GameStop, hedge funds, and "the people."

I’m Isaac Saul, and this is Tangle: an independent, ad-free, subscriber-supported politics newsletter that summarizes the best arguments from across the political spectrum — then “my take.” You can read Tangle for free, subscribe for Friday editions and you can reach me anytime by replying to this email. If someone sent you this email, they’re asking you to sign up. You can do that by clicking here.

Today’s read: 16 minutes.

A GameStop store in the mall. Photo: Wikicommons / EPIC

Something absurd happened this week.

It’s so absurd I’m not sure how exactly to describe it, or where to begin, or what part of the story to tell you first. I’m not sure how it fits into Tangle, or exactly how to write about it, but I’m utterly convinced I need to record it in the pages of this newsletter.

By now, most of you have probably heard a version of this story. It’s been on the front page of The Wall Street Journal, on Bloomberg News, all over cable television, and sprayed across social media: a bunch of people intentionally jacked up the price of GameStop, a company that may have been on its deathbed last year, but whose stock somehow had a meteoric rise of the sort that turned small-time retail investors into millionaires overnight.

The actual story is even sillier and yet more consequential. At its heart, the story is about the mood of the country, of millennials, of a full-blown class war, of coronavirus, of our broken economy, of the power of social media, and of a palpable hatred for “the system.” Frankly, as absurd as it sounds, and as much as has been written about this saga already, the story is deeply political. And, oddly, it became deeply personal to me yesterday.

On one side of the story is Wall Street Bets, an online forum that lives on the website Reddit and is seemingly populated by degenerate gamblers who like to call each other “autists” and “retards” and also enjoy “mooning” stocks — their word for inflating a stock’s price — usually by convincing each other in ridiculous, cheeky, overly optimistic terms that an otherwise risky investment is actually going to turn out really well. The people on Wall Street Bets are in on the madness and the joke together, egging each other on into buying shares or call options of companies and then posting screenshots of their winnings (and more humorously, their losses) when things play out. Some of them are professionals with lots of money. Some of them are YOLO (“you only live once”) buyers who treat everything like a wager. More than 2 million people are following the forum as of this week.

On the other side are the hedge funds, billion-dollar investment funds that perform advanced trades on the stock market, often by “shorting” stocks — or betting that those stocks will underperform. In this case, there’s one particular hedge fund, named Melvin Capital, run by Gabriel Plotkin, that has drawn the ire of the users on Wall Street Bets. To many, hedge funds are pariahs. After all, they profit off of the demise of companies — and sometimes even countries — and thus have huge incentives to root against the companies they bet will fail. This means that when a publicly-traded company suffers, often resulting in serious economic pain like layoffs or bankruptcies for employers and shareholders, hedge fund managers profit.

In the middle of all this is GameStop, a company that sells video games. If you’re over the age of 25, you probably remember seeing GameStop in the malls. If you’re under the age of 25, you probably own GameStop stock because you saw something about it on TikTok this week.

GameStop, for obvious reasons, was not having a great year. Matt Levine wrote a fantastic piece in Bloomberg about this story, one that’s so well written I’m trying desperately not to plagiarize it. I’ll let him set the table:

“For various reasons people do not buy a ton of video games at the mall these days. Two of those reasons are: People do not love going to the mall during a deadly pandemic, and people today increasingly buy video games by downloading them directly from online stores. Being a mall retailer of video games is not obviously a great business to be in, and this has been reflected in GameStop’s earnings and stock price. In 2011, GameStop reported net income of $408 million on revenue of $9.5 billion; in the last 12 months, it had a net loss of $275 million on revenue of $5.2 billion. GameStop’s stock traded as high as $62.11 per share in 2007; it got as low as $3.50 in March 2020. It closed at $18.84 on Dec. 31, 2020, for an equity market capitalization of about $1.3 billion.”

Yesterday, on January 27th, 2021, GameStop closed with a share price of $364.15.

For those of you who may not have any experience in the stock market — and to be clear, I am what is gently called a “retail trader,” a nice way of saying someone with not a lot of money who doesn’t know what they are doing — a stock going from $18.84 to $364.15 in a matter of weeks is not normal. It is, actually, beyond not normal. It is not supposed to be possible. It is absolutely, positively, totally, completely, enter-any-adverb-you-want bananas. It is so bananas I feel I need to emphasize just how bananas it is with a series of expletives to explain it, but I have enough readers who don’t appreciate that kind of thing, so I will refrain.

