Suck It, Wall Street
taibbi.substack.com
taibbi.substack.com
The talking heads doing the pearl-clutching and the commentators around the internet keep talking about how none of this makes financial sense, the fundamentals of the company aren't sound, it can't last forever, someone will get hurt, and it's obvious that zero of those people have scrolled through a single WSB thread.
You can't scroll very far through any of the WSB threads without passing comments like this one:
"Listen to me. Hedge fund dicks. 1%. And who ever the wants to read this.
"I will sell every position I own tomorrow. Red, green... I will sell. I will use all my capital to buy gme tomorrow. Fuck you hedge funds and 1%.
"I have been hit by every single financial and economic in the last 25 years. That’s been my adult life. You have taken every fucking thing from me. And now I will spend every single grand I have buying GME.
"What do I have to lose? My money? Well you fuckers made damn sure over decades that I’d never be able to own a house or live the life that you’ve been able to enjoy. But blocked from us."
That sentiment is posted multiple times in every single major thread -- along with great helpings of jokes and memes and a party atmosphere.
So many people keep assuming that the retail traders in this scenario don't know what they're doing and they need to be protected from themselves. They know what they're doing. Some of them have $millions riding on this and they've had multiple opportunities to cash out.
But they aren't looking for a payday so much as an opportunity to hurt some Wall Street firms that got a bit arrogant and thought they could get away with shorting more shares of a particular company than existed on the market.
Folks can bash Taibbi for getting some details wrong or for writing articles without an editor, but at least he managed to get the basic shape of this whole situation right, which puts him way ahead of a lot of other folks.
"WSB's power users are younger finance bros. It's 30s investment bankers and portfolio managers memeing with each other and cosplaying as 'autists.' If you didn't know what a gamma squeeze was 48 hours ago, you are their exit strategy and the down payment on their next Porsche."
https://www.reddit.com/r/AskReddit/comments/l7bl3z/brokers_o...
Absolutely this.
And the big hero to the little man stick it to the big man movement is.. the richest man in the United States? Who gave WSB lots of drama and laughter with the $420 stock fraud thing and is anti regulation and SEC enforcement to their newfound desire for enforcement on powerful players? Who ripped off NASA to buy bonds in SolarCity and then bailed that out with Tesla or would probably have gone bankrupt?
The WSB people are basically doing this for fun and most of the principle stuff is only on moves that have directly affected their position.
Even before some of the bad moves from brokerages today they had principled screeds to draw people in, but the only people who seem to be mad in principle are the crazy qanon people that have now joined in that are basically spreading blood libel against bankers and stuff and latching onto this and probably praying for violence to result or some kind of revolution like fell out of the Albanian MLM stuff.
The Musk worship is cringe-inducing, but he signal-boosted WSB shortly before the whole thing exploded out of Reddit and into Congress and every television set and living room in the country. I don't get the sense he's their big hero, the core WSB community is far too chaotic-neutral to agree on a hero.
edit: To the second half you added to your comment, we can take a quick trip through a few key WSB threads and see for ourselves how this evolved.
First, there's https://old.reddit.com/r/wallstreetbets/comments/kxw4hu/dont... from about two weeks ago, where the activity was pretty typical WSB stuff and GME was just starting to look like it might have some legs.
Then, there was the post that ignited WSB a week ago, https://www.reddit.com/r/wallstreetbets/comments/l2x7he/gme_... , which is still mostly WSB commentary but the first stick-it-to-the-hedge-fund comments are there. At this time GME was still in the $50 to $65 range and the party hadn't really started yet. I think this makes a good case against the pump-and-dump explanation.
Right around the same time there was the person that paid off their student loans, https://old.reddit.com/r/wallstreetbets/comments/l3aj4z/i_lo... , and the comments are still pretty typical WSB but with pepperings of diamond-hands &etc.
Within 24 hours, attention started to leak out of WSB and into places like CNBC, which started to accuse WSB of things like "market manipulation", and that led to posts like this: https://old.reddit.com/r/wallstreetbets/comments/l3z0n8/howd... , which is when things really started to turn into a proper protest.
Initially some WSB nutcases figured they could gamble their way into a little bit of money, but when Wall Street took them seriously and started fighting back, it became a protest.
