Springfield Gets Its Money Back--What About Maine?

Merrill admits to at least one screw-up. Wall Street brokerage Merrill Lynch & Co. late yesterday agreed to reimburse the City of Springfield (MA) for nearly $14 million in risky investments which its brokers sold to the city last spring and which have since lost 90% of their value. The announcement caught my attention because (a) I grew up in Springfield's suburbs and (b) Merrill created a similar mess in Maine. You will recall that last July Maine's Treasurer was suckered by Merrill brokers into sinking $20 million from the state's cash pool into the infamous MaineFail fund. Oops, did I say MaineFail? I meant MainSail.

Yesterday's deal means that Merrill will repay the city for all its holdings in collateralized debt obligations, plus another 200 grand in legal fees incurred by the city since. The city agrees not to pursue a threatened lawsuit against the firm. However, Massachusetts Attorney General Martha Coakley and Secretary of State William Galvin will continue their investigations, so Merrill is not out of the woods yet.

It remains to be seen whether Maine can extract a similar settlement. Springfield was in a strong position because Merrill had purchased the CDOs on the city's behalf without actually telling city officials until months later. Massachusetts law limits the investment of municipal cash to conservative instruments. Similarly, the primary investment objective for Maine's cash pool is the protection of principal, an objective that was poorly served when MainSail's assets were frozen in August.

In Maine's case it appears that the State Treasurer had an opportunity to perform some due diligence before signing off on the MainSail investment being pushed by Merrill. But that's OK, he has promised that it won't happen again, ever.