Posted on 01/29/2021 6:14:31 AM PST by Kaslin
The rules here are simple: Heads Wall Street wins, tails you lose.
For those who haven’t heard, there’s a bit of a brouhaha brewing with the video game retailer GameStop, which is publicly traded. Much of Wall Street soured on the company, believing it to be the next Blockbuster or Radio Shack: a dinosaur from a bygone era that has no hope of succeeding in the increasingly internet-run future. As a result, a major Wall Street hedge fund worth billions decided to make a bet that the company’s already low stock price would just keep going lower.
The traditional way to make money in stocks was to find a company that was worth more than what its stock price indicated, purchase the stock at a bargain, and then make your money either through the company’s distribution of its profits back to its equity owners or the appreciation of its stock price. Buy low, sell high. But you can also make money betting on a company to eventually circle the toilet. This is called shorting.
To make money off a company that’s not making any, you “short” its stock by borrowing a share from an existing owner, immediately selling it and getting the cash proceeds from the sale, and then buying back the stock when its price dips and returning the share to the original owner. It sounds simple enough, but it’s also extremely risky.
Because you’re borrowing an asset, you have to pay interest on that debt, and over time that can get increasingly expensive. Even if the stock drops like you expected, those carrying costs can destroy any profit margin you thought you’d earn. And if the stock price goes up, you could be facing financial ruin. That’s because when you short a stock, your losses are potentially unlimited.
Think about it this way: If you buy a stock for $25, the most you could possibly lose if the entire investment went belly up and the price fell to $0 is $25, the price you paid for the stock. On the flip side, your gains are potentially unlimited, because who knows how high the stock price could go.
Shorted stocks are the exact opposite. If you short a stock at $50 — you borrow the stock, and immediately sell it at the current price of $50 — the most you’ll earn is $50. When the stock approaches $0, you’ll buy it for pennies, return the share back to the investor from whom you borrowed it, and the difference is your profit.
However, if the stock price goes up, so do your losses. If it goes to $100, you have to buy it at $100 in order to return it to its rightful owner. But what if it goes to $1,000, or $10,000? Your losses could be infinite. The same goes for the various baskets of options and stock derivatives that can be used to mimic the payouts of stock shorts.
This brings us back to GameStop. A major hedge fund had a massive, and very public, short position on GameStop. Enter Reddit. A bunch of Redditors who followed the stock market realized that this billion-dollar hedge fund had a problem on its hand: Due to a combination of factors, GameStop somehow ended up with more short positions than outstanding shares.
The Redditors realized they could pull off what’s known as a “short squeeze”: If they started buying up GameStop stock and refusing to sell it, they could crush the hedge fund as its short positions came due, potentially even driving it into bankruptcy, all while profiting in the market by purchasing a stock that was once in the single digits and watching it approach $50 and then $100 and $200 and even $300.
At one point, it was estimated that the losses accumulated by GameStop short-sellers approached $5 billion. Melvin Capital, the now-notorious hedge fund with the huge GameStop short position, eventually required an infusion of $2.75 billion in cash from an even larger hedge fund to cover its possession and remain solvent.
And that’s when the Wall Street empire struck back. Suddenly, the federal Securities and Exchange Commission, or SEC, which purports to be a Wall Street regulator but instead operates as little more than a Wall and Broad soothsayer to a public skeptical of Wall Street’s power, weighed in and intimated that it might investigate or even shut down the trading of GameStop stock to prevent the price from getting even higher.
Then the Wall Street-backed trading apps and the Wall Street brokerages joined in, announcing they would no longer allow their users and retail investors to buy GameStop stock. The result? When you can no longer buy a stock, its price can only go in one direction: down.
The whole saga has spawned a mini-industry of commentary on trading, markets, Wall Street, hedge funds, regulation, efficient markets theory, and who knows what else. Hedge funds are bad! No, hedge funds are good! Markets are efficient vehicles for asset price discovery! No, we need strict regulation to prevent mob-incited runs on banks!
They all miss the point. What’s happening right now has nothing to do with hedge funds or free markets or pricing theory or any of that. What’s happening right now is another front in the major war taking place in institutions and countries across the world: It’s the elite versus the populists.
Wall Street has a long, storied history of viciously crushing short-sellers. It’s something of a local pastime. Just ask David Einhorn, who wrote an entire book on the industry’s efforts to destroy him for the crime of shorting the stock of a bank that was covering up the fact that a huge chunk of its loans were garbage and would never be paid back. The GameStop saga isn’t about the benefits, or evils, of short-sellers.
The real story is how “retail investors” — the industry term for regular people who day trade now and then or have a small brokerage account for retirement or to buy stocks every now and again for fun — figured out how to take down a financial leviathan. It’s not that Wall Street dislikes retail investors, it’s that Wall Street views them as little more than commission factories for the big brokerage houses.
Those rubes don’t know anything. They’re not sophisticated. They don’t have the credentials or pedigrees of the geniuses who simultaneously destroyed the housing market and economy in 2008. And they certainly don’t have the power to move markets.