All that froth allowed finance companies to suck out hundreds of billions in fees, encouraged lunatic risk-taking in every direction and rampages of private equity takeovers, and kept a vast stable of functionally dead companies alive on cheap credit. Those so-called “zombie companies” make up roughly 30% of all corporations in America now, and they racked up over a trillion dollars in new debt since the pandemic alone.
His own link(!) points out that these "zombie companies" include the WSB long target AMC (fair enough), Tesla, and, wait for it, Moderna. Did he even read it? Or does he assume we won't?
First of all the way that private equity works is exactly what he says. They take a healthy company, have it take out a huge loan, use that to buy out the current owners, and then hope to make money every way that they can. First, the private equity company gets paid for the deal. Next, they get paid to manage the company. Next, they look for every way to cut expenses to make the company's financials look better (even if only temporarily). And if they succeed, they flip it.
If it implodes, the debt goes away with the company and they don't get to flip it. But the private equity company already made a profit. So "the company survives" is a nice to have and not part of their business model.
The people who lend money for this are the ones at real risk. But if there is enough money looking for places to be lent, some of it will go to risky bonds.
Moving on, his definition of a zombie company is one whose earnings before interest, tax, depreciation and amortization (EBITDA) has not been sufficient to cover interest for the last 3 years. Such a company might actually be viable, but only if it has prospects of future earnings that are massively better than current ones. There are some companies for whom that is true, and no all zombies are actually going to fail long-term. Certainly Tesla and Moderna seem to have decent futures.
But most of them won't hit those dreams. Particularly not the ones that private equity got involved with. And the longer they last, the bigger the crater when they implode. But if you have extra rescue money that has to go somewhere, the zombies will be happy to take it to stave off disaster for a little while longer. And apparently they took a trillion dollars in debt in the last year.
How much of that trillion do you think that they will collectively manage to pay back? I mean, without taking on more debt down the road...
That’s how 1 small part of private equity, LBOs, work.
Private Equity encompasses a lot more than LBOs.
Secondly, if it’s so obvious that this is how LBOs always work, then why do the people giving out the loan agree to do so?
Like if you went to a bank and everyone in the world knows that your intention is to borrow money and then declare bankruptcy to avoid paying the bank back, they will not lend you money.
Why should that be any different for the larger companies? The reality is that entities lend them money because they largely succeed overall.
Next, your claim that LBOs buy healthy companies is almost certainly wrong. But even if that’s what they are doing, they are able to buy it because someone is selling it. IOW, because they are paying a premium on the current value placed on the company by others. So if they’re willing to pay a premium and still manage to flip it for more, isn’t that a sign of success? You took a business and increased its value dramatically. To the point where it pays for your many failures as well.
The problems with LBOs lie around the fact that the way they achieve a lot of their success is by making a lot of hard decisions that need to be made but the original ownership cannot. This might be the right thing to do to make the company more functional but it has a lot of side effects since it leads to significant and rapid job losses, etc. In a country where people are largely in debt, and rely on their company for almost everything including healthcare, this has serious knock on effects not just on the individual but their communities and then the entire country.
The solution isn’t to make companies less effective by making hiring and firing harder. The solution is to find solutions outside of this.
These could include universal income, better unemployment insurance, providing limited pauses on debt payments on losing a job, etc.
But it’s a lot easier to complain about evil PE firms instead so that’s what people do. Besides, talking about systems attracts fewer eyeballs than evil corporate overlords so that’s what we see.
Next, you are correct that LBOs buy lots of distressed companies as well as healthy ones. But if you look at the distressed companies that they buy, a large portion started off as healthy companies before they were first bought. And if they do proceed to bankruptcy, very frequently their only real problem is the crushing debt that the buyout left them stuck with. See, for example, Toys "R" Us.
Moving on, why do people loan money to them? There are a number of reasons. But one of the biggest ones is that banks are lending money created by the Fed to prop up the economy, on the bet that the Fed will create more money later to enable them to close out their position. This is a cycle that has been happening since QE started post-2008. Certainly that is a prime explanation for the eye-watering trillion dollars in loans to zombie companies since COVID started.
