Here's the scene: http://www.youtube.com/watch?v=ZekrhML4frI
I understood this as two very drunk friends basically talking rubbish to each other. Bunk explains how screwed McNulty is (professionally) and rather than say 'yeah thanks for the advice' or 'you are right', he just starts talking rubbish at him, winding him up. And Bunk takes the lead and runs with it - "I knew it was your first time..."
In common with much of The Wire, this is two real guys having a conversation (in this case, a drunken one), not directly moving the plot forward.
Now, having said that, it perhaps does relate to some incident in particular, or perhaps just in general - you'd expect two guys who work together in that environment at some point to have a disagreement. But it doesn't necessarily mean it was something that occurred or was referred to in a previous episode.
What I mean is this is good writing and a great show - soak it up!