Bank of America and Citigroup reportedly have been buying “toxic” mortgage assets in the secondary market, spending the billions in taxpayer money they got even as the U.S. Treasury Secretary and White House continue to decry the “crisis” in subprime mortgages.

A report in The New York Post indicates that Boa and City have purchased AAA-rated, mortgage-backed securities, including some that use option ARMs as collateral and alt-A mortgages.

The two banking giants have been given $45 billion in federal rescue funds.

The purchases are controversial, as some worry that the banks are using federal funds to speculate on the mortgage market rather than to generate new loans for homeowners. The purchases could be keeping prices higher than they should be.

Securities rated AAA have changed hands for approximately 30 cents on the dollar, and the most aggressive purchasers have been hedge funds, wagering that the value will rise over time.

But, according to the Post, City and Boa have outbid rivals to purchase those assets.

However, the secondary mortgage market is a central element in the financial markets, where mortgage making banks offload mortgages that have been converted into bonds. Yields on these financial instruments can be as high as 22 percent.

Boa defending the transactions in an interview. “Our purchases increase liquidity in the mortgage market, allowing people to buy a home,” a spokesman said.

City is essentially making the same argument, according to the Post.

The banks apparently told the Treasury department quite some time ago that they intended to invest in the secondary mortgage market.

Meanwhile, a group of five public pension funds have partnered to seek lead-plaintiff status in a class-action lawsuit against Bank of America. The lawsuit alleges Bank of America made untrue statements and failed to disclose material information in relation to its acquisition of Merrill Lynch.

The funds moving jointly for lead plaintiff status include some of the largest and most sophisticated pension funds in the world, including the State Teachers Retirement System of Ohio; the Ohio Public Employees Retirement System; the Teacher Retirement System of Texas, which is the largest Texas public pension fund; Stichting Pensioenfonds Zorg en Welzijn, represented by PGGM Vermogensbeheer B.V., which is the Dutch national fund for the healthcare and social sector and the second largest pension fund in Europe; and Fjärde AP-Fonden, which is one of the largest Swedish national pension funds.

"It is of the utmost importance to enforce the rights of investors, including Ohio investors, against the wrongful conduct allegedly engaged in by Bank of America. As one of the world's largest financial institutions, Bank of America should be held to the highest standards of corporate governance," Ohio Attorney General Richard Cordray told Moneynews.com in a statement.