Merrill Lynch is under investigation in Massachusetts for having sold some CDOs that fell 91% in value in less than a year to Springfield, a municipality that was just getting out from under its own fiscal woes.
The amount at issue isn’t large by Wall Street standards; the CDOs in question fell by $13 million. While Merrill may try to characterize the transaction as the action of a rogue broker, the state is also examining a questionable $20 million dollar sale by another Massachusetts-based broker to a public retirement entity in Maine.
It’s going to be tough for Merrill to escape liability on this one. Brokers are subject to a “know your customer” requirement; Municipalities are risk and loss averse. There is no way a risky CDO can be characterized as an appropriate investment. And the fact that the CDOs that Merrill is holding on its books have fallen far less in value isn’t helpful to the giant brokerage company either.
Ah, but they do make for tempting stuffees, as the fact that Manly (a suburb of Sydney, Australia), Orange County, California, King County, Washington, and investment pools in Florida, Montana, and Connecticut have all taken hits on complex mortgage-related investments. And I am willing to be that the broker got a bonus credit (extra commission) on the sale of the toxic CDO to Springfield.