One of the emergency measures implemented by the Fed was the suspension of the rules prohibiting banks from using deposits to fund their investment banking subsidiaries.

This was obviously done in order to free up enough capital at BofA to buy Merrill, warts and all. It presents some serious risks, as some of BofA's deposits (10% of America's cash) is now being invested in equities. More worrying is what other, less obvious deals are being quietly made under this temporary rule suspension. The risk is that a stock mark crash can now make depository institutions insolvent, and the FDIC is required to bail them out.

So, lets say this doesn't work. AIG fails, it becomes difficult for businesses and individuals who have perfect credit to obtain financing because its hard to hedge credit offers (which is what AIG does), so this causes further economic contraction, which the market attempts to price, overshooting, of course, in a panic, therefore drawing down the assets owned by Merrill and some other investment entities, who loose capital that they owe to depositors like BofA, who are subject to small bank runs because of media scrutiny, and declare bankruptcy, calling in the FDIC... If they bet more than the FDIC could cover it would get out of control fast.

You get the feeling that these guys are right on the edge.. The pedal is too the floor and they are pulling on the wheel as hard as they can. I don't know enough about finance to know how many more tricks they have in their bag, but I know enough to know that this is one that was never, ever supposed to be used.

naked capitalism: A Former Regulator on the Fed Allowing Deposits to Fund Investment Banking Operations