The Scourge of Wall Street, Matt Tabbai, shined a spotlight on Wall Street hypocrisy today on his website. He points out how short-sellers have flipped from Wall Street bastards to the Wall Street elite who must be protected at all costs.
First he brings up 2008. Remember 2008?
In the fall of 2008, America’s wealthiest companies were in a pickle. Short-selling hedge funds, smelling blood as the global economy cratered, loaded up with bets against finance stocks, pouring downward pressure on teetering, hyper-leveraged firms like Morgan Stanley and Citigroup. The free-market purists at the banks begged the government to stop the music, and when the S.E.C. complied with a ban on financial short sales, conventional wisdom let out a cheer.....
Oh yeah. Mr. Tabbai names the cheerleaders who egged on the SEC and blasted the shorts.
Fast forward thirteen years. The day-trading followers of a two-million-subscriber Reddit forum called “wallstreetbets” somewhat randomly decide to keep short-sellers from laying waste to a brick-and-mortar retail video game company called GameStop, betting it up in defiance of the Street. Worth just $6 four months ago, the stock went from $18.36 on the afternoon of the Capitol riot, to $43.03 on the 21st two weeks later, to $147.98 this past Tuesday the 26th, to an incredible $347.51 at the close of the next day, January 27th.
The rally sent crushing losses at short-selling hedge funds like Melvin Capital, which was forced to close out its position at a cost of nearly $3 billion. Just like 2008, down-bettors got smashed, only this time, there were no quotes from economists celebrating the “good news” that shorts had to cover. Instead, polite society was united in its horror at the spectacle of amateur gamblers doing to hotshot finance professionals what those market pros routinely do to everyone else.
What goes around comes around except unless it's Wall Street. Remember Toys R Us? After the history lesson, Tabbai gets down to business:
The only thing “dangerous” about a gang of Reddit investors blowing up hedge funds is that some of us reading about it might die of laughter. That bit about investigating this as a “pump and dump scheme” to push prices away from their “fundamental value” is particularly hilarious. What does the Washington Post think the entire stock market is, in the bailout age?
America’s banks just had maybe their best year ever, raking in $125 billion in underwriting fees at a time when the rest of the country is dealing with record unemployment, thanks entirely to massive Federal Reserve intervention that turned a crash into a boom. Who thinks the “fundamental value” of most stocks would be this high, absent the Fed’s Atlas-like support in the last year?
Keep preaching, Matt.
Short-sellers bet by borrowing shares from so-called prime brokers (Goldman, Sachs and JP Morgan Chase are among the biggest), selling them, and waiting for the price to drop, at which point they buy them back on the open market at the lower price and return them. The commonly understood rub is that prime brokers don’t always really procure those original borrowed shares, and often give out more “locates” than they should, putting more shares in circulation than actually exist (as in this case). GameStop is exposing this systematic plundering of firms using phantom shares and locates, by groups of actors who now have the gall to complain that they’re the victims of a “get rich quick” scheme.
Short-sellers are not inherently antisocial. They can be beneficial to society, instrumental in rooting out corruption and waste in whole sectors like the subprime industry, or in single companies like Enron. Moreover, the wiping out of such funds isn’t necessarily to be cheered. Sorkin correctly notes that many hedge funds invest on behalf of entities like pension funds, though maybe they shouldn’t, given their high cost and relatively mediocre performance, as I’ve noted before (Link to Rolling Stone article).
However, that’s the point. The degree to which even the beneficial functions of short-sellers are cheered or not is dependent upon whose corruption they’re uncovering. Let the record show that when the S.E.C. imposed a ban on shorts of financial stocks in 2008, they routed short-sellers who were dead right about the insolubility of America’s banking sector.... Rest of article.
Tabbai gets it right: This is a battle between two different groups of gamblers. The government should stay out of the way. The trades were made legally and catching a shorter in an exposed position is not against the law. There will be big losers in this drama, probably on both sides of the ball.
Note: Dear Google: Seriously? This post is clean except for some critical opinion and reporting of Wall Street. The links are to sub stack, CNBC, CNN, and other major news outlets.
22 comments:
The Hedge Fund managers will ultimately win because they are part of a protected group and the r/WallStreetBets guys are not.
If only Congress were to say out of this, but I sense the political mood will usher in something to protect the institutional investment groups.
Wow... People who idolize Ronalg Reagan are complaining about the Stock market? woooooooooow
2:10 - Almost sounds as if you're talking about the 'swamp dwellers'.
Glad they got the screws. My son saw the short squeeze coming and made 500% gain in 2 hours. They deserve it. He was just a bystander who pays attention.