And finally, the "hard decisions" that you're talking about very often take the form of finding things that can be cut. Like maintenance. If you stop that, your costs go down, your revenue is untouched for a long time, your financials look healthy. The reason why the original management didn't decide that is because they were looking at what happens 20 years down the road, and recognized that failing to pay these costs would be a net loss. Or that failing to keep a hospital up to date will cost actual lives. But PE has a much shorter planning horizon, and figure that the next owner won't figure it out until after the PE company has their profit locked in.
Now none of this is to say that the other things that you recommend aren't good ideas. However when I go to a local hospital, my odds of dying are increased because it likely has been taken over by PE and they prioritized profits over lives in the cuts that they made to maintenance. I'm not OK with this, and would like to see the people running those PE companies have to face personal liability for the effects of their actions.
* Taibbi story claimed that PE firms were behind the 2008 crisis (obviously not)
* Taibbi claimed that Blackstone Group was "Democrat-leaning" (quite the opposite)
* Taibbi claimed that the major returns from PE LBOs came regardless of whether companies succeeded (which is false, and confuses downside protection in some deals with an actual portfolio strategy that can raise a fund)
* Taibbi claimed that after running with Milkin in the 80s, Bain Capital moved on to do LBOs in the tech sector during the first tech bubble
There were a bunch of other things, like refutable empirical claims (for instance, at the time, the numbers showed that PE deals didn't materially impact payroll, despite Taibbi's claims) but that stuff is boring, the more interesting things to me are the places where he's saying stuff that can't be true, like that PE firms were doing LBOs of unprofitable 2-year-old tech companies.
My take on Taibbi is that he has a gift for saying things that feel true, but a poor track record of reliably saying things that are true. That doesn't mean the opposite of whatever Taibbi is on about is false; it means that you can't tell from his writing whether it is, any more than you could by flipping a coin.
The original article is at https://www.rollingstone.com/politics/politics-news/greed-an.... I don't know whether I read it before, but I just skimmed it now.
The takedown was at http://finance.fortune.cnn.com/2012/09/04/greed-debt-and-mat... but has moved to https://fortune.com/2012/09/04/greed-debt-and-matt-taibbi/. It is behind a paywall and I didn't read it. However I can go off your cheatsheet for a sample.
Taibbi's response to the takedown is at https://www.rollingstone.com/politics/politics-news/bain-and....
Point by point.
1. Taibbi never claimed that PE firms were behind the 2008 crisis. In fact his article doesn't mention the 2008 crisis. And appropriately not since Romney exited Bain in 2000 and that crisis is not the subject of the article.
2. Taibbi's follow-up acknowledges that "Democrat-leaning" was a poor phrasing, and also his description was specifically of the Blackstone Group in the early 1990s. (The original phrasing did make that clear - read it for yourself.) And he has a point that they supported Bill Clinton in 1992, following which their chairmanm Roger Altman, left to be Clinton's Deputy Treasury Secretary.
3. When you talk about returns from PE LBOs you have to be clear about returns for whom. He enumerated multiple cases where the returns for Romney and Bain came regardless of whether the companies succeed. Whether they came for the PE funds that people invest in is a different story. And the examples that he gave are NOT downside protection.
4. Taibbi DID NOT claim that Bain Capital did LBOs in the tech sector. Go read what he wrote and verify that. Any impression to the contrary shows a lack of reading comprehension. What he DID say is that tech bubbles bring easy money, some of that money gets invested in PE companies, and with that "dry powder" they get to go shopping. But they don't go shopping for tech companies. Instead they do things like shop for toy companies and donut shops.
If you're interested in where he talks about PE firms doing LBOs of unprofitable 2-year-old tech companies, I strongly suggest that you pull out quotes of him saying that they do. You may have trouble though. He nowhere says that.
Your comment about a "poor track record of reliably saying things that are true" appears to be more appropriately applied to the criticisms of Taibbi than to Taibbi himself.
Like I said, I was working from notes. I reread his piece carefully. I don't find Taibbi's defense very persuasive; for instance, I think if you read his piece, it's pretty clear that he's suggesting that PE firms put up pennies on the dollar, and that they were in some manner culpable for the first dotcom bubble and for the 2008 crisis. I also think that even when Taibbi is "right", what he's mostly doing is hyperventilating over banal side-issues that aren't the real problem. I read his writing about downside protection for PE deals and wonder what he'd say about liquidation preferences.
