Elizabeth Warren’s Not-Ready-for-Prime-Time Robinhood/GameStop Intervention

We initially despaired when Ted Cruz and AOC got into a dustup holding hearing about the short squeeze controversy focused on trading app Robinhood and GameStop. Elizabeth Warren has now weighted via a letter to the SEC (embedded at the end of this post) and a follow-up round of media appearances. The wee problem is her intervention comes off as if she’s trying to get in front of a mob and call it a parade.

While Warren’s missive does ask some good questions, it’s not remotely as tight or pointed as letters I’ve seen from her in the past while she was head of the Congressional Oversight Panel, or at the Senate, when seeking answers from the Fed, Treasury, and the SEC. It may simply be that she and her staff have usually focused on consumer finance, as in credit products and banking services, and the stock market is less familiar terrain.

More important, her questions demonstrate an underlying confusion about the objectives for having publicly traded stocks, which in fairness reflects confused American policies.

The only real justification is to lower the cost for companies to issue new stock to raise funds for their operations. The reason for having liquid secondary markets is to facilitate these new issues, meaning provide for price discovery and assure investors that they can exit their position down the road. Even through the business press, taking its lead from self-interested parties like intermediaries, touts more liquidity as ever and always good, there’s pretty much no evidence for this view. In fact there’s counter-evidence. As we wrote last week:

…while this story has entertainment and perhaps even educational value, the fact that it’s getting any traction in DC is confirmation of how backwards our priorities are. Since the crisis, there have been boatloads of economic studies on secular stagnation and other ills of advanced economies. Despite the joke, “You can lay economists end to end and never reach a conclusion,”: a surprisingly large number depict overfinanicialization as a drag on growth. Even the IMF concluded that the country representing the optimal level of financial “deepening” was Poland circa 2015, and more financialziation was productive only if regulations were strict. Those conditions haven’t been operative in the US for quite a while.

On top of that, the most unproductive activity is secondary market trading and asset management. The US stock market has a very high level of secondary market activity compared to primary investment, as in companies selling stock to the public to raise new funds to expand their business. You don’t need anything approaching this level of liquidity for companies to be able to price and sell new shares, as the success of large (by the the standard of the day) IPOs and stock offerings of seasoned issuers back in the stone ages of high priced stock commissions attests. The fact that it’s twice as easy to become a billionaire in asset management as in tech shows the degree to which money manipulation is sucking activity and talent away from Main Street to Wall Street.

As we’ve discussed, the SEC has pursued some objectives at the expense of others. As we saw, starting from our early years on Wall Street, when dinosaurs strode the earth and spreadsheets were prepared by hand on green accountants’ ledger paper, the agency has fetishized liquidity when there is every reason to think that’s benefitted Big Finance over Main Street. Even though the simple computation of trading activity shows average stock periods of around 11 seconds, various analysts try to exclude various types of profitable churn to come up longer average holding periods for “end” investors that are still on the order of months. By contrast, in my childhood, the average holding period for a stock was nearly two years.

This picture is made worse by years of super low interest rates. They have most benefitted businesses where interest rates are the biggest cost, meaning financial firms and leveraged speculators. And the agency has bizarrely allowed practices like corporate stock buybacks, high frequency trading, and dark pools.

I keep referring back to the 1994 Harvard Business School article by Amar Bhide, Efficient Markets, Deficient Governance, in which he argued:

Rules to ensure accurate and complete disclosure, the incarceration of insider traders, and the elimination of shady trading practices may actually hurt U.S. managers and stockholders.

Bhide believes that common stock is inherently unsuited to be traded on an arms’ length, anonymous basis. It is a legally weak and ambiguous promise: you get a vote which doesn’t mean much and can be diluted at any time, you get dividends if the company makes money and decides it’s doing well enough to share, and it is a residual claim on assets. The only way to make this sort of investment intelligently is if you are privy to the company’s strategies and budgets and can assess its management. But that information is competitively sensitive and can’t be made public. So Bhide argues that the only way to invest in common equity sensibly is to have a venture-capital type relationship, as in be regularly involved in management discussions.

