Lawmakers are questioning Bank of America's recent transfer of derivatives from its Merrill Lynch subsidiary to its retail bank subsidiary.

In letters to Treasury Secretary Timothy Geithner and the federal banking regulators, 18 Congressional Democrats said the reported transactions appeared to violate the principles established in Section 23A of the Federal Reserve Act, which restricts transactions between banks and their nonbank affiliates.

BofA is the nation's largest residential servicer and third largest lender, though the derivatives transfer is not related to those businesses.

The transfer followed a credit downgrade of BofA that could have required Merrill Lynch to post an additional $3.3 billion in collateral, the letter noted. The retail bank, however, has a higher rating and more assets, and would be required to post less collateral.

“Regulators must stop treating transactions like this as a private matter,” Rep. Brad Miller of North Carolina said in a press release. “This kind of transaction raises many issues of obvious public concern. If the bank subsidiary failed, innocent taxpayers could end up paying off 'exotic' derivatives.”

The letters asked the federal banking regulators to explain the basis for allowing the transfer, what factors they used in making the decision and what efforts the Federal Deposit Insurance Corp. is making to ensure the Deposit Insurance Fund is not put at any additional risk.

“If banks are going to gamble, they should do it with their own money,” Sen. Sherrod Brown said in a press release. “Ending 'too big to fail' means that depositors and taxpayers are not asked to cover Wall Street's losses.”

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