But either way: I concede the point that Taibbi's LBO writing is mostly notable because Dan Primack took the time to write a takedown. It's not as bad as his NYC parking meter writing, or his Obama bailout writing, or, god help us, his writing on dark pools and HFT.
On the other hand: being (mostly) directionally right about LBOs is kind of a lay-up? Like, it was the plot of Wall Street.
The large media corporation NYT just reported out that RH had to draw down a $600B line of credit and take a $1B round of equity funding in large part because of capital requirements from clearinghouses. Taibbi's substack, on the other hand, seems to believe that jet planes will never fly again because of COVID.
FTA:
"How much does Sorkin think his exalted Delta Airlines would be worth now, if the Fed hadn’t stopped its death plunge last March? How much would any of the airlines be worth in the Covid age, with their fleets of mothballed jets?"
I believe it is true that the Feds kept Delta and other airlines afloat. Regarding the "Covid age" — could be simply 2020-2021. Or who knows? Bill Gates and others have suggested that 50% or more of business travel will never return.
Of course, that's not what I was talking about. I'm just giggling at the idea that alone among USA journalists, Matt Taibbi has had his mind addled by the Twitter, as discussed upthread. How is that "Russia-gate" investigation going now?
[EDIT:] As I've observed before [0], I still don't get economics advice from Taibbi.
Regurgitating a press release is not "actual reporting". We won't know what actually happened between RH and Citadel for some time, if ever. It's misleading to keep mentioning this in this context, because TFA doesn't address Citadel at all.
ISTR you have described RH as "a force for evil". I didn't disagree with you, but it's disappointing that your famous animus for one of the rare decent journalists in USA has preempted that judgment. Every time Taibbi is linked on HN you're around to slag him. You seem more opposed to Taibbi than you are to DNSSEC. When you read Taibbi you imagine things that are not in the text. What did he ever do to you? Did he cut you off in traffic? Did he steal your dog? What gives?
Those who don't see TARP as v1.0 and CARES as v2.0 of a giant transfer of wealth from those who can't afford lobbyists to those who can, simply aren't paying attention. One shudders to contemplate the calamity scheduled to justify v3.0.
[0] https://reason.org/commentary/new-york-parking-privatization...
The intentional misreading of the latest piece (vis-a-vis Airline comments) seems very odd.
You should create some competition for him with your own writings to demonstrate how mistaken my opinion is on this matter.
Can you define "crank" in the verb form you seem to be using it in here?
A common element seems to be Patreon or Substack.
Could well be 30%, but of course there's no definition for zombie. Functionally dead is a bit harsh as they're doing something to get paid, but they're not doing it efficiently and they're not being challenged, eg thanks to network effects or reg capture.
I'm not really here to debate the definition. It's his link that enumerates the companies I'm pointing out. Which is why I'm making the case that he hasn't really read the stories he's linking to.
We could go further into the analysis: a whole bunch of companies, like Delta, which Taibbi implies will never be worth anything again, are distressed because of the pandemic, which will clear up this year. Demand for the products of these kinds of companies will return and the list of "zombie companies" will change, as it has in the past (per Bloomberg, take Sprint as an example). But this is really dignifying Taibbi's polemic, isn't it?
The estimate from https://www.macroaxis.com/invest/ratio/XOM--Probability-Of-B.... is that it has a 36% probability of bankruptcy in the next 2 years.
In a longer time horizon, Exxon's finances are strongly dependent on petroleum revenue, but petroleum demand could easily fall.
The petroleum industry is projecting that when COVID ends, demand will come back. And they are projecting that as far out as 2050, gas will remain the dominant source of energy for transportation.
However neither seems likely to me. I believe that we will see a permanent shift towards more remote work. That cuts out both a lot of commuting. It also cuts out a lot of motivation for business travel. (Bill Gates estimates a 50% drop in business travel.) Both suggest a permanent drop in demand in the short-term. And in the long-term, the transition to electric vehicles seems likely to go much faster than the gas industry wants to believe. We are already seeing places like Washington State pass laws that all new cars must be electric by 2030. This suggests that the transition to electric will be eating into gas revenues fairly quickly. This is not a small issue - use of oil for personal transportation is somewhere near half of all oil usage in the world.
So you say that "nobody thinks that Exxon is about to go under". But I'm looking at it and I think that they are a company that structurally has financial trouble, in an industry that has market trends against it. No matter how big a household name they are, I would be very happy to take a bet that they go bankrupt in my lifetime.
