The Wall Street Journal-20080201-Credit Crunch- Merrill Pays Back Springfield- Mass-- For CDO Purchase

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Credit Crunch: Merrill Pays Back Springfield, Mass., For CDO Purchase

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NEW YORK -- 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.

State and city governments are emerging as the most recent victims of the subprime crisis. Some critics charged that the CDOs were inappropriate for government cash funds.

"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.