Merrill Lynch's CDO Sales

I recently had the chance to read last week's Wall Street Journal article discussing Merrill Lynch's selling of CDOs to customers who were clearly not suitable for the instruments.

The piece focused on how unsophisticated some of Merrill's technically-qualifying "sophisticated" customers actually were. In particular, the article cast doubt on the notion that mere asset levels should have anything to do with sophistication in a legal or regulatory sense, as some of the Merrill customers either inherited their wealth, or made it in fields completely unrelated to financial services.

However, what drew my attention was the several cited examples in which Merrill personnel, including at least one VP, assured clients that the CDOs has "zero risk."

It seems to me that Merrill's documented actions are far more egregious than Goldman Sachs' in the matter of CDOs. Goldman had a mortgage-related synthetic CDO constructed in order that institutional market participants might buy and sell the associated risks. You may disagree on the amount of disclosure Goldman should have made, but they clearly kept the instruments among institutional investors.

Merrill, on the other hand, judging by the Journal's revealing article, pretty clearly stuffed risky CDOs into customers' accounts while deliberately and materially misleading those customers concerning the risks and nature of the CDOs.

I can't help but wonder if the BofA's purchase of Merrill will, ultimately, turn out to be a good deal, as behavior like these CDO sales comes to light.