Last Updated Oct 5, 2010 9:53 AM EDT
It takes a book to illustrate how bankers playing with financial toys that they didn't understand crushed the global economy. As Lewis writes, "How do you explain to an innocent citizen of the free world the importance of a credit default swap on a double-A tranche of a subprime-backed collateralized debt obligation?" You don't -- at least not in less than 266 pages.
When you've finished reading The Big Short there are a handful of things you'll never do again. One of those is place blame on vast numbers of ordinary people for getting into mortgages that made no sense to them and which they ultimately could not afford. Sure, people lied on their loan applications. But, Lewis writes, "They lied because they were told to lie."
The dirty little secret is that Wall Street needed these doomed mortgages to be approved in ever-larger numbers to keep printing profits in the many billions of dollars. It was this out-of-control money machine that made it possible for a Mexican strawberry picker in California who does not speak any English and who made $14,000 a year to buy a house for $750,000. Who was going to complain? No one wanted to lasso this beast until it was too late.
When I read books like this (which I finished in a weekend; it was that compelling) I always look for common-sense lessons that will help me be a better father, family financial planner and mentor to my kids. Here's what I'm taking away from Big Short:
Â· Be skeptical The heroes in Lewis' book refused to accept the party line. They read the fine print and found holes big enough to fly the Lehman Brothers' private air fleet through. Teach your kids to never accept as gospel what a sales person or a marketing company tells them. Such people have a vested interest and will almost always bend the truth.
Â· Understand your downside Giant institutions like Lehman and Bear Stearns disappeared because they did not understand what they had to lose. Before your kids make any decision -- financial or otherwise -- encourage them to ask, What's the worst that could happen? Then act accordingly.
Â· Perseverance and honest effort pay The heroes in Big Short worked tirelessly to find an edge. Some nearly lost everything waiting for the strategy to pay. But they were confident and stuck with their plan, and earned hundreds of millions of dollars as their reward. Translation: There's still nothing more redeeming than having your own convictions and doing an honest days' work.
Â· Don't trust the gatekeepers Lewis places much blame on regulators and ratings agencies for not spotting the vast amounts of fraud inside the money machine. Kids need to respect authority. But let them know that adults in charge don't always get it right. It's okay to question them and think for themselves.
Â· If you can't explain it, stand clear Not everything can be reduced to a sound bite. But anything that's good for you can be reduced to simple English. Financial parasites, especially, rely on obfuscation. As Lewis writes, "The subprime mortgage market had a special talent for obscuring what needed to be clarified." The same is true of all consumer credit markets.
Â· Ask why The search for understanding begins with asking why. Over and over. In The Big Short the heroes could not understand why seemingly impregnable Wall Street institutions were allowing a band of outsiders to make gargantuan winning bets against them; the heroes worried incessantly that they had missed something in their analysis and that in the end they would pay a stiff price. They kept asking why and they kept finding even more information to support their view, which gave them the courage to make even larger winning bets against the system.
The Big Short is a true story about everything that is wrong with our banks -- and, by extension, what we need to teach our kids about money before they must deal with them.
If you have a question about kids and money, I'll get the answer. Email me at firstname.lastname@example.org.
Photo courtesy Flickr user respres.