So how did GameStop, a company that would otherwise not appear to be a wise investment in the middle of a pandemic at a time when most people have internet access, skyrocket 1,270% in value over the last month? Again, I’ll let Matt Levine tell this part of the story:

The people on the WallStreetBets subreddit sometimes all get into a stock at once. This is fun, a nice social outing in an age of social distancing, a risky but potentially lucrative collective entertainment. Recently they decided to do GameStop. Because, I don’t know, they’re gamers, or because it’s a little comical to pump the stock of a chain of mall video-game stores during a pandemic, or because a lot of professional investors are short GameStop and they thought it’d be funny to mess with them. Or, especially, because their friends on Reddit were buying GameStop and they figured they’d join in the fun. Or all of those things in different combinations. Take one person who’s long for fundamental reasons, add 100 people who are long for personal-amusement reasons like “lol gaming” or “let’s mess with the shorts,” and then add thousands more who are long because they see everyone else long, and the stock moves.

The way this works is simple but confusing. The simple part is that if enough people think a stock is going to go up, and more people are buying a stock than selling it, the price of that stock tends to rise. The confusing part is that there are all sorts of ways to buy and strategize around stocks: there are calls, puts, margin calls, shorts, squeezes, and equations or “fundamentals” about revenue, deltas, gammas, exposure, and tons of other dynamics that are important to learn if you want to buy stocks. Someone smarter than I am can explain them to you.

Here’s what you need to know, though: When all these people on Reddit rallied around GameStop, and all their friends joined in, and together they began pumping money into it — some via buying shares and others via call options (time-limited, risky bets on the price of a stock rising by a certain date) — the hedge fund managers began to “lose their shirts,” as people who participate in this kind of thing like to say. They were getting fleeced. Taken to the cleaners. Owned.

Suddenly, miraculously, this band of internet trolls and newbies on Robinhood were realizing that, together, they might be able to overpower the individual billionaire investment firms betting that GameStop would crumble. This was a body blow. There was blood in the water. A chink in the armor. There’s also this: when someone shorting a stock gets caught in that stock’s meteoric rise, they get put into a position called a “short squeeze.”

In laymen’s terms, this is when they have to start covering their previous position by buying into the stock — which means they’re joining the chorus of people now buying shares in the stock and thus, helping drive the price of the stock up even further. It’s a trap, and there really isn’t any way out unless you have enough money to weather the storm. With every body blow from the mob of retail traders, the billionaire hedge fund shorting GameStop is having to participate more and more in the stock’s rise to minimize their own losses while helping their antagonists profit wildly.

This, you should also know, was new. Hedge fund managers usually don’t lose — the retail day traders do, typically because they have fewer tools to analyze the market with, and less capital to stay in the game if things go south. Long-term investments in the market as a whole are almost always smart, so comparing this dynamic to Las Vegas or a casino isn’t perfectly apt. But if you’re a regular person trying to beat the hedge fund managers trading in the market, you are basically like someone at a casino craps table trying to beat the house.

Now here’s something about me: I play on an ultimate Frisbee team in New York City. We are not barefoot hippies playing catch with our dogs, but actual, serious, competitive athletes who train year in and year out to compete on the world stage — we are, as silly as it might sound, some of the best ultimate Frisbee players in the world. Some of us, the ones who are much better than I am, even make a living playing the game we love. And, like everything else, our season was a victim of the coronavirus pandemic this year.

In place of ultimate Frisbee, with more free time and lots of pent up competitive energy, we’ve done all sorts of things to stay connected: We have group chats and movie clubs. We troll bird watching groups on Facebook. We meet up and run outside. We place $20 wagers on NBA games. We watch footage of ourselves playing ultimate and do “film study” like an NFL team might. We try to organize and participate in community work. We have weekly meetings where we discuss the anti-racism movement, New York City and politics.

And, recently, we began investing in the stock market together.

