Relevant:
- Massachusetts charges Merrill with fraud
- BofA's Merrill to pay $132 million in SEC case over mortgages
- Bear, Lehman, Merrill Trade as Junk, Derivatives Show
- City of St. Petersburg wins $10.4 million verdict against big bank - Tampa Bay Times
- City of St. Petersburg wins $10.4 million verdict against big bank - Tampa Bay Times
2008-02-01 — bloomberg.com
Merrill Lynch & Co. agreed to pay Springfield, Massachusetts, $13.9 million to settle a dispute over collateralized debt obligations that tumbled in value.
...
Merrill, the world's largest brokerage, bought CDOs for Springfield between April and June last year after it was hired to help manage the city's cash. It didn't give the city a detailed description of the investment until November when it sent officials a private placement memorandum on Centre Square CDO, one of the series of securities it bought.
This may prove to be a watershed event. This is Wall Street's worst nightmare: being forced to pony up to anyone (especially public institutional investors) whom they had offloaded junk mortgage securities to. This means a vast pool of what was thought to be "off" their balance sheets really remains in terms of potential liability -- that is, if they want to salvage their reputations at all.
Lehman Brothers is involved in a similar confrontation.
We've already seen this happen with bank-run hedge funds (i.e. Bear Stearns) and SIVs (Citigroup et al.): they simply can't get away with washing their hands of culpability. It would undermine the highly-critical reputational value needed for major financial companies. The upshot: expect more surprises to the downside for money center bank earnings for the forseeable future.
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