By Mark Anderson, NMBA Legal and Legislative Assistant
At the beginning of February, an incredibly fascinating, enlightening economic story became national headlines. The story involves not only the material economic conditions in our country but how information is presented to the public and what really motivates the most powerful factions in our society. Given the speed of our current news cycle, there is always a temptation to quickly forget about events no matter how significant, but this story is worth noting, storing away in our memory banks, and understanding the fundamental lessons that it has taught us.
The story involves a group of online day traders deciding to do a coordinated mass-purchase of individual low-cost stocks as a way to turn a profit. The first stock seized upon by the traders was Gamestop, a retail chain where customers can buy and rent video games. As with most retail businesses in general, Gamestop has fallen on exceedingly difficult times since the beginning of the pandemic. At the beginning of 2021, Gamestop was valued at $17 per share. And hedge funds, generally known as “smart money” because of their inherent advantages, placed their money on Gamestop to continue to go down, putting billions of dollars on the bet that Gamestop’s stock would continue to fall. This is what is known as a “short” bet. In some ways, it’s the financial equivalent of a self-fulfilling prophecy. Hedge funds, which drive a great deal of financial consensus in this country, essentially set an expectation for a company to fail and will do everything in their power to accelerate the failure, leading to financial windfalls for a select group of incredibly wealthy investors.
These day traders, who congregate on the Wall Street subforum of the message board Reddit, had other ideas. Using the trading app Robinhood, the buying spree began in earnest on January 12 and, by January 27, day traders had driven the Gamestop to a previously-unthinkable $347 per share. Because a stock like Gamestop isn’t purchased much, it’s subject to extreme volatility. If someone can drive a lot of purchases into an infrequently purchased stock, then the stock can rise rapidly. The hedge funds who placed a short bet on Gamestop did not count on day traders sweeping in to disrupt the process, but these hedge funds left themselves wildly vulnerable. A hedge fund called Melvin Capital, run by a man named Gabe Plotkin, lost $3 billion of its assets under its control in a week and pulled off its short bet position. As a result, two other hedge funds rushed in and invested billions in saving Melvin Capital. One of the hedge funds that bailed out Melvin, Point72, is owned by well-known hedge fund manager Steve Cohen. Plotkin is a protégé of Cohen’s and former employee of Point72.
David Dayen provided an excellent writeup of the situation in The American Prospect and summed up the dynamic thusly: “They weren’t using some amazing or novel strategy: The run-up in GameStop is just the “pump” of a pump-and-dump scheme, where hype pulls people into a stock before the rug gets pulled out. That’s what hedge fund managers do all the time, making bets and using research to puff up a stock and then take the profits off moving a stock through force of will — theirs — rather than the company’s inherent value. The only real difference here is that ordinary investors drive the train, and the hedge fund guys are getting run over. The hedge funders are mad because distorting corporate stock prices beyond the fundamentals are supposed to be their thing, not the work of the hoi polloi.”
The story’s reaction was nearly as fascinating as the story itself, as feelings about the story were deeply divided along class lines. Elite hedge fund managers, financiers, and those in the media surrounding those industries immediately condemned the day traders’ actions. Hedge fund manager Leon Cooperman called the beleaguered stock buying spree “An attack on the wealthy by people using the money from their stimulus checks.” This was the overarching sentiment if you turned on any financial news report in the days following the initial story. Cooperman’s opinion is wildly ridiculous because the day traders were playing by the same rules that hedge funds play by all the time, but he and others like him don’t like average people playing in their sandbox.
In the days following the initial buying spree, Robinhood made the controversial decision to prevent users from purchasing Gamestop stock and the stock of other downtrodden companies like Nokia, AMC Theaters, etc. Not only did Robinhood take this step, they also froze users out of being able to access the restricted stocks they had previously purchased. It wouldn’t take a ton of detective work to conclude that some influential, powerful hedge funds had a talk with the higher-ups at Robinhood and had them shut it all down. Now, Robinhood is facing tremendous backlash and possible legal ramifications. In short, once the little guy started figuring out the system and beating the big guys at their own game, the big guys immediately changed the rules of the game. In the weeks since the initial purchasing spree, the stocks have, of course, plunged back to earth, but many day traders were able to make quite a bit of money, which can be considered a victory.
The Gamestop story also proved to be an instance where most people, no matter where they fall on the political spectrum, managed to agree that hedge funds and private equity firms have essentially gutted the American economy and left it a hollow shell of its former self. This country’s real dividing line is between people with vast, dynastic sums of wealth and everyone else. The Gamestop story showed this in the clearest terms in recent memory, as did a recent CNBC story highlighting the American worker’s plight. According to a recent study by the human resources firm Zenefits, the U.S. is dead last in the developed world in worker benefits (29 of 29). This means the U.S. places last among its counterparts relative to health care, unemployment, retirement, parental leave, paid vacation and sick days.
The Gamestop story also proved to be an instance where most people, no matter where they fall on the political spectrum, managed to agree that hedge funds and private equity firms have essentially gutted the American economy and left it a hollow shell of its former self.
So, on the one hand, you have the U.S. placing dead last in how it treats average workers, but, at the same time, you have the financial markets revealing themselves to be manipulated by the mega-wealthy with total impunity. Given that, it’s becoming clearer every day that the U.S. is a brutal place for average workers. As Dayen notes in his writeup, “We’ve created a massively over-financialized economy where secondary market trading is a more reasonable ticket to wealth in America than finding a high-paying job. You can see it as the inevitable byproduct of a system built on massive inequality. The little guys figured out how to band together and stick it to the big guys. In so doing, they protected retail companies with lots of workers who now get a reprieve, however brief. They revealed the rot in our system, essentially took over Wall Street, and made a lot of rich and amoral people cry.”
It’s undeniable that many people now consider a lottery ticket, whether literal or figurative, a more realistic possibility than attaining genuine upward mobility in the American economy. There are just too many obstacles placed in front of the vast majority of people. The Gamestop story shows that, in the 21st century, the American economy has turned into something far beyond laissez-faire capitalism. In a laissez-faire capitalist system, the hedge fund that left itself vulnerable due to sloppy decisions would face the consequences of being beaten by amateur day traders. However, we have a system where the hedge fund is bailed out by other hedge funds, thus effectively creating an unlimited safety net for massive wealth, functioning as corporate socialism. On the other hand, we provide a paltry safety net for our most vulnerable citizens, as the study cited above illustrates. When a country leaves its most vulnerable citizens without a sufficient safety net, it leads to various externalities (homelessness, poverty, disease, crime, etc.). If we don’t completely reevaluate our priorities as a country, then these factors will continue to rise.