But look: it's not my claim that Exxon is a good investment. In fact: Exxon's stock seems to have tracked the prevailing grim sentiment about the oil business. Rather, what I'm pointing out is that it doesn't seem reasonable to suggest that Exxon is "functionally dead", a "phony-baloney" company propped up by paymasters in the rigged financial services industry. Exxon is, as a company... kind of important? Like, it does a bunch of stuff?
Another example: Boeing. We're all aware of a big reason for Boeing's predicament. But Boeing didn't get there by being a "zombie" that wasn't doing real business; in fact, we can probably ruefully say Boeing did too much business on the 737 Max product. So there's another reason you can be on the "zombie" list: your company made a huge mistake that will take years to climb out from.
Moderna was also on the list Taibbi linked to. Because it was an R&D company that wasn't meaningfully shipping product. I don't know that we even need to talk about Moderna's financial prospects (I genuinely have no idea what they are) to dispose of the idea that it's a "functionally dead" "phony-baloney" company; it's a key, effective component of a strategy to rescue the world from a global pandemic. So there's yet another way to get bucketed as a zombie: you can be a startup.
My point --- I was too lazy to type it last night and am too lazy to come up with a way to say it succinctly now, sorry --- is that Taibbi is either taken in by or preying on a layman's understanding of the word "zombie" to drive a column about how 1/3rd of the market is kayfabe. There is probably a way to make that point, maybe without even having to argue that Ford Motors is a fake company. But Taibbi tried to make it by linking to an article that calls out Tesla and Moderna as examples of the "zombie" phenomenon; he either hasn't read his link, which basically refutes his argument, or he's assuming you won't. Because after he writes that link, he goes on to imply that "zombie" means here what a normal person thinks it means. And it does not.
Well I'm not normally a massive fan of his either. But he does have something here. I don't doubt that airlines will exist in the future, but why exactly must it be the same ones that exist now? The planes and the pilots will still be around, but why should they be run by the same companies? You could ask the same about many crisis era firms, they do something that should survive, but why should they survive? Why shouldn't there be some replacement, and why should the public prevent it? Doesn't this reduce opportunitie for newcomers?
So, just, real quick: has it in the medium-to-recent past been a good idea to bet on the idea that the airline business will be dominated by some new entrant, rather than the major carriers we have now? Since Southwest entered the market, has there been a shakeup in the top tier of airlines that brought a newcomer in? Like, I know Alaska and Jetblue are a big deal, but if airlines were smart phones Delta would be Samsung and Alaska would be, like, LG.
I'm happy to noodle about Delta's prospects, but you can look at his piece and see what he's actually saying about Delta, as an example of how the stock market is fake and props up companies with no prospects. But you know why Delta's 2020 revenues are where they are, and it's not because some permanent shift away from Delta.
I guess he didn't word it very well, because he does seem to suggest that some real businesses aren't doing much. I guess it's like his vampire-squid article, it's hyperbole.
The thing about low rates is we no longer discount the future. If rates were 10% and 2020 happened, Delta would be worth a whole lot less. This would allow new shareholders to buy into it. At the moment things are being valued like they're going to be great forever. Why should we all be tied to a really long and optimistic time horizon? It seems wrong, because there are things that you should expect to happen over 5-15 years.
Efficient Market Hypothesis conserved. You're welcome.
Finance is a slow game. Mistakes are built into over month, years or even decades. The only thing that happens quickly is crossing the point of no return. Pretending that a point of no return is when the mistake happened and requires an immediate view or response is bad framing.
Instead of stealing from the rich and giving to the poor, the American version takes in the young and sells them to computer-powered hedge funds; this Robin Hood is the house that always wins.
https://taibbi.substack.com/p/pandemic-villains-robinhood
Except when it doesn't, apparently.
TIL Matt Taibbi is not the perfect Oracle, that pierces the veil of unknown future.
If you asked me that Reddit would use RH app to cause ruckus on Wall Street, I would have laughed that as implausible, one month ago.
RH is still very weird thing and it being able to basically hold your stocks hostage and sell them on their own terms, should be regulated.
Imagine if you bank basically freezes your assets and sells them off, without your input. You'd want your bank regulated, no?
