Merrill Lynch (NYSE:MER) will buy back almost $14 million in collateralized debt obligations which it sold to Springfield, MA. Because of the subprime mess, those instruments have lost over 90% of their value. The city said that Merrill should have disclosed more about the financial product.

In a bit of a PR compromise, Merrill and the city has decided the bank will do the right thing. "The City of Springfield and the Springfield Financial Control Board have said that neither body approved the purchases of these investments," said Mark Herr, a Merrill spokesman according to The Wall Street Journal.

There would seem to be some window dressing on that. Since when is Merrill responsible for the approval of purchases of its own products? Someone in Springfield's government obviously approved the buy, but state authorities are probing whether Merrill disclosed the risks of the CDOs.

Merrill is setting a bad precedent. What happens when other cities and states say they were mislead. Does Merrill give all of them a refund?

Douglas A. McIntyre is an editor at 247wallst.com.