Unlike the Wall Street Bet Redditors, our chats are not filled with obscenities and $50,000 bets on stocks that are bound to fail. Much like the Wall Street Bet Redditors, we egg each other on into investing in risky stocks or buying up shares of a company based on someone’s girlfriend’s cousin’s uncle who worked there once in the late 90s, and sometimes just because we want a company to succeed. We bought stock in Purple Mattress because a teammate’s colleague mentioned that the beds were comfortable, and we pretended that was as good as a stock tip. We bought stock in silver because “precious metals” was fun to say and gold was too expensive.

And, a few weeks ago, quite a few of us bought call options — those risky, time-limited bets that the stock would go up — on AMC, the movie theater company.

Our rationale is not what you’d find in a Melvin Capital report. We were not interested in the “fundamentals.” We said things to each other like, “the movies will never die” and “I can’t wait to sit in a movie theater” and “the first thing I’m going to do when I get a vaccine is go see a movie” and “AMC is a great American company.” We also bought stocks like Tootsie Roll, because buying Tootsie Roll made us laugh — and in a year short on laughs, it felt good to buy Tootsie Roll.

Well, on Monday, the same mob of retail traders who suddenly had unchecked enthusiasm for GameStop began targeting a few classic American companies, including AMC. People started posting videos of themselves bowing down to abandoned AMC theaters. Memes of AMC’s classic red letters being blasted to the moon in animated graphics went viral online. The people on Wall Street Bets, and millions of others who had never heard of Wall Street Bets until they got in on the GameStop joke this week, started buying shares of AMC, too. The stock was becoming a meme.

And then the price of AMC shares started to climb.

I bought AMC call options on December 14th. They cost me $785, and they had an expiration date of 1/22/22. It was a risky bet, but holding down a full-time job while building Tangle (thank you for your support!) has given me some disposable income for the first time in my life and I thought, what the hell, let’s roll the dice.

It seemed smart and I felt clever: AMC was tanking because the movies were closed. The movies are awesome, vaccines are being rolled out, and when people start going back to the movies, AMC will make money again. “Deep value entry,” one friend said to me in a text, both mocking the kind of thing someone like Gabriel Plotkin might say while also offering an ode to the most popular Wall Street Bet user on Reddit (username DeepF*ckingValue). I was betting on a comeback for the movies, and that felt like a good bet.

It turned out it was a much better bet than I ever imagined.

Yesterday, I sold those $785 call options for $4,520. Had I bet, say, $10,000 on this option instead of $785, it would have been worth nearly $60,000 — enough to put a downpayment on a house.

Nothing about this seems unfair to me. In fact, it seems like the opposite of unfair — it seems as if I made the same kind of bet hedge fund managers make every single day, except in reverse, with far less money, and this time I got extraordinarily lucky, based on some ridiculous set of circumstances that somehow a stock I invested in — and hoped to maybe double my profits on when movies are a normal thing to do a year from now — became an internet meme and went viral on Reddit.

But a lot of people don’t agree with me. Specifically, people who are hedge fund managers who definitely lost their money, and a lot of financial pundits who probably lost their money, too, were very upset.

Melvin Capital, for instance, needed a $2.75 billion rescue injection of capital this week to continue to short GameStop. Then Melvin Capital announced it had closed its short position in GameStop, though the mob of retail traders quickly decided this was a conspiracy — and that Melvin Capital was trying to turn things around because it was bleeding out, hoping to convince retailers the battle was over and they could sell now.

Short sellers as a whole, the people betting against GameStop, lost over $5 billion. As you might imagine, losing billions of dollars overnight to a bunch of internet sleuths calling each other “autists” on a subreddit site did not make these hedge fund managers happy.

And this is where the story gets political.

This week, and specifically yesterday, as GameStop continued to defy reason by rising another 134% in a single day, the story of the stock spread far past Reddit. It became a social media phenomenon. Friends were texting me about it. Non-financial journalists were writing stories about it. Adult film stars were tweeting about it. It was going viral on TikTok, Reddit, Twitter, Facebook, Instagram, and just about everywhere else people consume news. You probably heard about it, too. And everyone wanted to get in on the fun — so the stock kept climbing.

At the same time, a parade of talking heads, hedge fund managers, financial pundits and current or ex-regulators in nice suits began making a case to the public: the madness had to stop. The Reddit forum inflating these prices needed to be shut down, some said. All trading needed to be halted until this was figured out, others suggested. There might be some kind of foreign interference, one pundit floated.

