Well that didn’t take long. Just one week into the Biden presidency, America’s ruling class has put the hoi polloi in its place by bailing out a flailing hedge fund because a bunch of COVID-bored bloggers and small investors were about to push it into insolvency.
First, some background. In May of 2020, the car rental company Hertz filed for bankruptcy sending its share price to 56 cents. Day traders decided to start bidding up the price, increasing it ten-fold. It was not because these day traders thought the stock should be worth more. It was because they hoped they could buy it, let suckers buy it for more, then dump in for a nifty profit – a practice called “pump and dump.” Think if it as playing musical chairs, only the last person sitting in the chair is the loser, not the winner.
Fast forward to today. Day traders decided to do the same with a stock called GameShop. GameShop sells video games from retail outlets in malls – a business model that is slightly better than manufacturing buggy whips and black-and-white televisions – which is why its stock was valued around $3 a share in August of 2019. When the company decided to have a larger internet presence, the stock popped to about $20 at the end of 2020.
But then the day traders entered the picture. Using an app called Robinhood – which enables traders to buy options and a social media site called Reddit to publish their bullish viewpoints – they pushed the value of this stock to $350.
This was not big deal until the hedge fund Melvin Capital, with over $13 billion in assets, decided to make a killing by short selling this obviously overvalued stock.
Now a little more background. Hedge funds are large pools of capital that are managed by supposedly savvy individuals who know produce high returns. The more successful ones often require that you have $10,000,000 in assets to even be allowed to invest with them. Thus, hedge fund clients are wealthy and politically-connected individuals. Did you ever wonder why you could never get in on the recent IPOs (initial public offerings) such as Airbnb and Affirm – which all doubled in value the first day of their public offerings? It is because you are not rich enough to be in a hedge fund that has access to these offerings.
Short selling is a way of making money when a stock loses value. A short seller borrows a stock from a broker with the promise to return that stock on a specific date. The short seller then immediately sells the stock. But when this time period expires, the short seller must return the stock to the broker.
Perhaps an example will make this clearer. Let’s say you borrow 1,000 shares of XYZ stock valued at $10 a share from a broker and promise to return these stocks one month later. You sell the stocks for $10,000 and a month later, they are worth $5 a share. You repurchase them for $5,000 and return the 1,000 shares to the broker – making a nice $5,000 profit.
But what if the stock goes up to $20? You must purchase them for $20 for a total of $20,000 and take a $10,000 loss. But it gets worse. Let’s say you had purchased $10,000 of XYZ simply as an investment. The most you can lose is $10,000. But if you short sell XYZ, you are open to getting financially annihilated. If the stock went up to $200 a share, you must now repurchase the shares for $200,000 for a $190,000 loss! Short selling is very risky.
When Melvin Capital decided to short sell GameStop, the bloggers on Reddit decided to “stick it to the man.” Not only did they refuse to sell GameStop at a good profit, they decided to buy more! Melvin Capital had to replenish its GameStop shares to its broker at a much higher price and thus lost over $3 billion, 23% of its assets.
This is when our Biden-backing ruling class did what it does best – change the rules when they are no longer to their advantage. It’s fine for some hedge fund guy to go on a financial channel and push some worthless stock to bid up the price so they can dump it, but regular people are not allowed to do this.
Two hedge funds, Citadel and Point72, injected $2.7 billion, to bailout Melvin Capital. But then Robinhood did a reverse Robin Hood – it suspended trading on its app in shares of GameShop! Of course, the hedge funds had no such constraints. This allowed the hedge funds to minimize their losses. Newly minted Treasury Secretary Janet Yellen stated she was “monitoring” the situation, but she received over $800,000 in speaking fees from Citadel. As Will Rogers said, “We have the best politicians money can buy.”
But the underlying theme in this fiasco is that the hedge funds would never have gotten away with this if Donald Trump were still president. At least when our ruling class bailed out the Wall Street Welfare State in 2008, there was a theoretical concern that the economy would collapse. Not in this instance. Bailing out Melvin Capital is merely our ruling class gaming the system with impunity.
Since President Trump’s ignominious exit, our ruling class has reasserted itself – and not just in financial shenanigans. It is now verboten to even intimate that Biden’s election victory was tainted. Twitter and Facebook brazenly ban conservative opinions and conservatives themselves. When a conservative Twitter replacement, Parler emerged, Amazon, Google and Apple threw it off the internet. The tech oligarchs have effectively abolished the First Amendment.
The political forces are now lining up to render the COVID-temporary untraceable mail-in ballots permanent, ensuring Trump or a similar populist never again emerges. Calls for gun confiscation will soon be coming. As President Reagan said:
“Freedom is never more than one generation away from extinction. We didn’t pass it to our children in the bloodstream. It must be fought for, protected, and handed on for them to do the same, or one day we will spend our sunset years telling our children and our children’s children what it was once like in the United States where men were free.”