RH's business model of "selling" clueless retail investors to the big funds worked. Untill there were to many of those retail investors and RH risked running out of cash.
>"a stand alone complex is multiple copies of a behavior, object, view, ect, existing without an original."
It doesn't imply there wasn't an original, but usually that original was just the seed crystal for the behavior.
Why are we all buying this narrative that it's a bunch of little guys on r/WSB driving this?
As though the little guy narrative were some average stock pickers who happened onto buying $MSFT back in the late '70s?
It may well be the case that a bunch of day traders on a Reddit obtained some good Intel and are stickin' it to The Man.
But that also sounds a bit too perfect.
If another hedge fund saw an opportunity to blow away some competition, and ran the strategy through a Reddit for plausible deniability, that would also work.
It's OK: the federal government will pass the damage on to the peasantry in any case.
This shouldn't be allowed because it would destroy stock markets as we know them.
There is absolutely nothing wrong with redditors fucking with short sellers. People who are clutching their pearls about this are only trying to protect rich friends who are hedge fund managers.
There is nothing wrong, illegal, or immoral about trying to "manipulate" the stock market unless you are committing fraud or have insider information. CEOs of companies, activist investors, and analysts do this for a living every day. They are not more qualified than us to have and share opinions and history tells us they are perhaps much less.
There is absolutely zero reason for anyone - SEC, The Government, robinhood, the exchanges, Facebook - to intervene and anyone who is considering intervention right now is only doing it to protect their rich hedge-fund friends.
Market manipulation is a crime under Section 9(a)(2) of the Securities Exchange Act of 1934. There is a big difference between buying or selling because you think a stock is over or under valued, and trying to manipulate a stock price to extract money from people not in on the manipulation.
SPOILER: you can't, because it isn't true. It's an incredibly popular myth, but it is just a myth.
An interesting resolution to this would be if GameStop would allow the short sellers to close their positions by selling them newly minted shares. The result would be that the company would get all the money instead of the shareholders. But the shareholders own the company. So the share price would only crash by half (from the dilution) instead of 99% or whatever it is now.
Which would also have the effect of saving the company.
Maybe one or two hedge funds will declare bankruptcy. The rest will rake in the dough. And a large number of stupid people will find themselves poorer.
Personally, I’m not for over-regulation. To some extent, people need to take personal responsibility. But conning the stupid is immoral.
The many ill-informed twitterati, pseudo-intellectuals, and political grifters who have taken to cheering a transparent pump n dump will find themselves in an awkward situation in the next few weeks.
The hedge funds used to have money that plausibly soon they won't. It is taking money from hedge funds.
> do you think that the retail traders who yolo’d their savings (there are many of these) will be the ones to sell at the correct second?
Or any point before that second but after the price has increased above what they paid? Quite a number of them I would expect.
Also, it's possible to use limit orders, so that if a short squeeze happens and causes the price to go up above the limit, the person's shares are automatically sold.
Or it could all go wrong in several different ways. It isn't a low risk activity. But if the risks are out in the open, where's the scam?
Looking at WSB today, a lot of people and comments are clearly market-irrational, because they're smelling blood. They're not buying the stock based on the fundamentals, they're buying the stock in the hope of bankrupting any fund that is trying to short sell the stock.
For revenge. For shits and giggles.
A friend of mine posted some statistics from a Swedish broker who reported that over 15000 people had bought shares in GME in the past two days. That's just one broker in one small country. Suddenly, that 50 million share float doesn't look very big. It's definitely small enough that what is essentially a global flashmob of angry people can completely disrupt the share.
I think if you're shorting the stock right now, thinking it "has to" crash back down, you're severely underestimating the size and irrationality of this mob.
The circumstances at the moment are strange, for sure, but the end result seems all but certain to be the same: the patsies mostly end up giving their money to someone else. It just happens that this time, it's a different group of market manipulators, who may or may not be acting legally and so may or may not get to keep that money anyway.
If nothing else, this incident has shown that maverick investment could be dangerous to our financial systems. These stocks do not exist in a vacuum and the people playing games with them are not operating independent of the rest of the markets. Their actions could hurt a lot of innocent people as well -- ordinary people who just have their savings and pensions invested in the market in normal, responsible ways -- at least in the short term.
