UPDATE 2-Maine bans Merrill Lynch from bond team

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By Anastasija Johnson

NEW YORK, April 4 (Reuters) - The state of Maine has kicked Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research) off its bond underwriting team for serving as a broker on a failed state investment that exposed taxpayers to risky subprime loans, state Treasurer David Lemoine said on Friday.

Maine is one of the first U.S. states to punish an investment bank this way in the aftermath of the global credit crunch that began last summer.

An investment fund called Mainsail II defaulted on its debt to the state last August, two weeks after Maine bought about $20 million of commercial paper through a Merrill broker.

"Until the Mainsail II matter is fixed and I am satisfied that the Merrill Lynch brokerage culture is trustworthy, this office will not bring Merrill Lynch into any of our bond deals," Lemoine said in a statement.

A Merrill spokeswoman declined to comment.

Exclusion from the underwriting team means Merrill will not earn fees on Maine's upcoming $120 million bond sale and future transactions.

The state put about 3 percent of its roughly $725 million cash pool into Mainsail's commercial paper just two weeks before the investment's sterling ratings crumbled to junk and the fund's assets were frozen as mortgage market-related losses roiled credit markets.