A lot of people were going to get hurt, they insisted.

The conservative commentator Saagar Enjeti delivered a powerful monologue about the hypocrisy: “When regular people start doing what the billionaires do, then they start crying about crimes, they want the SEC involved, they want to know if it’s illegal when the little guy does what they do in a less high brow version and without a suit on. That’s what is at play here. Wall Street is shook because multibillionaires who recklessly gamble on a stock are getting screwed. They’re targeting average retail investors for having some fun online because it reveals just how much of a sham this all is.”

Folks on the left were tweeting not-so-subtle callbacks to the advice that the wealthy often give to the lower-income:

The quips were endless. “A hedge fund is angry because a bunch of people got together, pooled a ton of money and bought stocks in the hopes of massively profiting at the expense of someone else,” sportswriter Will Brinson said.

“Just making sure my reality aligns with the clever market watchers,” New York Times writer Peter Goodman tweeted. “So [Jeff] Bezos being worth $200bn while tens of millions lose jobs, health care, homes is not a sign of stock market and real economy diverging, but some Reddit clowns who have hurt some hedge funds is. Got it.”

Another conservative commentator, Ryan James Girdusky, called GameStop “the first populist uprising without Trump we’ve had since 2015. It will go on without him.”

Suddenly, the people typically divided along political lines became united.

“Gotta admit it’s really something to see Wall Streeters with a long history of treating our economy as a casino complain about a message board of posters also treating the market as a casino,” Rep. Alexandria Ocasio-Cortez (D-NY) said.

“It took less than a day for big tech, big government and the corporate media to spring into action and begin colluding to protect their hedge fund buddies on Wall Street. This is what a rigged system looks like, folks!” Donald Trump Jr. tweeted.

Chamath Palihapitiya, the venture capitalist, former senior executive at Facebook and CEO of Social Capital, had asked his followers what stocks he should invest in earlier in the week. When all the retailers insisted he join the fun and buy GameStop, he got in — to the tune of hundreds of thousands of dollars. And then, in a remarkable interview, he went on CNBC and defended his position to host Scott Wapner.

“A lot of people believe that coming out of 2008, a lot of people believe that what happened was Wall Street took an enormous amount of risk, and they left retailers as the bagholders,” Palihapitiya said. “A lot of these kids were in grade school and high school when that happened. They lost their homes. Their parents lost their jobs and they’ve always wondered, why did those folks get bailed out for taking enormous amounts of risk and nobody helped and showed up to help my family?”

Wapner was, it appeared, indignant. He insisted he was worried about people getting hurt, and prodding Palihapitiya about what the actual value of the company was, how he could justify its price, whether the people buying GameStop were even capable of evaluating its real worth. Is all of this just fine? Wapner pressed him. There’s nothing wrong with the integrity of the system if this kind of giant stock run is occurring?

“It's not my job to go and defend a bunch of highly compensated hedge fund managers against losses,” Palihapitiya said. “Just the fact that for one time those folks lost, we can bellyache and cry on national TV, to me, is a joke… there’s a lot of kids, a lot of people on Wall Street Bets who have made money to pay off their mortgage. I read a post about a kid who was able to pay off their entire student loans and posted it — that’s amazing progress.”

Immediately, Palihapitiya became a folk hero. Here was one of the actual rich guys, one of the suits, on national television standing up for the retail traders — making a poignant case about how they were just playing the same game everyone else is, and this time they were winning.

And then “Wall Street,” that amorphous blob of highly paid corporate executives, government regulators, stockbrokers, hedge fund managers and other powerful “elites,” started to take action.

Ameritrade brokers reportedly stopped filling order requests for GameStop, AMC and other securities even though their clients were pining to get in on the action. The Securities and Exchange Commission released a stern statement that it was “monitoring” the situation and said that “consistent with our mission to protect investors and maintain fair, orderly, and efficient markets, we are working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants.” Discord banned The Wall Street Bets server, accusing it of hate speech, and the Reddit forum temporarily went private before coming back online.

Robinhood, the app for stock market trading that I and many other traders used to buy into the runs, spent the day oscillating between crashes and completely inaccurate, incomprehensible prices for the market — making it nearly impossible for any retail traders to exit their positions with profit for most of the morning. After the market closed, Robinhood sent out an email to traders warning of “volatility” in the market.

