Montage of News Clips-
It is the story you could not avoid this week, and maybe the one you couldn’t quite understand either. You’re not alone.
After yesterday’s volatile trading all eyes will be on the market
No way you could have avoided this story the last few days.
It’s a week like no other, it’s the hottest stock on the market.
GameStop
GameStop
Narration
GameStop. For those of us who started playing video games before digital copies existed it was the peak of childhood excitement, right there alongside Toys R Us and Nintendo Power magazines. Since the increase in digital streaming services and online retailers such as Amazon, brick and mortar game stores have steadily gone the way of the dinosaurs. In 2020, GameStop reported 215 million dollars of losses. Primarily due to the pandemic shutting down nonessential businesses, but emblematic of the long decline of the store. On December 30th, 2020, GME stock was valued at around 18 dollars a share. One month later, it was up to 347 dollars a share. So what happened? Most people are aware that some crazy stuff happened involving GameStop, reddit and hedge funds in early 2021. But the stock market is made to be intentionally complicated and confusing, after all wall street doesn’t like sharing. So in this episode of Michigan Voices, I’ll be explaining exactly what happened with GameStop and Wall Street, why it matters, and interviewing someone who bought in during the peak and experienced the crash.
Lee Cooperman
So I would say that I think that I understand what is going on in the market, this is not going to end well when it ends, and the bigger question is when does it end? I don’t think it ends soon, but I think it will end, and it will end very badly for the public.
Keith Gill
It’s alarming how little we know about the inner workings of the market, and I am thankful that this committee is examining what happened. I also want to say that I support retail investor’s right to invest in what they want, when they want. I support the right of individuals to send a message based on how they invest. As for me, I like the stock.
Nicklas
Alright, I’m here interviewing Quintin Andrews. He’s my roommate, but he also does have some connection to the events here, so why don’t you introduce yourself.
Quintin
Yeah, hi, I’m Quintin Andrews. I bought three stocks of GameStop pretty much right at the peak. That was- That was very fun.
Narration
The linchpin of everything that happened is something called “shorting.” The famous adage to describe the stock market is “buy low, sell high,” everyone knows that phrase. Shorting is the opposite in a way: best described as “borrow and sell high, buy and return low.” Rather than gambling on a stock increasing in value, shorting is done when an investor expects the stock to drop in value. So they borrow shares from someone who already owns them, sells them immediately with the expectation that they will soon have to buy the shares again to return them to the lender. This only makes a profit for the investor if the stock does, in fact, drop in price. Here’s a simple example to give these terms some reference. Say a stock is valued at $10 a share. I borrow ten shares from someone and immediately sell them for $100 total. One week later, the stock is valued at $3 a share, so I buy the ten shares back, return them to the person I borrowed them from, and pocket a cool $70 profit. After GameStop announced their massive losses for 2020 in December, stocks started dropping and investors took notice. Among these investors were hedge funds which, in very simple terms, is a group of investors that have pooled their money together. Two of these hedge funds: Melvin Capital and Citron Capital immediately shorted shares upon hearing this announcement expecting the company to continue losing money. Shorting shares is, in many ways, a self-fulfilling prophecy; as the very act of selling shares will further drop the value of the stock. All of this is very typical behavior of Wall Street, except for one aspect: Reddit. A subreddit by the name of “Wall Street Bets” noticed the shorts, led in particular by a user by the name of Keith Gill, who goes by the username “Deepfuckingvalue.” Gill was already invested in GameStop; he liked the company, and he thought it would recover again after the pandemic. After a series of posts bringing the attention of the shorts and the stocks to the subreddit, a massive effort that can only be summarized by the Planet of the Apes phrase adopted by the community: “Ape alone weak, apes together strong,” took place. The goal was simple: buy GameStop stock. Get everyone who will listen to buy shares, driving the price up. The hedge funds will be eventually forced to buy back their owed shares at a huge financial loss, driving the price up even further with the end goal of costing Wall Street millions and making thousands individually.
Nicklas
What made you decide to hop on board the train?
Quintin
An insane amount of hype and what seemed like solid due diligence. Basically just researching into the stock.
Nicklas
Yeah, would you like to go into a little more detail about that? What did you expect would happen?
Quintin
I expected, what I thought would happen, is that the shareholders would be able to hold on to the stock. The hedge funds shorted the company over 140% of what the amount of stock supply was worth, so basically what we all thought was going to happen was we’d hold onto the stocks and since they said it didn’t cover we could just hold onto it until we decided when to sell.
Nicklas
Yeah, I wanted to get, as someone who bought in during the hype, I’m sure like a lot of people, one of your, either your primary or secondary goal was hopefully making a bit of money; but I have to imagine that some of it was sticking it to Wall Street as well.
Quintin
Oh, that was definitely part of it. Like, you know everyone remembers what happened during 2008. They basically, the economy crashed, but they also, like, all of Wall Street and the hedge funds were able to get away scot free because they got the..
