses to insured deposits ultimately borne by taxpayers," wrote Rep. Brad Miller (D-NC), one of eight House members who signed a letter to Secretary of the Treasury Tim Geithner.

Instead of the FDIC doing its regular job of protecting mom and pop, it's been forced to open an ATM at the big casino. As Rep. Maurice Hinchey (D-NY) put it, "This is the opposite of capitalism - the risks are socialized and the benefits are privatized."

"Forced" is the operative term. Bloomberg again:

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said [people with direct knowledge of the situation], who asked to remain anonymous because they weren't authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting.

FDIC vs. the Fed? No contest there.

Now, the Fed - according to Bloomberg - has the power to limit these kinds of transfers "under Section 23A of the Federal Reserve Act, which is designed to prevent a lender's affiliates from benefiting from its federal subsidy and to protect the bank from excessive risk originating at the non-bank affiliate."

However, it also has the power to grant exemptions to 23A. Whether BoA specifically asked for Fed permission before making its recent moves is unclear, as none of the parties involved is saying much. But it probably didn't have to. The bank received such an exemption in September of 2010 and can be forgiven if it feels it's been granted an implicit guarantee that it is too big to fail.

"As a general rule, as long as transactions involve high-quality assets and don't exceed certain quantitative limitations, they should be allowed under the Federal Reserve Act," Bloomberg wrote, quoting Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill School of Law.

High-quality assets? Hmmm...

Though it's probably all perfectly legal, that hasn't stopped some lawmakers from stepping in. In addition to the abovementioned Miller's letter, a similar one has emerged from the Senate.

"This provides an additional safety net subsidy for one of the biggest derivatives dealers that is contrary to ... the original intent of the Federal Reserve Act and the Federal Deposit Insurance Act," 10 senators wrote in a letter to Fed Chairman Bernanke, Acting FDIC Chairman Martin J. Gruenberg, and Acting Comptroller of the Currency John Walsh.

Of course, it's always possible that BoA's derivatives basket is full of Grade A stuff and that no bad will come of this.

But experience suggests that, while we should hope for that outcome, we should also prepare for the next big bailout.