The free market turns out to be not so free as the financial elite swoop in to save their own skins, literally stealing from the common folk and sacrificing our interests for their bottom line while blathering about protecting us from ourselves or something. Sound familiar?
Not unlike what we saw on January 6 on the Capitol. If you don’t have the police in there at the right time, things go a little crazy.”Laura Unger, former Securities and Exchange Commission Commissioner
Few events bring the far left and far right into at least temporary alignment. Rarely, do the likes of Elizabeth Warren, Alexandria Ocasio-Cortez, Ted Cruz, and Rush Limbaugh agree on anything, but this week was one of those times. The topic was the gaming of the stock market, crystalized by GameStop. First, some much needed background information. The debacle started when large hedge funds targeted the popular video game store, GameStop, with short sales, effectively placing massive bets that their stock would collapse, or perhaps they would make it collapse, and they would reap the profits on the way down.
A popular forum on Reddit, however, had other ideas. “Wallstreetbets” and it’s over 2 million subscribers got wind the Wall Street elites were targeting the stock and decided to do something about it. They rallied individual retail investors, urging them to buy the stock on platforms such as RobinHood, TD Ameritrade, Charles Schwab, etc. As a result, Gamestop shot up in value, soaring more than 400% in the past week alone to $347.51 a share as of Wednesday, January 27.
To put this in perspective, the stock was worth just $6 last September. The technical term for bidding up a stock being shorted by other investors is a “short squeeze,” but all you need to know is that the hedge funds lost and lost big. How much is difficult to determine, but well into the billions, if not close to a hundred billion.
Melvin Capital, for example, almost went bankrupt this week before two other large groups, Citadel, keep that name in mind for later, and Point72 infused a little less than $3 billion into the fund. Data from S3 Partners suggests losses in the $5 billion range over the last month, $917 million on Monday and $1.6 billion on Tuesday alone. These losses might just be the tip of the financial iceberg, however. Gamestop was not the only stock involved. There are indications short positions were taken by large hedge funds on AMC Entertainment, Best Buy, Express Inc, Koss Corp, Naked Brand Group, Nokia, Sundial Growers, Allstate, and potentially many others.
As a result, Melvin Capital’s total losses over the last week were likely $12 billion. CNBC’s David Faber reports that Melvin Capital remains “in trouble” after the “massive losses” and that the money from Citadel and Point72 “is probably gone.” It’s possible Citadel and Point72 would’ve had to double their cash infusion to save the company, but the details remain unclear and are at times contradictory. For example, on Tuesday, CNBC reported that Melvin Capital had closed out its positions on GameStop to stop the bleeding, but by Thursday it was revealed that might not be entirely true.
It’s also strange that short sales of GameStop exceeded the total number of shares available. The Motley Fool reports “There’s not enough stock to go around to let them cover their positions,” meaning they were essentially trading shares that don’t exist. “Almost 130% of GameStock’s float is still sold short — ‘float’ is the number of shares available for trading — there’s no way short-sellers can cover because there’s just not enough stock available,” Rich Duprey explains. How that is possible hasn’t been explained.
Nor is Melvin Capital the only hedge fund shorting the market. Faber from CNBC noted that “any number of large hedge funds have suffered significantly.” According to data from Ortex, the total estimated losses for short sales in 2021 alone are almost $71 billion across over 5,000 firms. Tyler Durden, obviously a pseudonym, writing on ZeroHedge claims, “This means that virtually every hedge fund that had short positions was getting hammered. So when dozens of these giant asset managers sat down and decided to politely call one broker after another what do you think happened.”
This brings us to the next, much more troubling part of the story. As Mr. Durden indicated, rather than let the market play itself out the way one would expect a supposedly free market to do, the brokerage houses ordinary people use to trade, while ordinary people were reaping profits from the increasing stock price, stepped in to protect the large investors at the hedge funds.
They did so by literally preventing their own customers from purchasing Gamestop and other stocks, only allowing the sale while hedge funds could still trade freely. On Wednesday, TDAmeritrade was apparently the first to do so, restricting GameStop and AMC. Robinhood, Charles Schwab, and E-trade followed suit. This had the immediate effect of halting the losses for the hedge funds, and ultimately stopping any individual investor fueled rally on these stocks, likely causing the stocks to plummet once regular trading was resumed.
Translation: The big boys were going to lose up to $71 billion and that was considered unacceptable, so they stopped your average investor using say Robinhood from freely trading. The free market was not so free on Wednesday and Thursday.