Stop a second and understand what this means. Public company stock investors don’t have the information they need to determine what a company ought to be worth and therefore decide whether to invest. Perhaps they can sound bets only in extreme cases: when a company is way too cheap or way too pricey. So the notion that the market is efficient, and therefore stock prices are “true” in some abstract sense is a dubious. While efficiency does imply that stock prices may reflect all available information but critical information will always be missing. So equity investing has a considerable “garbage in, garbage out,” element.

I was once at a dinner party hosted by Financial Times US Editor Gillian Tett, where the crowd was mainly financial journalists. Late in the evening, Bhide said there should be no public stock markets. Everyone there (but me) went on tilt, yet no one could mount a reasoned rebuttal. It was ideology and finance bafflegab.

So back to what the SEC thinks it’s supposed to be up to. The Securities Exchange Act of 1934 calls for consistent, extensive, and timely disclosures, and to a high standard:

It shall be unlawful for any person, directly or indirectly..to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.

The so-called ’34 Act also bars insider trading, requires insiders to report their ownership stakes and disgorge any short-term trading profits to the company.

Finally, the SEC is tasked to discourage “manipulation and sudden and unreasonable fluctuations of security prices.” Um, GameStop and all those short squeezes sure look like the agency messed up. To stop wild and crazy prices, the SEC bars trades that manipulate prices, like sham orders and rumors of bid rigging, or create a false impression of of active trading as well as making material false and misleading statements.

If you read Warren’s short letter, you can see she is concerned about market manipulation and wonders if the supposed little guys (who she points out might not be so little) were engaged in collusion that might still might not be illegal under vague and outdated rules:

Although “[f]ederal securities law prohibits market participants from misrepresenting a company’s prospects to artificially affect its share price,” there is a troubling lack of clarity regarding who the major market participants are in this case and the degree to which their activities may be coordinated. With many of these traders “cloaked in anonymity, there is no way of knowing whether messages touting GameStop come from average Joes – or scam artists executing a ‘pump-and-dump’ stock scheme.”

Admittedly, Warren later seeks more information about both the shorts and the WSB types:

a. Did the sharp rise in GameStop’s share reflect changes in the company’s fundamental value? If not, what drove these changes of GameStop share prices?

  1. To what extent did large investors, such as hedge funds like Melvin Capital Management, and their short positions impact the fluctuationof GameStop’s share prices? Did any of these practices violate existingsecurities laws?
  2. To what extent did online message boards, such those on Reddit, or broader social media amplification impact the fluctuation ofGameStop’s prices? Did any of these practices violate existingsecurities laws?…

4. What steps will the SEC take to update and implement rules defining market manipulation? Please provide a detailed timeline.

However, the Senator also too often displays a touchingly naive view that market prices somehow reflect fundamentals. Has she managed to miss the slaughter of value investors in the ZIRP era? Even in less bubbly times, none other than godfather of investing, Benjamin Graham, said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” And if you combine this with Keynes, “In the long run, we are all dead,” you may not last long enough to see those properly-weighed prices.

It’s also disappointing to see Warren do a mere hand wave on systemic risk. Mind you, so far I see no evidence of any so far (as in leverage on leverage or seriously undercapitalized players who are also systemically important). But if she were semi-serious, she’d at least name the vector experts have been worrying about for quite a while, which is central clearinghouses. You see no mention of them.

Warren also felt compelled to strike a populist pose, which comes off (charitably) as overegging the pudding:

These wild fluctuations are just the latest indication that many private equity firms, hedge funds, and other investors, big and small, are treating the stock market like a casino, giving little consideration to the companies, communities, workers, and consumers that may be affected by these risky bets. The recent chaos reveals a clear distortion in securities markets, with benefits accruing to investors that do not clearly benefit the company’s workers, consumers, or the broader economy….

