Updated from 3:06 p.m. EDT

Bank of America ( BAC) can attribute much of the recent ill will from investors to its acquisition of Merrill Lynch. The credit default swaps market appears to indicate derivatives traders anticipate a simple, if radical solution: Spin it off.

It costs more to insure against a Merrill Lynch default than it does to insure against one by BofA, and that price gap has widened since early February, notes Dan Barrett, an analyst at Tradition Asiel Securities. Barrett speculates that the CDS market could be pricing in the possibility that Merrill would be spun out, leaving behind the safer, core banking business.

Though the controversial acquisition just closed four months ago, such a deal would make sense for several reasons.

First, it would allow Bank of America to raise money, which government regulators have determined it needs to do, according to several unconfirmed reports.

It would also allow BofA to get some value for its investment banking division before it sees further departures of talented executives. Though several Merrill executives, including former Merrill CEO John Thain and President Greg Fleming, have left since the deal closed, many still remain.

Embattled BofA CEO Ken Lewis and the rest of the BofA brain trust in Charlotte have always had an uneasy relationship with their New York-based investment bankers. Roughly a year before the Merrill acquisition, Lewis was widely quoted as saying, "I've had all the fun I can stand in investment banking at the moment." The reason he liked Merrill was for its "thundering herd" of retail brokers.

While the investment banking business is depressed at the moment, several savvy firms are hiring bankers in anticipation of a rebound. Industry leader Goldman Sachs ( GS) is back to profitability after a money-losing fourth quarter, and though Morgan Stanley ( MS) lost money, that was actually caused by a rise in its bond prices, due to an accounting oddity. Even hedge fund Citadel Group is getting into the investment banking business.

Still, a spin-off is a long shot at best. BofA flatly dismissed the idea, when reached by TheStreet.com. "We have no intention of spinning off Merrill Lynch," BofA spokesman Robert Stickler wrote in an email message.

Jonathan Finger, a longtime BofA shareholder who helped lead a shareholder revolt that stripped Lewis of his chairman title this week, also does not believe a Merrill spin-off is in the cards.

"They're very concerned about how things appear," Finger says. "They've got their head in the sand and they're out there proclaiming this is a great deal for them and they didn't overpay and that this is going to pay out for them in the long term."

Richard Bove, analyst at Rochdale Securities, says he does not believe BofA has a capital problem, "no matter what the stress tests show." However, if there were, he says the best solution would indeed be to get rid of Merrill. He believes Merrill "could be easily IPO'd and I think an IPO would be successful. "

Bove says a spun-off Merrill would be similar to Greenhill & Co. ( GHL) or Lazard ( LAZ), which he argues are trading at relatively high multiples.

As for all Merrill's bad assets, Bove believes they have already been written down so far that they are at or close to market value. He adds that many of the remaining bad assets are related to commercial real estate, and he attributes the nearly 10% rise in Morgan Stanley's stock Friday to the fact that the Federal Reserve announced it would make securities backed by commercial real estate assets eligible for inclusion in the Term Asset-Backed Securities Loan Facility.

Nonetheless, Bove believes it would be "stupid" for BofA to get rid of Merrill.

"If they did, they'd be getting rid of Merrill when Merrill's about to turn extraordinarily profitable," he says.

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