You are absolutely correct: "These loans were not made at the expense of the Treasury, but at the expense of the Dollar itself, and of the underlying "Full Faith and Credit of the US Government".

BSC is not an FDIC-insured bank, but JPM is on several accounts as it is a bank holding company with retail and commercial operations. Both bank's however are two of the FRB's 20 primary dealers of US treasuries. (more links here) The Primary Dealer Credit Facility was created the day that the JPM-BSC merger was announced, 16 March. These are the facilities for primary dealers as of 28 March. You will note also the Term Discount Window created 17 Aug 2007; at that time Bush and Bernanke announced a plan to "rescue" homeowners by extending FHA origination and insurance underwriting. This was a public signal that Treasury and FRB understood the MBS market and housing values were collapsing. OFHEO was not amused. By Dec 2007 reserve system non-borrowed funds were negative, and FRB established the Term Auction Facility.

And there is no law prohibiting or limiting FRB underwriting precisely because three of the FRB "core banks" are primary dealers and LIBOR panelists -- BoA (which has been "asked" to absorb Countrywide), JPMorgan Chase, Citigroup. I don't need to tell you that "the market" is forcing BoE to validate LIBOR panelists' compliance. In effect, the only thing keeping treasury yield level (USD) is market confidence in these institutions capacity to deflate housing value and suppress dilution (inflation) as directed by the US Congress.

I doubt "insider trading" triggered a panic or the JPM-BSC. Any institutional fund manager paying the slightest attention to BSC litigation, exposure, margins, or rumor of default, under the conditions described above would have pulled have pulled out ($17B over two days, iirc) at the first opportunity the last 10K was filed because they were well aware the company's market cap was bogus.

Diversity is the key to economic and political evolution.