The manipulation of share prices may exacerbate inequality and the impacts of the ongoing pandemic-related economic collapse. While investors work to outmaneuver each other in search of short-term profits, working families continue to suffer, underscoring the growing disconnect between the stock market and the real economy. For example, millions of workers have lost their jobs or left the workforce altogether amid the pandemic and economic collapse, but “America’s 614 billionaires grew their net worth by a collective $931 billion” in the roughly seven months following the beginning of the pandemic.14 The rapid growth of economic inequality is, in large part, due to the disproportionate impacts of surges in the stock market, which has rebounded dramatically since the onset of the public health emergency. The stock market is not reflective of real economic conditions felt by communities across the country, and traders treating securities markets as casinos exploit these growing disparities.

Gambling in Casablanca? Whocoulddanode?

Hasn’t someone clued Warren that the price of a company’s stock generally matters way way way more to the C-suite than Joe Employee? That’s because for most companies, selling stock to raise dough is an infrequent event. The biggest sources of corporate funding are, in order, retained earnings, borrowing, and share sales. And in aggregate, public companies have been slowly liquidating, as in net saving rather than investing, as we pointed out in a Conference Board Review article in 2005.

The exceptions to this general rule are:

If the employee works for a financial firm with weak or declining bond ratings, since financial firms are borrowing all the time (they usually have some to a lot of short term debt) and a weak rating means they really ought to shore up their equity base soon (see what happened to AIG and the monolines as examples of how quickly a doom loop can kick in).

If the employee works for a non-financial firm that has a lot of maturing debt and similarly has shaky bond ratings

If the employee either by having a mendaciously-designed 401(k) plan or questionable investment judgement, is heavily exposed to his employer’s stock1

Nevertheless, Warren does get props for refraining from short-bashing. Not only do short-sellers get information out about companies that their managements would rather have you ignore, but banning short selling, interestingly, does not help the stocks of beleagured companies, contrary to boardroom urban legends. Various studies determined that the prohibition of shorting of big bank stocks in the runup of the financial crisis did more harm than good.

Warren connects the rise in stock prices during Covid to widening inequality. Valid observation, but asking the SEC to fix it is barking up the wrong tree. As readers know, it’s a combo of the America’s Covid rescue plans doing more to help the rich than the little guy, and the Fed running in to push interest rates back to the floor, which turbo charged stock and real estate prices. But Warren seems unwilling to accept that the wealthy-favoring monetary and fiscal interventions would elevate asset prices further from there already lofty levels.

Yes, Warren can argue that stocks are seriously overpriced, and even the IMF agrees with her. But Saint Greenspan deemed stock prices to be irrationally exuberant in….drumroll….1996, before the dot com mania really took off. So the fact that stock prices are too high by plenty of sensible standards does not mean they can’t go higher.

Warren took her GameStop gaming/Covid suffering combo plate to the press, which did get a lot of play, particularly on the Sunday political shows. She seems to be trying to straddle selling the necessity of a big Covid bill along with her upset about the stock market casino. Linking them at least allowed her to debunk the bizarre assertion by poors-hater-in-chief Leon Cooperman and his buddies that all of the GameStop buys were funded by young layabouts gambling with their stimulus checks:

And in some of her interviews, she’s including stock buybacks in her list of things for the SEC to address. From Politico:

The Massachusetts Democrat likened today’s stock market to a casino, where she said big-money players are manipulating the markets through measures like pump-and-dump and stock buybacks to inflate stock prices.

So perhaps Warren will become more sure-footed as her staffers get a better grasp of the issues. But right now, she looks a bit wobbly.


1 Investment advisors warn sternly against having significant holdings in your company’s stock because you are already at risk by working there. And before you say, “Oh, but we can judge well if our company is a good bet,” Enron and Bear Stearns both had very high levels of employee shareholdings at the time of their collapse.

00 Warren to SEC on GameStop
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  1. oliverks

    I am more concerned with the bond market than the stock market. It seems to me that price discovery has more or less collapsed across large sections of the bond market.

    With the ECB, Fed, and BoE all buying huge amounts of bonds, what is the really value of these bonds. Even the types they are not buying are still being influenced by their actions.