@2:45
They have been called by many names throughout the centuries. But you are correct. Their current socially accepted euphemism is “the swamp”
I have to agree with Matt.
3:38....yeah, like he tells you he won every time he goes to the casino. Haha. While he lives in your basement
One day this will be used as an example of the definition of the word paradox. The common people profiting at the expense of the Wall Street establishment are going to end up hurting a lot of common people who can not afford the inevitable crash and burn.
Where is Gordon Gekko when you need him?
You ain’t seen nothing yet. Just wait until the basement-dwelling, day-trading millennials each get their $1,400 stimmy. Woe to any hedge funds with short interest on that day!
Biden will come riding in to help the hedge funds. Dems are now the party of the rich. GOP the party of the working guys.
https://twitter.com/amuse/status/1355277636952612866
>Biden administration considering having the SEC unwind GameStop trades that created scores of millionaires over the past week.
Biden administration considering having the SEC unwind GameStop trades that created scores of millionaires over the past week.
>https://www.bloomberg.com/news/articles/2021-01-27/yellen-monitoring-gamestop-market-activity-psaki-says
Yep. They're doing exactly what I predicted about to fuck the retail investors and protect Wall Street. If you're a Democrat this should piss you off. Never voting blue.
Saying they are the party of the working class does not make it so.
Two sets of shit eaters: pump and dumpers…verses hedge fund elites that profit off of the sweat and hard work of honest middle class Americans working their asses off contributing to society. I’ll take the pump and dumps since the enemy of my enemy is my friend.
The vast majority of sheep (likely 95+%) have no f’ing clue.
When the Fed prints money from thin air i.e. steals the wealth of hard working savers, hardly anyone complains; because they’re either too ignorant to know what’s happing to them, or worse, benefiting from the devaluation and too chicken shit to be moral.
When the Fed keeps (DICTATES) interest rates artificially low (in this so-called pretend joke “free market economy”) i.e. steals income from retirees too old to chance the stock market, same deafening silence from those that benefit.
And the propagandist’s tools posing as journalists, like CNBC’s Andres Ross Sorkin, keep providing cover.
Now that we’ve learned we can fight the elites,, when we will we come together and make the billionaires (like that predator shit eater Bill Gates) pay the huge estate taxes they want others to pay?
When we will we bust up these foundations posing as charities that keep family’s in power for generations with spoiled shit eater silver spoon punks pretending to actually care about the poor while claiming the middle class being is “privileged?”
@3:48, NAILED IT. And the simple fact that that’s the FIRST thing media said this was about, while nobody on WSBs or any of the millions of “investors” even mentioned that, shows you, well....that it’s them indeed. They DOTH indeed protest too much.
Hedge Funds have saved some companies and destroyed others. See Remington and Toys R Us.
What's setting many people off is the specter of the government intervening here on the side of the hedge funds as well as the forced liquidation of Robinhood customers' shares. Robinhood should have no right to sell off your shares without your consent if you haven't bought it on the margin. Period.
Question for the day: Is Robinhood a bucket shop?
If Robinhood or anyone else gets caught in the unauthorized rehypothecation (in this case, lending shares to shorts) of fully=-paid, non-margin shares, it'll get sporty fast.
Long story short, pardon the pun, is that an _apparent_ short interest of over 100% of float doesn't mean that anyone sold "fake" shares. It doesn't mean no did, either, but the "real" short percentage of GME is about 50-60%, which is still very, very high. Basically, whoever bought the shorted shares didn't know they bought shorted shares and if (or when) they shorted or put them into the borrow pool, they got "re-shorted," which is legal (prudent is another topic). In theory, the same 100,000 shares could be shorted a 100 times - legally - and until something breaks down, few would know or care. Now that the stonk has hit the fan, lots of people care.
But that isn't among the really big other shoes anyway. One of the mud-covered, steel-toed boots dangling over certain heads is that Marvin Capital didn't go around to stock owners directly asking to borrow their stock to short and contracting with those stock owners, Marvin asked their prime broker to find the stock to borrow and borrowed what that prime said it found. The deal is between the beneficial owner (the "original" long buyer of the stock, even if they don't know what they bought was borrowed-and-shorted shares) and the prime broker, so if and when Marvin can't cover, the prime will have to answer to that stock owner/lender. Or, in the case of stock purchased on margin, if and when that person decides to cash in, and if Marvin can't cover, the prime will still have to come up with what Marvin cannot. As of Friday, the value of GME's float was a bit less than 20 billion (the float isn't every outstanding shares or the market cap in most cases), so that's a bit over 10 billion dollars that the "lending chain" (the prime who borrowed it and Marvin as the borrower) would have to have - in cash - to cover without producing the stock if every share of borrowed stock were called instantly at the Friday closing price. But it won't be. There is simply no way that the shorts can cover instantly, i.e., be able to buy 50-60% of the float in an instant single transaction. Not at any price.