If the same strategy continues, it must be a matter of weeks, if not days or hours, before governments begin heavy-handed regulatory interventions and even new legal restrictions, assuming that hasn't already started behind the scenes and isn't responsible for the interventions in buying certain stocks that have already happened.
Why? If the end result is the same, what's the argument for regulating it?
Also, there's a hilarious near-unanimous political backlash against the brokers that interfered or halted with their customers' ability to trade GME these past couple of days.
> If nothing else, this incident has shown that maverick investment could be dangerous to our financial systems.
In the 2008 financial crisis, the actors who caused it suffered absolutely zero consequences, while the losses were socialized, and regular people suffered consequences in the form of recession and unemployment.
The hypocrisy is staggering, if anything, the large actors in the financial systems are dangerous to ordinary people!
> Their actions could hurt a lot of innocent people as well
"Won't somebody please think of the children!!!"
Yeah, no. The explicit target of this action are the shorting hedge funds that were betting on Gamestop's slow demise. There are no innocents being hurt here.
Mitigating the collateral damage that this sort of situation causes.
The hypocrisy is staggering, if anything, the large actors in the financial systems are dangerous to ordinary people!
I agree that some large actors have in the past been grossly irresponsible. I agree that they should be regulated and if necessary penalised accordingly.
But two wrongs do not make a right.
The explicit target of this action are the shorting hedge funds that were betting on Gamestop's slow demise. There are no innocents being hurt here.
Tell that to everyone whose savings and pensions are invested rationally in places that are traded on the same markets but have nothing to do with the WSB pump and dump. Extreme volatility and irrational stock prices ultimately hurt everyone in the market who is trying to invest responsibly.
The thing is, this isn't 2008. The risk then was that the entire financial industry was in a precarious position because even the ones not holding enough bad mortgages to bankrupt them were still holding some, and the double whammy of that and being exposed to defaults by what people expected to be stable institutional debtors could have had a domino effect.
Right now the financial industry is already flush with stimulus money and interest rates are around zero. You don't get the same domino effect. So big firms that made risky bets can suffer the consequences.
> But two wrongs do not make a right.
Just the opportunity to not bail them out this time could be worth the consequences to act as a deterrent for this kind of careless risk taking.
> Extreme volatility and irrational stock prices ultimately hurt everyone in the market who is trying to invest responsibly.
Explain how this has any significant effect on everyone investing in major index funds. Most of them don't include GameStop at all and for the few that do it generally isn't a major component. And even if it was, they would have then owned the same number of shares before this started and after it ends, so if the price goes from $5 to the moon and then back to $5 again over the course of a short period of time, that effects them how exactly?
And yet, despite steady, healthy growth in recent months, I appear to be down close to 10% over the past week. Now, that could just be bad luck, with sharp falls striking a variety of different funds at almost exactly the same time. Perhaps there has been some profit-tasking after that period of growth. But there has been generally positive sentiment in other respects this week, from Biden to vaccines, and no obvious cause for sudden alarm or to expect the growth to stop.
Alternatively, something else is happening, and there is only one story making the front pages today that could explain it.
Now, as I mentioned, I'm generally a buy-and-hold, long term investor. Short term blips don't greatly concern me, and probably won't until I'm getting close to retirement. But if I were about to retire, I'd be concerned about the short term consequences for rationality in the markets.
and that's why it's a game of chicken...
Also, I don't believe it's legal for a public companies to issue shares to specific parties at sub-market prices. It certainly wouldn't be legal for the to do it if shareholders didn't approve of it.
I think it is common for public companies to sell stock below market though. If they set a price ahead of time, unlike GameStop in this instance, then the market price will change, right?
AMC did this, both through direct stock sales and through convertible debt. The latter seems easier, because all the work is done ahead of time and when the stock reaches a certain level everything just goes "poof" automatically.
https://deadline.com/2021/01/amc-entertainment-silver-lake-s...
The purpose of the stock market is asset allocation, to ensure capital is used efficiently. Companies with high stock prices can issue shares to invest in their business when needed. People are voting with their money for companies to live or die. In that sense, certain forms of 'manipulation' are indeed wrong as they decrease capital efficiency in the system.
You can argue that the stock market has ceased to function this way already, but to that I'd say: two wrongs don't make a right.