Nicklas
The bailout?
Quintin
The bailout, yes, of course. They got the bailout.
Narration
This continued for weeks as a massive back and forth took place between the hedge funds and the retail investors, that is, individual investors who don’t do it professionally. The hedge funds held out as long as they could, doing everything they could to make individuals lose faith in the bubble and sell their shares. At a certain point it became less about making the originally planned profit, and just refusing to lose to Reddit. I’m choosing to skip past a lot of the inbetween, because the cycle repeated most days. Powerful investors would get on the news and tell everyone that “the bubble would burst,” and “you’d lose all your money,” and “wouldn’t you just feel better if you sold your three shares and went home?” “Please, please sell your shares, we’re losing millions,” was the underlying plea. They tried every trick in the book, buying up even more shares themselves, just to immediately sell them to scare individuals who saw the dip and panic sold; straight up mocking and belittling the individuals on social media; Citron tweeted “Tomorrow, 11:30 Eastern, Citron will livestream the five reasons GameStop buyers at these levels are the suckers at this poker game. Stock will drop back down to $20 fast. We understand short interest better than you, and we’ll explain.” Eventually, something had to give. It seemed like at first, Reddit had won; as Citron reported that they had finally closed their positions at, and I quote, “a 100% loss.” Shortly after, Melvin also bought back their shares and reported 53% loss of investments in the month. Rumors started spreading that Melvin was declaring bankruptcy.
Nicklas
Ultimately, Melvin Capital and Citron Capital, the two largest hedge funds involved, they were forced to buy back their shares and lost a lot of money.
Quintin
They – oh – they did. In short, it paid off a lot for the guys who bought in before it got to $100.
Narration
One day later, on January 28th, however, popular trading apps such as Robinhood and TD Ameritrade restricted transactions regarding GameStop and other companies that were experiencing the same story on a smaller scale, such as AMC Theaters and Nokia: the final bullet in Wall Street’s belt.
Quintin
Like they see all the cards laid out, and they have a lot of their own cards hidden, so.
Narration
How is an individual supposed to trade more than, at the height of the restrictions, a single share? Meanwhile, these hedge funds were trading hundreds of thousands of shares at any given moment. This faced massive backlash on a private and political scale. In a rare bout of bipartisanship, both congresswoman AOC and Ted Cruz condemned Robinhood for limiting the trades of individuals while hedge funds faced no such restrictions. Eventually the restrictions were lifted, but the bubble had started to burst. Less than one week later, the shares had dropped from a peak of $483 a share to $92. An article by Insider Magazine summarizes the event, in my opinion, best in their title “Reddit day traders wanted to beat Wall Street to prove the system is rigged. Instead, they did it by losing.”
Quintin
Reddit aired out, they aired out the dirty laundry which has been done every other decade or so and that’s, like, they proved that, in a way, they did prove that the system’s rigged by showing that hedge funds just never lose.
Narration
At the end of everything, some individuals like Gill walked away with a profit.
Nicklas
Keith Gill, you may know him better as “Deepfuckingvalue,” the guy who originally kind of pointed out what was going on with GameStop ultimately did make $22 million off of this.
Quintin
Well, I think he made something like $13 million and then, he pocketed 13 million and then just kept the others in the system. But yeah, that’s what I know of. That’s how I know him, yeah. What about him?
Nicklas
I was just pointing out that he made $22 million.
Quintin
Fair enough. *laughs*
Narration
Thousands more suffered losses as they held out hope for too long that the stock would continue to rise, even as more and more people sold as the excitement faded. Wall Street, on the other hand, recovered quickly. Some groups such as Senvest Management made over $700 million off of GameStop in January. Even Melvin, who publicly lost the most, got away with an almost $3 billion bailout and 22% profits in February.
Quintin
That’s insane that like, it’s very insane, it’s like they do a screw-up and they get a bailout. Yet, they can’t lose. No matter what they do, they cannot lose. They just get their money back immediately. They’re either only taking small losses or they’re always taking big profits, but when they take a big loss they always get the bailout.
Narration
In many ways, Reddit did lose and the status quo has been left entirely unchanged. If anything, Wall Street has more power now as surveys have shown that nearly half of all Americans are too nervous to consider investing: faith in an individual’s ability to make money, shaken.
Quintin
That’s a very interesting statistic. I could definitely say that that checks out. Even though I guess I did continue investing. I still have a Microsoft stock and an Apple stock. I basically have a bunch of tech stocks, but yeah.
Nicklas
It’s annoying to end anything on a pessimistic note, but in this case I feel like it’s warranted because nothing meaningful has changed towards giving the people the power.
Quintin
Exactly, yeah. No, I agree full-heartedly.
Nicklas
With a bit of hindsight looking back, is there anything you’d like to say about, just everything that happened?
Quintin
*laughs* Don’t buy into hype on Wall Street. Here we go, here’s a phrase: if you’re hearing about it, it’s already too late.
