The SEC is investigating Merrill Lynch in connection with some custom CDO product. Often, investment banks will create custom products for hedge or pension funds. These products take some sophistication and are usually meant to hit or exceed certain benchmarks (like tracking the Dow Jones Index). The products are little like sausage, a bunch of different securities and derivatives are packed together to achieve the benchmark. But, sometimes, the derivatives trade goofy because they are not actual securities, but more goal-reaching vehicles. Â So, if someone is betting against a stock by some odd derivative strategy, that derivative may not track the stock.
Seems that this happened here, except that it was Merrill–who created the product–also bet against it. If they didn’t tell the fund they were creating the product for, it could get them in some hot water.
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