Regardless of the legality - the entire stock market, is not mechanisms which lead to equitable and socially beneficial distribution of resources, efforts, products, services. Fundamental needs and well-recognized valid interests of the majority of the population (in the US and in the world at large) are unmet and unattended to, while limited interests of small elites are well catered to.
So, there is a lot wrong with short-selling as part of a wider mechanism.
Lots of hedge reptiles were on the momentum side rather than the short side. They've ridden it up, and eventually they'll ride it back down. There's no way they'll allow regulation to interfere with this sort of opportunity. Smart money does not outlaw dumb money.
People defending short sellers are likely to be one and/or protecting their rich short seller friends.
Neither side is deserving of compassion or concern as long as they are fully informed on the underlying nature of the share of the business they are buying.
Selling a house that you have a mortgage on is selling something that you only partially own.
Short sellers are selling something they borrowed because what they borrowed is fungible (ie one share in GME is equivalent to any other share in GME).
The real question is whether what they borrowed exists and whether the owner of that is doing the right thing by lending it. If owners of shares won't lend, then short sellers can't borrow.
Should a pension fund that owns shares that are expected to increase in value (otherwise why do they own it), lend that share to someone who is actively trying to reduce its value?
Short sellers are effectively betting against the success of a company, which gives them an incentive to do everything in their power to put that company out of business. And don't say "but that's illegal!" since our enforcement system has no teeth and big players commit crimes all the time whenever the fines are lower than the cost of legal alternatives.
And when a company is overvalued or committing fraud, that is a good thing. Stopping a bubble from growing is how you reduce the harm inflicted on regular investors.
> which gives them an incentive to do everything in their power to put that company out of business
And the long position is incentivized to hype up a business up to and beyond the line of fraud.
Both sides of a financial transaction can perform their duties fairly, or corruptly. Life is not so simple as to declare only one party the problem.
Please don't do this. It's toxic for the discussion.
The WSB investors are engaging in "market manipulation" as well, and obviously without regard to the "fundamental value" of GameStop .
Given that a chosen government selection of banks and investors have benefitted enormously from the government's "market manipulation", while arguably the general public has not, the author hints at the hypocrisy of bank and government officials criticising the WSB manipulation and those who profited from it.
The easiest way to understand the issue IMO is to determine the source of the money as it flows to banks and zombie companies. Does the money come (a) from government (via taxes on citizens) where government decides who will be the recipient or does the money (b) come from private citizens where the private citizen (consumer) decides where she will spend her money.
1. Example companies would be ones that are not profitable but receive significant government support, and this support arguably fuels changes in market value (which may/may not reflect "fundamental value"). Tesla is one example.[a] Moderna is another.[b]
a. https://seekingalpha.com/article/4315467-forget-share-price-... (2020)
https://realmoney.thestreet.com/investing/stocks/tesla-s-mai... (2018)
https://www.investors.com/politics/editorials/if-tesla-is-wo... (2017)
https://www.latimes.com/business/la-fi-hy-elon-musk-defends-... (2015)
Tesla like other auto manufacturers has received billions in government funding.
b. https://fintel.io/doc/sec-mrna-10q-moderna-2020-october-30-1...
Moderna's COVID vaccine mRNA 1273, specifcally the underlying IP, is subject to Bayh-Dole. Obviously they can, are and will be selling to the US government (who will always have rights to this vaccine), but going forward the odds are against them competing with other similar vaccines that have less encumbered IP.
Everyone's brokerage account holdings could be transferred to GameStop holders, or government steps in and tweaks things to allow it all to unwind.
What are you talking about? How does this happen?
Except with SIPC itself being defunct. You hopefully still have priority over GameStop holders that didn't cash out yet and have busted trades from a bankrupt clearinghouse and priority over other creditors. No SIPC to cover your legal costs pursuing your claims. I think margin accounts may be behind fully settled cash accounts in line.
People have speculated that this is an area of application for distributed ledger technology, but the Australian Stock Exchange has been trying to roll out such a system and it has been slow: https://www.fintechfutures.com/2020/07/australian-securities...
Trading in securities with daily settlement, while movement of money is not operating on the same frequency, means that there is a requirement for someone to take that risk.
That's the systemic risk, not the trading itself. If the execution, settlement, and clearing of a trade were simultaneous and instantaneous, then there's no risk to the market itself.