The absurd hypocrisy of Wall Street
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 Securities and Exchange Commission complied with a ban on financial short sales, conventional wisdom let out a cheer.
“This will absolutely make a difference,” economist Peter Cardillo told CNN. “Now, if there is any good news, shorts will have to cover.”
At the time, poor beleaguered banks were victims, while hedge funds betting them down as the economy circled the drain were seen as anti-social monsters. “They are like looters after a hurricane,” seethed Andrew Cuomo, then-attorney general of New York, who “promised to intensify investigations into short selling abuses.” Sen. John McCain, in the home stretch of his eventual landslide loss to Barack Obama, added that SEC Chairman Christopher Cox had “betrayed the public’s trust” by allowing “speculators and hedge funds” to “turn our markets into a casino.”
Fast forward 13 years. The day-trading followers of a 2-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 Jan. 21, to $147.98 on Jan. 26, to an incredible $347.51 at the close on Jan. 27.
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.
The press conveyed panic and moral disgust. “I didn’t realize it was this cultlike,” said shortseller Andrew Left of Citron Research, without irony denouncing the campaign against firms like his as “just a get rich quick
scheme.”
The episode prompted calls to regulate Reddit and, finally, halt action on the disputed stocks. As I write this, word has come out that platforms like Robinhood and TD Ameritrade are curbing trading in GameStop and several other companies, including Nokia and AMC Entertainment holdings.
Meaning: just like 2008, trading was shut down to save the hides of erstwhile high priests of “creative destruction.” Also just like 2008, there are calls for the government to investigate the people deemed responsible for unapproved market losses.
The acting head of the SEC said the agency was “monitoring” the situation, while the former head of its office of internet enforcement, John Stark, said, “I can’t imagine there isn’t an open investigation and probably a formal order to find out who’s on these message boards.” Georgetown finance professor James Angel lamented, “It’s going to be hard for the SEC to find blatant manipulation,” but they “owe it to look.”
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.
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?
For context, Goldman Sachs posted revenues of $44.56 billion in 2020, its best year since 2009, aka the last year Wall Street cashed in on a bailout. Back then, the shortcut back to giganto-bonuses was underwriting fees for financial companies raising money to purge themselves of TARP debt. This time it’s
underwriting fees for bond issues and IPOs. The subtext of both bailouts was that anyone who owned or underwrote financial assets got richer, while everyone else got the proverbial high hat. It’s no accident that income inequality dramatically accelerated after the last bailouts, and that the only people to see net gains in wealth since 2008 have been the richest 20% of Americans, a pattern almost certain to continue.
The constant in the bailout years has been a battery of artificial stimulants sent through the financial sector, from the TARP to years of zero-interest-rate policies (ZIRP) to outright interventions like the multiple trillion-dollar rounds of quantitative easing. All that froth allowed finance companies to suck out hundreds of billions in fees, encouraged lunatic risk-taking in every direction and rampages of private equity takeovers, and kept a vast stable of functionally dead companies alive on cheap credit.
Those so-called “zombie companies” make up roughly 30% of all corporations in America now, and they racked up over a trillion dollars in new debt since the pandemic alone. While policymakers may have stabilized the economy with the bailouts, they may also “inadvertently be directing the flow of capital to unproductive firms,” as Bloomberg euphemistically put it back in November.
In other words, it was all well and good for investment banks and executives of phony-baloney companies to gorge themselves on funhouse profits on a funhouse economy, but when amateurs decided to funnel just a bit of this clown show into their own pockets, finance pros wailed like the grave of Adam Smith had been danced upon. The worst was Morgan Stanley CEO James Gorman, who issued a somber warning that those behind the recent market frenzy are “in for a very rude awakening,” adding, “I don’t know if it is going to happen tomorrow, next week or in a month, but it will happen.”
This is the same James Gorman whose company just saw its 2020 fourth-quarter profits go up 51% versus the year before, with total revenues up 16% to $48.2 billion, matching almost exactly the 16% rise in the stock market last year. If you’re going to rake in $33 million as Mr. Gorman did last year captaining a firm that just siphoned off billions in essentially risk-free profits underwriting a never-ending bailout, should you really be worrying about someone else getting a “rude awakening”? There are 19 million people collecting unemployment who might be reading those profit numbers. Does this man know how to spell “pitchfork”?
GameStop has prompted more pearl-clutching than any news story in recent memory. Expert after grave-faced expert has marched on TV to tell Reddit traders that markets are complicated, this isn’t a game, and they wouldn’t be doing this if they really understood how things work.
“I’m not sure everybody fully understands what’s happening here,” was the melancholy comment on CNBC of Wall Street’s famed fluffer-in-chief, Andrew Ross Sorkin. The author of “Too Big to Fail” added in pedagogic tones that while this “stick it to the man moment” might feel good, betting up the value of GameStop above Delta Airlines just isn’t right, because “there are no fundamentals here”:
Fundamentals? How much does Mr. Sorkin think his exalted Delta Airlines would be worth now if the Fed hadn’t stopped its death plunge last March? How much would any of the airlines be worth in the COVID-19 age, with their fleets of mothballed jets? What a joke!
Regarding improprieties, leaving aside that the Redditors were doing exactly what billiondollar hedge funds do every day — colluding to move a stock for fun and profit — the notion that this should be the subject of a federal investigation is preposterous.
Is it completely outside the realm of possibility that the GME fiasco isn’t just day traders giving the finger to Wall Street, that “major players” are behind the stock’s movement, in an illegal manipulation scheme? No. Probably it’s not that, but it could be, just as some of the usual suspects may have piled on the long side once the frenzy started. But if there’s anything to investigate here, the obvious place to start is with the hedge funds and their brokers.