By January 2021 half a dozen or so short sellers had lost around $13 billion. Retail investors on Reddit’s WallStreetBets forum became catalysts in catapulting the stock price of GameStop from $13.66 on December 9 to $345.83 on January 27. The unfortunate short sellers were betting the stock price of ailing GameStop would fall.
Who knows why any of the retail investors chose to invest in GameStop. Money can be made by purchasing a low-priced stock, pushing the price up by incentivizing lots of other purchasers, and selling before the stock crashes. Also much satisfaction can come from watching short sellers and other dealers in market misery squirm.
Regardless of gain or loss, or impetus for the massive investment in an ailing company, the GameStop saga will most likely have lasting effects.
Congress Wants to “Do Something”
Congresswoman Maxine Waters, Chairwoman of the House Committee on Financial Services, announced a full Committee virtual hearing for February 18, at 12 PM ET. Subpoenas have gone to the CEOs of Reddit, Robbinhood Markets Inc. (on-line investing platform), Melvin Capital Management LP, Citadel LLC (capital management), and Keith Gill (retail investor).
Congresswoman Waters’ statement:
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.
Did either the short sellers or the retail investors involved in GameStop do anything illegal or even unethical? They appear to have done what law and practice has allowed since the financialization of the U.S. economy away from manufacturing, the proliferation of financial instruments that facilitate market manipulation, and the abundance of cheap money and debt.
The Misery Makers Might Get a Slap on Their Wrist
Hedge funds who use short selling as one of their many money-making activities and private equity firms who specialize in buying ailing companies are indeed the most visible dealers in market misery today. Private equity firms buy struggling companies with cheap borrowed money, and burden the companies with debt and a downsized workforce. As the companies struggle to pay interest on their debt, hedge funds borrow the companies’ stock from brokers, sell it, and then buy back the stocks at a lower price.
Poor management, inflexible strategies in changing times, and lately government responses to the Covid-19 pandemic contributed to the downfall of companies that were household names: Thomas Cook Travel, J. Crew, Neiman Marcus, Toys R Us. However, the role of the misery makers should not be overlooked.
But they also shared one increasingly common problem for retailers in dire straits: an enormous debt burden — roughly $1.7 billion for J. Crew and almost $5 billion for Neiman Marcus — from leveraged buyouts led by private equity firms. Like many other retailers, J. Crew and Neiman over the past decade paid hundreds of millions of dollars in interest and fees to their new owners, when they needed to spend money to adapt to a shifting retail environment. The Pandemic Helped Topple Two Retailers. So Did Private Equity, NY Times, June 18, 2020
Unsustainable debt is a good indicator of a company in decline that can enrich short sellers. GameStop’s debt was almost 6 times its equity at July 31, 2020.
At February 12, 2021, GameStop’s price was $52.40. Depending on when investors bought GameStop stock, and when they sold it, if they sold it, they either made money or they lost money. That’s how markets work.
Let’s see what Maxine Waters contributes to this saga.