The New York Post yesterday reported that Citigroup and Bank of America, those two enormous welfare cases teetering under the weight of their toxic assets, are in the market snapping up more of them.

Both Citi and BofA each have received $45 billion in federal rescue cash meant to help prop up the economy and jumpstart the housing market.

But the banks’ purchase of so-called AAA-rated mortgage-backed securities, including some that use alt-A and option ARM as collateral, is raising eyebrows among even the most seasoned traders. Alt-A and option ARM loans have widely been seen as the next mortgage type to see increases in defaults.

One Wall Street trader told The Post that what’s been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay.

The Post reports that these “AAA” (I use the scare quotes intentionally) mortgage securities have been selling for 30 cents on the dollar. Thank you. I’ve been wanting more information about that. Now, who’s selling them?

BofA told the paper that it’s trying to loosen up mortgage markets so people can buy homes.

While some observers concur that the buying helps revive a frozen market, others argue the banks are gambling away taxpayer funds instead of lending.

Moreover, the MBS market has been so volatile during the economic crisis that a number of investors who already bet a bottom had been reached have gotten whacked as things continued to slide.

But why would they really want to buy these things—and at higher than market value? Could it be that they’re trying to artificially inflate an illiquid market so they don’t have to write down their “legacy” stuff? That seems to be what the Post implies here:

One source said that the banks’ purchases have helped to keep prices of these troubled securities higher than they would be otherwise.

Awfully fishy. Why again aren’t we nationalizing these guys?

Good work by the Post.

(h/t Ritholtz)

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.