Well, you had to see this one coming...

Turns out Merrill Lynch didn't just sell CDOs to "sophisticated" institutional investors. It also sold them to individual investors who thought they were sophisticated.

Yes, those individual investors lost their shirts. And, yes, now they're saying they weren't very sophisticated, after all.

(Sophistication wasn't much of a defense against losing your shirt on CDOs, by the way. Merrill lost its own shirt on CDOs. But Merrill has no one to sue for that. The shareholders just took it in the teeth).

The devil's in the details in these things. Sometimes investors beg their financial advisors to get them into some of that high-octane stuff that the pros buy. Sometimes, the advisors just sell their clients stuff they never should have bought (in part because the advisors themselves don't understand the risks). And sometimes the "product" people at firms tell the advisors to sell all sorts of stuff they shouldn't be selling. So, without details, it's hard to say who's in the wrong here.

But it seems safe to say that it would be a rare breed of individual investor indeed who should be dumping their nest egg into CDOs...

Dan Fitzpatrick, WSJ:

"We were just lambs being led to the slaughter," said Michael Slomak, a member of a Cleveland family that he says invested $2.65 million in several Merrill-issued CDOs. He says these structured securities, typically based on a pool of debt such as mortgages, had a level of risk that was never adequately explained. The family lost all but $16,500, according to an arbitration claim the family brought against Merrill before the Financial Industry Regulatory Authority.

Merrill, now part of Bank of America Corp., didn't provide its response, but a Merrill spokesman said that a "very small percentage" of its CDO sales were sold to individuals and that these buyers had more money than the average investor.

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