Then, on Thursday morning, Robinhood suspended certain trades on its platform.

Users could no longer buy more shares or options in stocks like GameStop, AMC, Nokia, Blackberry, or any of the other companies seeing an influx of shareholders because the internet wanted to save them. Instead, users were met with a notice that the only action they could take was to sell off their positions — to exit. Something that would unambiguously benefit the short-sellers.

Simply put, Robinhood began doing exactly what it was accusing the retail traders of: manipulating the market. And, of course, the price of these stocks began to fall — which is almost certainly going to cause all the pain Robinhood said it was trying to protect users against, except it will be on the retail traders — not the big hedge funds. Robinhood’s decision to manipulate trading was particularly egregious, and offensive, because it sells itself as a company that “democratizes” finance for all. Immediately, a movement began to delete Robinhood and move to other trading platforms. Some even floated the idea of a class-action lawsuit.

These actions, these series of events, in sum, was viewed by the pro-GameStop, apparently populist crowd as a ridiculous overreach and a hypocritical punishment of the small investor. It united voices on the right and left — in unison — against the corporate media, against the SEC and the federal government, against Robinhood, against the hedge funds, and most of all against the small percentage of extremely rich people who seem to feel it is their right alone to move and control the market on a day-to-day basis.

And, frankly, they had a pretty good argument. Even I got in on the fun.

“The difference between the r/WallStreetBets and the hedge fund bros is that WSB is doing it out in the open for everyone to see. They're also sending you an invite,” I tweeted. “Retail traders dynamiting $GME and $AMC right now are using their own money to elevate a stock en masse. Nothing they're doing is illegal, or wrong, the only issue is that a bunch of billionaire hedge funds didn't see it coming. What Ameritrade is doing should actually be illegal.

“Using your position in Congress to inform your stock picks: totally cool,” I added. “Buying stock cause you saw a meme on Reddit: no longer allowed.”

The non-Twitter-friendly truth, though, is a little more nuanced.

First, the people on Wall Street Bets are probably not the heroes you’re looking for. While their populist, screw the system attitude appears to be genuine — they are of course motivated by greed and nihilism and boredom and all sorts of other toxic influences that make us act a little crazy sometimes.

Secondly, this won’t last. What’s happening with GameStop and AMC and other stocks can almost be compared to a Ponzi scheme, except this is one where most people are winning. The floor will come out, it’s only a matter of time, and, as with true Ponzi schemes, the last people in will get hurt the most. Someone, for instance, could buy $5,000 of the stock at its asinine closing price of $364.15 only to watch it correct back down to $18 — which would cost them just about every dollar they invested. Everyone knows how the story is going to end, we just don’t know how long it will take. Melvin Capital will keep getting bailed out by the ultra-wealthy, and if it somehow doesn’t survive, it will be replaced, and new shorts will come in.

Thirdly is that hedge fund managers are not all bad. Some of them are probably reading this newsletter, some of them are friends of mine. “Hedge fund” should not be synonymous with “evil,” and even in recent memory hedge funds have actually done some good. Hedge funds often make money for middle-class, working families who use them to invest their savings. There is nothing inherently horrible about that.

Finally, there’s also the obvious: Melvin Capital, or the rich billionaires, or the hedge fund managers, or Wall Street, or whoever you may view as the villains here, are almost certainly playing both sides of this. Citadel, a massive hedge fund that pays Robinhood a pre-set fee for the trades they execute, is almost certainly on the hook too — and could have influenced Robinhood to take the action it did.

Either way, it’s not just regular people with Robinhood accounts making money and ultra-wealthy people losing it. All sorts of trading and transaction fees line the pockets of Wall Street traders — and all sorts of hedge funds are in on the massive swings the stocks are taking. And plenty of retail traders are going to lose their shirts, too. The retail mob may feel they are facing off with a billionaire Blackjack dealer at the casino, but the truth is they’re flanked at the table by those hedge fund managers who are playing the game right alongside them. There will be blood.

And yet, even knowing all that, something about this story still feels so good.

