Tag Archives: hedge funds

Playing Games

I know very little about the stock market–just enough to recognize that the term “playing the market” is more revealing than those who use it may recognize. The 2008-9 financial crisis revealed that–rather than sober decisions to invest in solid companies in hopes of long-term growth– a large number of “masters of the universe” were simply gambling.

In other words, the stock market has become a casino– yet another symptom of a society that has abandoned the basics in favor of game-playing. And not so incidentally, the rules of those games favor the obscenely rich.

The recent GameStock pushback by small investors couldn’t have been more aptly named.

Unless you’ve been hiding under a rock the past few weeks (not that I’d blame anyone for hiding at a time when all aspects of American society seem to be coming apart), you’ve undoubtedly heard the basic outlines: GameStop is a retail chain that began by selling video games; it has struggled to stay open, thanks to the COVID-19 pandemic and the attendant increase in streaming. Its problems were widely recognized and it was a disfavored–even reviled– stock on Wall Street.

So the “pros” (aka gamblers) thought they could make money by “shorting” the stock as its price went down.

When investors decide to short a stock, they are essentially betting against it. They “borrow” shares of the stock on the assumption its price will decline; they plan to buy the shares at the lower price, return what they “borrowed,” and pocket the difference. (You will notice that this is strictly “game playing”– no goods or services are produced, no jobs created–no social benefit ensues.) If the stock goes up rapidly, however, the gambler-investors are forced to “cover their shorts”–to buy back the stock at a higher price.

So what happened with GameStop? According to Time,“amateur” investors who connected through a widely read social media message board “orchestrated a massive take-down of several marquee hedge funds while profiting hugely in a matter of hours.”

Not only are Wall Street players aghast with one pro saying that the moves were “unnatural, insane and dangerous,” but the surge in GameStop from less than $2 billion in market cap to more than $24 billion in a such a short time got the attention of regulators. The Attorney General of Massachusetts William Galvin said he was looking into the matter and called for a halt in GameStop trading, and the White House press secretary said that the administration was concerned about market integrity.

The blow-back against that was swift. On Reddit, one participant summed it up, “So market manipulation by federal pumping $ into falling banks & corporation is OK but Reddit users rallying GameStop is wrong and must be regulated…Funny how quickly the financial press cries for hedge funds.”

What happened in the past few days on Wall Street is akin to what happened in Britain when voters chose Brexit and in the United States when Trump was elected: a mass of people, angry at the privileged few and feeling that the system was rigged to reward the elite and screw everyone else, coalesced into a potent phalanx that upended a status-quo.

As you might imagine, the “Masters of the Universe”  who were were caught off guard and who sustained substantial losses were outraged. They denounced the small, amateur investors as misguided, misled and destructive. Defenders of those investors pointed to the truly excessive profits from manipulation that have largely gone to a few thousand hedge funds, private equity executives, professional investors and their rich clients.

Thanks to the way today’s market works, a small investor who held $100 of GameStop stock would lose her $100 if the company went bankrupt. But a hedge fund might make $200 from that same bankruptcy. As the Time article points out,  leverage, arcane financial instruments and access to them by only a few of the “big guys” is what makes that crazy outcome possible.

And the “victory” of the “little guys” was short-lived; as this is written, the stock has declined again, so in this particular “game” there’s been plenty of financial hurt to go around.

Bottom line, we need to add regulation of investing (aka disincentivizing gambling) to America’s “to do” list.

As Alexis Goldstein recently wrote in the New York Times, “Rather than gambling on the dubious promise of more Americans gaining access to the casino, it’s time to rewrite the rules to ensure that the house doesn’t always win.”