Merrill Lynch has been under investigation by the Massachusetts state attorney general’s office over the sales of CDOs to Springfield that had fallen in price by 91%. The issue was that Springfield had made clear that its investment policies were conservative and these instruments were clearly inappropriate. There was further fuel for the fire in that the Merrill office responsible for the sale, in Quincy, MA, was also being investigated by the state of Maine.
Merrill decided to reimburse Springfield for its losses and costs rather than suffer continued embarrassment, particularly when it stood good odds of losing were it to fight. From the Wall Street Journal:
Merrill Lynch & Co. has bought back, from Springfield, Mass., complex debt securities that rapidly collapsed in value during the credit crisis.
The securities, known as collateralized debt obligations, were repurchased at the same price of $13.9 million that Merrill initially sold them to the city last spring. These CDOs, which are pools of debt that included subprime mortgages, are worth only $1.2 million, according to a recent Merrill account statement for Springfield.
Merrill also agreed to pay outside legal fees incurred by the Springfield Finance Control Board, which overseas the city’s finances.
“The City of Springfield and the Springfield Financial Control Board have said that neither body approved the purchases of these investments,” said Mark Herr, a Merrill spokesman. “After carefully reviewing the facts, we have determined the purchases of these securities were made without the express permission of the city. As a result, we are making the city whole and we have taken appropriate steps internally to ensure this conduct is not repeated.”
The Massachusetts Attorney General’s Office said it continues to investigate the sale. “We are still reviewing this matter to determine if additional action by our office is necessary,” said Melissa Sherman, a spokeswoman….
“Springfield deserved to get the money back, and Merrill has acknowledged that,” said Richard Rosenweig, a partner at Goulston & Storrs, attorneys for the Springfield Finance Control Board