Wall Street Whiners

February 4, 2021

It’s been amusing to watch Wall Street, and its enablers, foam at the mouth following the recent chat-room gang-up that pushed the stock price of moribund retailer GameStop, and others, into the stratosphere. The stocks collapsed. Many made millions. Most lost. And market bigshots were rattled.

Some financiers complained that this was a digital conspiracy to manipulate market prices. Of course, it was. But this “conspiracy” consisted of tens of thousands of individual gamblers who had gathered online. It was not a criminal conspiracy, involving a handful of pinstripes in a smoky backroom with insider knowledge and billions of dollars of other peoples’ money at their disposal, who knew how to pump and dump.

Stock exchanges have always been rigged, dramatically less so today than in the past, which makes bleating by the Big Boys unbecoming. Even so, the media has devoted truckloads of ink, and hours on air, about investment banker grievances and concerns when what actually happened was a “nothing burger” of a business story.

However, there was one fascinating angle to the story. The manipulation -- called a “short squeeze” (don’t ask me to explain) —- is nothing new, but what’s new is that the GameStop frenzy represented the first-ever intersection of markets and social media. Simply put, a small army of novice day traders joined forces on social media in a chat room and executed a “squeeze” that made a few instigators rich and trashed many punters plus a couple of Wall Street’s most successful hedge funds.

Did this mean that social media could do to capitalism what it has done to democracy? Could it be harnessed to empower mobs and cabals to proliferate, like racist and terrorist groups on Facebook, in order to storm the bastions occupied by America’s Barbarians at the Gate?

No and no. There was no existential threat nor illegal activity here. It was another example of deregulation —- the culprit behind most bubbles, swindles, and market collapses in the past. All these traders did was use a trading app that was unregulated, under-capitalized, and free for anyone to use. Regulators didn’t regulate: It was a page out of Wall Street’s playbook.

A few regulatory tweaks will fix the situation until another loophole comes along which is what Wall Street has always done. That’s why the Street’s anger about GameStop anger is so hypocritical. The reality that its greatest fortunes have been mostly the result of similar gang-ups and finding loopholes big enough to jam billions through before the regulators or cops arrived.

Naturally, social media amplified the story. Cheerleaders tweeted out that the traders were a righteous populist uprising against Wall Street. One trader posted a revenge photo of The Joker in Batman burning money to get even — that became a mission statement to some. Politicians took sides and called for hearings and investigations into the affair.

But all that’s needed is to rein in all online trading apps to prevent the market from becoming a video game.

What’s also interesting to note is that GameStop’s mania caught the attention of Janet Yellen, newly-appointed U.S. Treasury Secretary and former Fed Chair — two institutions that have messed up markets plenty. She met with securities officials regulators and a federal probe will be undertaken.

But here’s where their attention should also turn: Markets have become removed from reality, thanks to the printing of $8 trillion in recent years by The Fed which was allocated to goose the economy and avert a recession. Stimulus is all well and good, but, combined with lax market regulation, has artificially driven up the prices of securities, cryptocurrencies, and CEO salaries. Stock buybacks, takeovers with inflated stock, outrageous salaries and bonuses, and casino mentality are mostly to blame. The GDP shrinks and markets go through the roof. It’s little wonder why the GameStop bunch behaved the way they did.

Even so, hedge fund billionaire and philanthropist Leon Cooperman blasted them for playing a “loser game” for being people who “don’t have any idea what they’re doing… The reason the market is doing what it’s doing is people are sitting at home, getting their checks from the government, basically trading for no commissions and no interest rates. This is idiocy! It’s appealing to the lowest common denominator and basically trying to turn people’s heads around by promising a lot of free stuff.”

(In 2017, Cooperman and his firm Omega Advisor settled insider trading charges and other violations by paying nearly $5 million and agreeing to onsite monitoring by an independent consultant of their books.)

Fortunately, markets still work when they enable good public companies to raise capital to provide jobs and to innovate; and allow small investors to build nest eggs. But at the edges, and thanks to social media’s new involvement, the system can be rigged. What Washington needs is smarter and Internet-savvy regulators to monitor boardrooms and brokerage firms as well as flash mobs, Wild West apps, and chat rooms on social media.

If there’s one lesson to learn from all this GameStop noise, it is that eternal vigilance is the price of liberty, but it’s also the cost of protecting free enterprise.