AUDIE CORNISH, Host:
Now to a mystery at the heart of the financial crisis. Why did so many major U.S. banks hold onto toxic mortgage assets, even when their own staff knew they were too risky? To answer that question, NPR's Planet Money has partnered up with ProPublica, which has uncovered some important new evidence. And NPR's Adam Davidson is here to explain the findings. Hi, there, Adam.
ADAM DAVIDSON: Hey, Audie.
CORNISH: So, first of all, explain the mystery.
DAVIDSON: So you remember in the fall of 2008 when all these huge storied investment banks and regular banks were collapsing or on the verge of collapsing. The reason they were in so much trouble then and some of them are still in trouble now is because they held on to these toxic assets, those subprime assets. Even though people within the banks themselves were very clear. These assets are very risky. It's very irresponsible to own these. Yet these huge, huge banks kept them.
CORNISH: So, why would they do that?
DAVIDSON: So, they had Merrill Lynch create a unit within Merrill Lynch, whose sole purpose was to buy the junky assets that nobody else wanted. And the way they got those people to buy them was by sharing their bonuses. So the guys creating and selling the subprime assets got huge bonuses, and then they would share them with the other people in the same company who would buy them.
CORNISH: That can't be normal, right, I mean, this internal payments idea?
DAVIDSON: And, in fact, these risks that they took on were exactly why Merrill Lynch, this old revered company, all but collapsed. I mean, it avoided total collapse by a hurried sale to Bank of America. But, basically, the Merrill Lynch that existed before failed because of practices like this.
CORNISH: Do we know if Merrill Lynch was breaking any laws with this though?
DAVIDSON: As far as we can tell, from what our sources have told us, the FCC did look into this, did start an investigation, but dropped it.
CORNISH: NPR's Adam Davidson was talking about Planet Money's investigation with ProPublica into why banks held on to toxic assets. Thanks, Adam.
DAVIDSON: Thank you, Audie.
CORNISH: And there's more details on this story at ProPublica.org.
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