Real Estate Lender Implosion

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Merrill to Repay Massachusetts City for CDO Purchase
(Update1)

By William Selway

Feb. 1 (Bloomberg) -- Merrill Lynch & Co. agreed to pay Springfield, Massachusetts, $13.9 million to settle a dispute over collateralized debt obligations that tumbled in value.

The money will reimburse Springfield for the cost of the CDOs, securities tied to home loans and other debts shunned by investors as losses on subprime mortgages mounted. New York-based Merrill said it agreed to the refund after discovering the purchase was made without the city's consent.

``My focus all along has been to recoup these funds for the taxpayers of Springfield,'' Springfield Mayor Domenic Sarno said in a statement released last night. ``In my view, Merrill Lynch has now done the right thing.''

Local government agencies from Florida to Washington state have lost money buying securities such as CDOs that are backed by collateral no one wants. The market for CDOs has collapsed amid surging subprime defaults that have hurt their credit ratings, making the securities difficult to sell.

Merrill Chief Executive Officer John Thain said this week that the firm will cut back on packaging home loans and consumer debts into securities because demand for the products has eroded. Similar securities have also saddled Wall Street banks with at least $133 billion in credit losses and asset writedowns, threatening to undermine the bond insurance companies that guaranteed the debts would be paid.

Documents, Testimony Sought

Springfield bought its CDOs between April and June of last year from Merrill, according to city records. The value of those securities fell to $1.3 million in November. Massachusetts Secretary of State William Galvin's office subpoenaed documents and sought testimony last month from Merrill regarding the sale of the CDOs.

State Attorney General Martha Coakley said her staff ``will continue to review this matter to determine if additional action by our office is necessary.''

Merrill, the world's largest brokerage, sold Springfield investments in S Coast FD V CDO, TABS CDO, and Centre Square CDO, according to city records.

``After carefully reviewing the facts, we have determined the purchases of these securities were made without the express permission of the city,'' Merrill said in a statement. ``As a result, we are making the city whole and we have taken appropriate steps internally to ensure this conduct is not repeated.''

To contact the reporter on this story: William Selway in San Francisco at [e-mail]

Last Updated: February 1, 2008 08:20 EST

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