Here's the next rub - generally, only larger accounts (like $250,000+) can put fully-owned stock into the borrow pool, so all the fully-paid shares owned by folks with less than the minimum, or those who don't want the stock(s) in the lending program, wound not be available for lending out and with a stock like GME - a $6 stock of a dying company with no moat in a nearly-dead market, owned largely by small-time true believers and large institutional holders, it is a near-certainty that a relative few of the fully-owned "retail" shares were in the pool. For example, the Pied Piper of all of this owned something like 10-15,000 shares (no margin, either) but they were only worth about $50-60,000, and that was the majority of his account, so they weren't in the borrow pool. There are a lot of folks who had 100-1000 shares (fully-paid, not margin). So it's likely - but not a certainty - that a lot of the borrowed shares were from institutional owners. They aren't the sort who give a shit about the prime's problems when they are told, "Um, the borrower seems to be a bit....short of the billions it owes us, so..." And prime brokers aren't the sort who ever want to be forced to tell large institutional customers about their internal liquidity problems.
This will get very interesting before the dust settles.
I just noticed that the Reddit crowd has jumped on silver on the futures market. I found only mentions of the situation but some of those hinted at the possibility of ominous consequences.
Of course there will be political conspiracies on news agendas in the a.m. dontchaknow.
Brooksley Born recognized the hedge fund threat in the late 90s when working at the SEC but all those above her, the Fed, etc mocked her as being a lady being over her head and look where the geniuses got us. And currently the situation seems worse for swaps than it did back then. She saw the situation as a multi $trillion crash in 2000 and predicted a repeat after 2010.
Who was it that called intelligent, observant people "Nattering Nabobs of Negativity," anyway?
Karl Denninger sent me this message:
There's more.
How do you sell a fractional share?
You can't. DTCC doesn't know what that is and can't clear it.
So who bought the share that got fractioned?
Robinhood did.
Which, incidentally, leads to another problem -- at what price and what did the customer get charged for the "piece" they "bought"?
Now you know why RH is in capital trouble.... because it was really their transaction underneath all those fractionals.
There's more to it than that too if you think about it a bit, and "sporty" isn't quite the right word.
A couple of points re: fractional shares -
1. I doubt, but do not know, that are many fractional shares of sub-$20-30 stocks. Fractional shares are, at least in theory, to allow small accounts the ability to diversify into higher-priced stocks like GOOG, AMZN, etc. For example, 500 million people didn't each buy 1/10 of a share of the float of pre-frenzy, $10-20 a share GME, and neither did a million or even 100K people, either. Did a couple of hundred? Don't know, don't care, doesn't matter.
2. It would be according to the fractional contract as to loaning them. And moreover, brokers other than Robinhood offer it. For example, Fidelity offers fractional shares, but I have no idea about the details. If Robinhood's fractional share program was based on margin rules - the shares are subject to loan (rehypothecation) because the buyer has pledged the share or fraction thereof against the loan made to buy them - in such a case, sure, the whole shares that the broker bought to allow the fractional purchases could be loaned out to short-sellers. In any case, the fractional isn't cleared, two-day or otherwise, because the fractional is between the fractional buyer and their broker.
In any event, whatever the contract allows, I doubt that the number of fractional shares of, for example, GME (if any at all) purchased pre-frenzy matter in the scheme of things. Is it possible that a few accounts bought a fractional share what was a $10-20 stock until a couple of weeks ago? Sure, anything is possible. If some tiny amount of fractional buys did happen in the case of pre-frenzy, sub-$20 GME, was it enough to matter? No.
My experienced-based guess is that a lot of brokers will be happy but some on both sides, from college kids to hedge funders will get crushed while others, from college kids to hedge funders, will be thinking they are invulnerable geniuses as they are guzzling champagne to celebrate what they see as a big score.
TL/DR: Fractionals don't matter and a whole bunch of money will change hands in the coming weeks.
I'll be watching from the sidelines and after the greedy, ill-informed, stupid, and crazy all gore and maim each other in the Melee of Hubris Field, I'll calmly sort through the resulting carnage and invest for reasonable gains, with dry powder and preserved capital resources.
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