It’s Wall Street’s job to move markets. It’s Wall Street’s job to tell people which stocks and bonds to buy, which conveniently just happen to be the same assets that the mega-banks are desperate to get off their balance sheets.
A bunch of trash, mortgage-backed securities based on mortgages that will clearly never get paid back? Just put them all in the same garbage bag, claim they couldn’t all possibly start to rot at once, and then demand that the ratings agencies whose salaries you pay stamp them not as trash, but as pure gold. Then, when magically all those bags of garbage start to stink to high heaven, why, then it’s time to demand that the federal government — funded by those retail investor rubes who will probably lose their jobs and homes and savings because of those bags of Wall Street’s garbage — bail every last one of them out.
See, retail investors don’t move markets. Until they do. Which, in the case of the Redditors bidding up GameStop stock, they did. And that cannot be tolerated. The whole GameStop saga isn’t about finance or politics. It’s David vs. Goliath, the have-nots vs. the haves, the underdog vs. the heavy favorite with the best talent and training and equipment money can buy. It is a perfect microcosm of the war between the populists and the elites, the individuals vs. the institutions, the people vs. the powerful.
A bunch of internet randos found a way to take financial advantage of a company that had backed itself into a corner. They banded together, executed the strategy, and made bank. They used the exact same rules and systems that Wall Street has used for decades to screw individual investors out of their money.
That was the Redditors’ real crime. Because that’s not allowed. You are not allowed to use the same set of rules for your own advantage.
The rules here are simple: Heads Wall Street wins, tails you lose. The institutions set the rules, not you. The elite, not the populace, will determine what is allowed and what isn’t.
Which is why this isn’t going to stop with GameStop. It’s going to replicate itself within and toward every major institution of American, and global, life from here on out, whether it manifests in protests or riots or crazy elections or entire nation-states removing themselves from global super-governments.
Once the animals figure out that the pigs in charge don’t really think all animals are equal, because some animals are so obviously more equal than others, they tend to get restless.
Then trot out a bunch of the commentators on CNBC to chant "Hedge funds good! Reddit bad!"
Where are the SWAT Raids??
Where are the Perp Walks??
Where are the ASSET FORFEITURE Proceedings??
Robinhood,Ameritrade,.. and all the other trading apps, including the Hedge Funds themselves, and ANY OTHER ENTITY that played a Part in this Massive FRAUD AND THEFT needs to be ARRESTED, PROSECUTED and ASSET STRIPPED Immediately.
These people STOLE 50% of the Little Guy Investors Money IN BROAD DAYLIGHT and No5thing has happened yet. WHY??
A Robinhood employee says Tenev received calls from the White House and Sequoia Capital to place restrictions on trading GME.
Folks,
The stock market is not what it used to be. Profits and management.
It is about as good a a lottery ticket. The only thing it has going for it is inflation. lots of money chasing few stocks.
It is important to understand that Robinhood despite its populist posturing was in collusion with the hedge funds. It sold them important trending data that helped them immensely with their short and long targets. When the users of Robinhood and other platforms dramatically ran up the stock of Gamestock, a stock that the hedge funds had immensely shorted, it literally caused those hedge funds to have monumental losses and go broke. The hedge funds did all they could tapping their paid politicos in the white house and forcing Robinhood to self destruct by preventing buy orders and allowing only sell orders. The hedge funds were desperate and countering any way, however illegal and immoral, that they could. They were successful in mitigating some of their losses but most took a huge hit and some are in fact bankrupt. Yet unless there is real legislation limiting their scams, they will reformulate and return. Given the amount of money they give the politicos, it is highly unlikely that there will be any legislation or criminal prosecutions. Friendly judges will quash the civil suits.
The hedge fund was out to make money... the WSBs were out for blood! O’ by the way you cannot short blood......
I *think* gamestop is halted. Everything else is updated but $gme’s been still for 6+ minutes now.
Nevermind, it’s back going
fascinating!
Yeah, they seem to be doing that. Stopping and starting. I hope a lot of billionaires are wiped out ASAP.
Let me check with the local blood bank. If I can borrow a pint, I can drop by the local blood mobile give that and get a couple of cookies and some orange juice...
Closing out the short may be a little difficult if I just bring in a ziplock bag of blood to close out my short position.
The Wimpy plan.... “I’ll have a hamburger, for which I will gladly pay you Tuesday.”
bfl
Thanks for posting. This is a very well written commentary on the whole picture of what is happening with the Gamestop issue.
My son used to buy games from Gamestop, there is store a couple of miles from our house. Or sometimes he bought some at the Fort Campbell, KY AAFES mall when I took him in.
Especially the leftwing. It would serve them right.
“Thanks for posting. This is a very well written commentary on the whole picture of what is happening with the Gamestop issue.”
Yes, thanks for posting Kaslin. This article explains in simple, easy to understand terms what is going on.
“Thanks for posting. This is a very well written commentary on the whole picture of what is happening with the Gamestop issue.”
Yes, thanks for posting Kaslin. This article explains in simple, easy to understand terms what is going on.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.