Of course, the trading platforms couldn’t just come out and say they were stopping the bleeding for their rich masters, in effect robbing common investors. Instead, they resorted to meaningless euphemisms. “We’re committed to helping our customers navigate this uncertainty,” Robinhood said in a blog post. “In the interests of mitigating risks for our company and clients we have put in place several restrictions on some transactions in $GME, $AMC and other securities. We made these decisions out of an abundance of caution amid unprecedented market conditions and other factors.”
Why would the brokerage houses do such a thing?
Aside from protecting their rich masters, it turns out that the large hedge funds are also their most profitable customers. ZeroHedge reports that Robinhood makes most of its money from Citadel, Virtu, G1X, and other hedge funds, that are “woven tightly in the fabric of the markets.” In other words, they were more than willing to sacrifice one set of customers for another, gaming the system for their favored players.
Amazingly, it might get even worse. Though unconfirmed, there are rumors that Citadel was able to reposition its shorts prior to trading being stopped. Meaning, they told Robinhood to stop trading after they put themselves in a more advantageous position at our expense. Imagine if you could call your broker to do the same.
Perhaps needless to say, reaction across the political spectrum was swift.
Rep. Rashida Tlaib, a Democrat from Michigan and a member of the Financial Services Committee, called the move “beyond absurd” and demanded a hearing on “Robinhood’s market manipulation.” “They’re blocking the ability to trade to protect Wall St. hedge funds, stealing millions of dollars from their users to protect people who’ve used the stock market as a casino for decades.” Senator Elizabeth Warren also used the casino language, tweeting, “For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price.”
Alexandria Ocasio-Cortez called the move “unacceptable,” and supported hearings. Representative Maxine Waters, who chairs the Financial Services Committee concurred, saying “We must deal with the hedge funds whose unethical conduct directly led to the recent market volatility and we must examine the market in general and how it has been manipulated by hedge funds and their financial partners to benefit themselves while others pay the price.”
Left leaning politicians weren’t the only ones upset. Republican Senator Marsha Blackburn tweeted, “Free the traders on @robinhoodapp.” Senator Ted Cruz mocked Robinhood by posting a March 2016 tweet comparing their slogan “Let the people trade” with their announcement of the restrictions. He also seconded calls for a hearing.
Rush Limbaugh provided some additional depth, honing in on how the common people were making money at the expense of our betters. “The key to this is what has happened: We are seeing one of the largest wealth transfers from the financial ruling class to the middle and upper classes in recent memory, and it’s not authorized. Sometimes the upper class authorizes a transfer of wealth with certain new policies, certain new regulations. This is totally unauthorized. This came about because of the understanding of the system and how to game it by normal people.”
The newly minted Biden Administration was, unfortunately, caught much more flat footed. Press Secretary Jen Psaki would say only the President is “briefed by his economic team frequently. But I don’t have anything more to read out for you.” Even worse, the new Treasury Secretary, former Fed Chair Janet Yellen, has been implicated in the shenanigans, at least tangentially. She’s earned approximately $810,000 in speaking fees from Citadel, not exactly chump change. Ms. Psaki refused to confirm if Yellen would recuse herself from advising the President, claiming she was “monitoring” the situation.
How this plays out from here no one knows, some, like Bar Stool Sports Founder, Dave Portnoy, are claiming these actions are criminal though I’m not sure anyone is holding their breath waiting on some of these players to do actual jail time.
Still, it’s fair to draw at least one immediate conclusion: The term “deep state” is often thrown around without clear definition, but the tangled web of the financial elites and their combined interests are now on full display for everyone to see. These hedge funds are not individual operators, each making their own bets on the market. They all lost their shorts at the same time because they’re all placing the same bets and then rigging the market to move in that direction. It’s effectively price setting of the financial market, a practice long banned in other markets under antitrust laws.
In addition, the hedge funds effectively own the trading platforms and hence the platforms will do their bidding even at the risk of sacrificing their other customers. In theory, Wall Street should be the freest market there is. It’s a democracy of capital. The whole idea is that anyone from any background can own a piece of any publicly traded company in the world. There isn’t supposed to be any difference between me buying 10 shares and a hedge fund buying thousands, but there most certainly is. In practice, the market is far from free, some are more equal than others.
Lastly, the government elites are certainly in cahoots with the financial elites. There is no mystery who’s side they’re and it’s not yours. Former Securities and Exchange Commission Commissioner, Laura Unger, spoke Thursday to NBC, comparing average people making money in the stock market to the assault on the Capitol. “It puts a lot of questions about the integrity of the market, everyone is scratching their heads over this. What should happen? What can be done to stop this?” Unger asked about social media users gathering in forums like Reddit to discuss investment strategies. “Not unlike what we saw on January 6 on the Capitol. If you don’t have the police in there at the right time, things go a little crazy.”
Apparently, a thought police for political speech is no longer enough. Our betters also need to police the financial markets, for our protection of course.