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GameStop and Robinhood: Revenge of the Herds

GameStop and Robinhood: Revenge of the Herds

GameStop, the video-game store that every mother of preteens knows like Target, has been struggling in the increasingly digitized world. Enter Reddit. A forum on their chatroom platform decided that GameStop was being driven into the ground unfairly and that hedge funds were hastening its demise. To learn more, read John Jiang’s excellent piece in The American Spectator explaining the scheme. The solution? Band together and buy the stock, driving up the price. The higher the stock price, the more pain for the hedge fund. And, indeed, hedge funds like Melvin Capital ran out of money when their short position was squeezed. They owed more money than they had. A bigger hedge fund, Citadel, gave them a $2.75 billion loan to float them so they didn’t entirely die:

What happens now? In the short run, some hedge funds took a financial bath and lost billions. In the long run, the individual investors who drove up GameStop’s stock price and now have it overvalued will lose money. Some will lose money because the software application they used to buy the stock, Robinhood, wouldn’t allow them to sell their stock when they wanted to. Evidently, only hedge funds are free to buy and sell at will.

Robinhood is an app, like TD Ameritrade or E-Trade, that allows individual investors to buy stocks. Instead of having to have a minimum of, say, $25,000 to invest in a hedge fund directly, a small-time investor may risk his capital in tiny increments. Together, all these individual investors give an app like Robinhood power. The millions of people together on the app form their own sort of hedge fund. Power to the people!

As hedge funds were taking hits, strange things happened. Robinhood stopped letting people buy GameStop shares. Then they forced people to sell at the lowest possible amount. Worst, users cannot complain or else they’ll be banned. In short, they destroyed the positions of their own users, thus destroying their brand in two days by betraying their own name and mission. A company ostensibly built for the little-guy investor was protecting big hedge funds from further losses. No doubt, the Securities and Exchange Commission will get involved.

That caused people to examine who was investing in Robinhood. Companies like Sequoia Capital and D1 Capital Partners invested in Robinhood in anticipation of the company going public.

The sleuthing continued. Who owns Citadel and why would they bail out hedge funds who made a bad bet on GameStop? In that search, it was found that Citadel had paid Janet Yellen, new FED chair, over $800,000 for a speaking fee. An ethics agreement states that she is unable to participate in any dispute with Citadel for one year.

As the day wore on, Twitter booted a user who was encouraging the stock buying. Google was deleting negative reviews of the Robinhood app on their store and search engine. Another app owned by the CEO of Twitter, Square/Cash App, blocked purchases of GameStop stock. Facebook banned a group of 150,000 Robinhood investors. Discord, the gaming platform, banned the WallStreetBets chatroom after the market closed, giving institutional investors a huge advantage over individual investors who make decisions as groups. Why did they close it? For “hate speech.” Who were these Wall Street investors hating? Wall Street hedge funds? How awful!

The elites were closing rank. Again. The little guy was being thwarted. Again. The little guy is enraged.

There are a couple things at play here: First, the hedge funds were preying on a vulnerable company. It can become a self-fulfilling prophecy when funds go short on a company. The company is struggling and putting together a plan to make itself viable. Funds see the companies going belly-up anyway, count on it losing, and bet billions on it losing, and other people see those people betting on the company losing and figure it’s a done deal, and then — surprise! — the company loses. Many big businesses and investment capital companies have either gone into companies and strengthened them or have picked them clean of value and sell the bones. Selling short is a way to drive value down and make it easy for companies to buy the company on the cheap. It’s a brutal system. Creative destruction.

Second, at a time when so many businesses like GameStop and AMC, the other company involved in the Reddit buying spree, suffer due to the COVID shutdowns, it seems like hedge funds are benefitting from a horrible economy. Which is true. They are. There’s a desire to see hedge funds and the rich people who run them to suffer like the little guy has suffered. And yesterday there was some serious suffering.

Third, the elites across the government, finance, and media wholesale took the side of the hedge funds. Banks didn’t let their customers use their own money. Social media companies didn’t let their customers voice their opinions. Media companies cast the people investing as extremists for doing what hedge funds and other institutional investors do every day. What? Why is it wrong for an average American to buy and sell and determine the future of companies but not for hedge funds?

On social media, a scene from the movie Caddyshack played out online. The caddies were jumping in the pool set aside for the club members and making a mess culminating in a Baby Ruth candy bar floating in the water causing a mass evacuation of the pool for fear of “doodie.” Turns out it was nothing of the sort, but that didn’t stop the pool from being drained. It’s unlikely that the caddies were ever invited back.

Classic Caddy Shack doodie in pool- Hilarious! from Peter Bailey on Vimeo.

Oh, the humanity! The plebes were swimming in the investment pool and dropped a pseudo-turd! Get them out!

The small-time investors gleefully splashed around and are jumping from the high-dive and making the club a mess. The club members are still getting their bearings, but the likely outcome will be that the interlopers, not the wealthy hedge fund elites, will be punished in the coming days.

In the last few years, nearly every American institution has been revealed to be fraudulent. All the rules, laws, and regulations benefit the “elites” and burden the average worker or businessman. The game appears rigged and only one side gets ahead. When the average guy tries to even play the game, it causes “turmoil.” Why don’t they know their place?

Far from being a “common man” savior, President Joe Biden is scorned as being just more of the same uni-party leadership.

Like the Capitol being permanently locked down, to keep the smelly people out and far away, the power-brokers online and in finance coordinated to build an online fence to keep the smelly people out. Worse, they steal their money by forcing sells or not allowing them to buy. Will any regulations of these all-powerful institutions come? Probably. And as with all regulation, it will likely benefit the bigger businesses and push the smaller guys out.

With politicians wanting to get to the bottom of things, the circus is only beginning.

Donald Trump Jr. coined the phrase “outsider trading.” That’s what’s happening in the specific. In the aggregate, there seems to be a cold war between the oligarchy and the peasants. It’s happening in every aspect of political and civic life. Whether in finance, sports, entertainment, culture, the military, and on and on, the elites are fortifying their positions — literally in Washington, D.C., but figuratively online, in the media, everywhere. Why? Why are these power brokers so brittle and insecure that they must rig the system in their favor? Could it be that they know what they do is wrong?

The powerful people’s response to the various outbursts (boycotting Target; lining up for Chick Fil-A; voting for Donald Trump; abandoning ESPN, professional sports, and movies like Mulan; and on and on) is to become ever more heavy-handed. America may be headed for a Magna Carta moment. Or maybe the oppression is just beginning. Either way, the GameStop stock buy-up is the financial shot heard around the world. The game may be rigged, but the outsider traders are bringing some pain while they can still play.

Published at Fri, 29 Jan 2021 16:34:45 +0000