When this whole thing started, I was mostly laughing — glued to my phone watching my $785 turn into $1,000, and then $2,000 and then $4,500. But as the story unfolded from my Frisbee team group chat to Reddit, then to Twitter and television and the front page of The New York Times, it turned into something different. It created these lines of division, these groups of people, one who saw miscreants disrupting the status quo and another group who saw hedge fund managers getting beat at their own game — and I found myself decidedly in the latter camp.

Not just that, but I found myself infuriated with those in the former.

Imagine for a moment something that almost certainly happens with frequency in our country: a few of the 788 billionaires in America have dinner together. The subject of a burgeoning publicly traded company comes up. They decide it’s a good investment. They throw a fraction of their net worth at it, a few million dollars, and then go on TV and talk about how much they love this company. They blast off a few tweets to their millions of followers, who follow them into the investment, the price climbs, and their investment grows.

Then, imagine a more organized version of this, something we know that happens every day in our country: a hedge fund manager evaluates the fundamentals of a stock like GameStop. They decide this stock is going to fall. They position their investments accordingly, and then they start telling everyone they can that the stock is going to fall. With access to television spots and the interest of major media companies like CNBC or Fox Business or The Wall Street Journal, the word of their position spreads quickly. The company, a company like GameStop that’s already fighting to stay alive, suddenly feels a foot on their neck that is Wall Street speculation pushing the value of their company further into the ground.

Now imagine the scenario that we had in January of 2021: A group of retail traders with no institutional power, no cable TV spots, no billions of dollars, evaluated a company like GameStop. They decided they liked this company, and they didn’t like seeing it get squeezed by the Big Guys. Maybe they thought it was funny. Maybe they wanted to screw over rich people. Maybe it was just a lightning-in-the-bottle moment nobody can explain, a confluence of all these working parts that came together at once. Regardless, they were going to do what everyone else in the market does: position themselves advantageously, invest their money in the outcome they wanted, and then try to convince everyone that the stock was going in the direction they thought it would.

To their shock, they were extremely good at executing this plan. Better than a lot of people who do it for a living. The only problem is that when they did it, those very same institutional traders who do these things every single day began to use their institutional power to stop them. They made such a fuss that the federal regulators released statements that amounted to thinly veiled threats. They called for banning social media posts about stocks, the only non-institutional power to move the market they have, and floated the absurd idea that foreign powers could be involved and suggested that now we need more regulation in the market.

How is it possible to look at this situation and feel that it’s fair?

Now consider this: Gabe Plotkin, the hedge fund investor behind Melvin Capital, is one of the best in the game. He recently bought a $32.2 million mansion with nine bedrooms after overseeing 30% average yearly returns at Melvin Capital. He joined Melvin in 2013, after paying a $1.3 billion fine and pleading guilty to insider trading at his previous gig with SAC Capital. When Melvin Capital was getting bulldozed by Reddit, SAC Capital injected them with cash. So did Citadel, the hedge fund that is currently benefiting from the pause in trading on Robinhood.

“Robinhood was never what it pretended to be,” Gemini CEO Tyler Winklevoss said. “It built its business on selling Wall Street Bets order flow to the hedge fund Citadel. In the moment of truth, we learned which customer it cares about the most.”

How might you feel if you were someone who had lost their house in the 2008 financial crisis that was manufactured by these same kinds of institutional, big-money investors, then spent 12 years watching those same investors skate around scot-free, and then made a few thousand dollars on a miraculous, speculative trade — only to be told what you were doing was actually bad now, maybe even illegal, and perhaps required punitive measures?

How is it possible to examine this and not see the obvious fault lines — the many vs. the few, the populist vs. the establishment, The People vs. Wall Street?

Something absurd happened this week.

I wasn’t sure how it would fit into Tangle, or how to write about it, but I knew I needed to put it down in the pages of this newsletter. It is both a breath of nostalgia and perhaps a vision of the future.

It’s a political story, one of greed and altruism, rules and rulebreakers, old and new, little guys and big guys, anger and resentment, rich and poor, the power of the internet and the dwindling importance of the men in suits. It’s unclear who the heroes are and it’s possible there are none — and maybe that is the story in the end.

But it’s also a hard look into the temperature of the country, the fury over how things are built, the exhaustion over one set of rules for me and another set for thee, and another tally on the scoreboard for the people who are saying the game is rigged.