Merrill Lynch has been thrown into turmoil by auction rate preferred securities issued by fund manager BlackRock. Brokers at Merrill, many of whom have customers with funds locked up in the still frozen market for the ARPs, are frustrated that BlackRock has not redeemed a greater share of the ARPs it issued, according to sources at the firm.

"People are going crazy because BlackRock is not redeeming as much as Eaton Vance and others in the market," a source familiar with the matter says.

Merrill's brokers have grown increasingly dissatisfied that their management has not done more to pressure BlackRock, which is 49% owned by Merrill, to redeem its ARPs, sources say. Senior executives at Merrill have defended BlackRock's position, which has triggered a backlash against them as well.

Some brokers are threatening to leave the firm, afraid that valuable customers will defect to rival firms if they are not made whole on their auction rate funds. Rival Morgan Stanley is publicly poaching Merrill brokers, trying to take advantage of the firm's troubles. Merrill already faces a class action lawsuit and a suit from the attorney general of Massachusetts over its role in the auction rate securities market.

Officially, Merrill praises the redemptions made by Blackrock.

"We've already made progress working with issuers and we continue to work with them to overcome this unprecedented liquidity crisis. BlackRock is an important part of this solution and we are working constructively with them," Merrill spokeswoman Selena Morris said.

BlackRock's redemptions lag behind some of its competitors. When the market froze BlackRock was the second largest closed-end mutual fund issuer of ARPS, and it has redeemed only 25 percent of its ARPs.

The largest closed-end mutual fund issuer of ARPs, Nuveen Investments, has redeemed or promised to redeem 35 percent of its ARPs, according to a report from Thomas J. Herzfeld advisors. Eaton Vance, which was the fourth largest issuer, redeemed 72 percent of its ARPs. Smaller issuers such as Lehman Brothers' Neuberger Berman, which is redeeming 50% of its ARPs, are also outpacing BlackRock's redemption.

But BlackRock is hardly at the back of the pack on redemptions. Many issuers, including third-largest issuer Allianz (which includes PIMCO), have not redeemed any of their ARPs, according to the Herzfeld study.

The situation at Merrill is fraught with tension and complex corporate politics. Many of Merrill's brokerage customers own ARPs issued by BlackRock. (Last month, James Stewart, the financial journalist, described in an article in the Wall Street Journal how he bought ARPs issued by BlackRock.) The thundering herd believes it is being betrayed by an arm of their own company.

"Outside providers are playing the game," a source said. "Larry Fink is not."

Inside of BlackRock they seem not to have heard about the internal strife at Merrill. There is, however, sympathy to the frustrations caused by the failure of the auction rate markets.

"I think it's very fair to say that many of the parties, including issuers, are frustrated," a source familiar with the thinking inside of BlackRock said. "While we've accomplished a lot, we still have a ways to go. We're frustrated that we haven't made more progress."

Until earlier this year, many closed-end mutual funds issued ARPs, which they used to boost returns by purchasing additional securities with the proceeds. While the market thrived, it was a highly lucrative leverage play, allowing funds to borrow long-term debt while paying short term rates. Roughly half of closed-end funds issued ARPs.

When the market for ARPs seized up around 180 days ago, BlackRock's closed-end funds had approximately $9.8 billion in ARPs outstanding. $7.3 billion remains outstanding.