    This gets back the ZIRP policies mentioned above.

    It is really unclear how we get out of ZIRP because traditional pension funds are already suffering. If their bonds get repriced to reality, most pensions would be completely doomed. I do pitty pension fund managers in the time of ZIRP.

    1. Yves Smith Post author

      This is why I have pretty much ignored the systemic risk question for stocks. Unless you have leveraged speculation, like the US in 1929, stock market crashes don’t impair the financial sector. They can fuel a slowdown in the economy via the wealth effect in reverse. Even a clearing house failure is more likely to produce jawboning and a bailout than a full blown crisis.

      But I don’t see systemic risk in the bond market EXCEPT in Europe due to the continuing entwinement of sovereign and big bank exposures, and the banks not having been made to do anywhere enough to improve their capital bases. Big bank blowups in Europe or London could entangle US players.

      The financial crisis continues to be widely misrepresented as a housing market or subprime debt crisis. It was a derivatives crisis, as I explained long form in ECONNED. Those derivatives, bundled into CDOs with a bit of actual subprime bond exposures to make them more palatable, were tremendously leveraged. They created 4-6X the real economy value of subprime debt, and referencing the weakest bonds to boot, and highly leveraged, systemically important players like AIG, the monolines, the Eurobanks, Citi and Merrill were heavily exposed. We don’t have anything like this cooking.

      See this classic essay by Kalecki in 1944. He saw this all coming, including perma falling interest rates and negative interest rates:


      The (not really) problem is the Fed has worked out that negative interest rates don’t work, as in they don’t stimulate spending (why would they, they signal deflation) but they have no clue how to get themselves out of their corner. The Bernanke taper tantrum scared the Fed.

      We could even have mini-stagflation, since all of the Covid-induced reductions in productive capacity (small business closures, plants with reduced production schedules due to illness) will create supply pressures.

      So I think we see instead worsening economic distortions, particularly widening inequality. So we will have neofeudalism, perhaps accompanied by even more political instability and rebellions. The working out will come in the political realm. The only way out isn’t through the Fed but big time fiscal spending on productive activities, like planting trees.

      1. oliverks

        Thank you for posting the link, I had not read it before.

        I did not understand exactly why rentier interests would dislike full employment. It would seem that it would be good for some, such as land lords or telcos. So I think I missed something in his argument there.

        His notion of supporting consumption, might become vital over the next 30 years. I know AI / ML is not held in high regard on this blog, but we really are at the beginning of a revolution. It will take 30-40 years to take effect, much like the microprocessor took a long time to change the world.

        The pace of change will disrupt many lives for both skilled and unskilled workers. Dealing with that change, is going to be very difficult. It is not that work won’t exist, but the disruption will be so large and rapid that workers will have a hard time adapting.

        I suppose that is not so unlike what has happened over the last 30 years, but I suspect it is going to get worse over the next 30 or so years.

        Certainly there are many targets that the government could invest serious money into as well. Tackling global warming, or trying to cure schizophrenia and other neurological diseases, or rebuilding public infrastructure, … There are no shortage of worthwhile projects, that could pay back handsomely in the future. What is needed is a politician with courage to propose we do one or some of them.

        1. Patrick

          Just starting The Fourth Turning after hearing it touted by “bond king” Jeffrey Gundlach (had previously dismissed it because IIRC it was touted by Bannon – so we’ll see).
          The times, they are a’changing.

        2. Yves Smith Post author

          The essay is extremely clear on that issue. Businessmen like full employment because labor has more power and can make demands and easily quit and find new work. The bosses care more about preserving their authority and status than maximizing profit.

          1. oliverks

            Sorry, that part was clear, I understood the part about business leaders not liking full employment. The bit that I didn’t get is why rentiers wouldn’t like full employment.

            In particular

            … and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and thus adversely affects only the rentier interests

            My naive perspective is increasing prices would seem good for the rentier class not bad. Later on he then says…

            The workers would ‘get out of hand’ and the ‘captains of industry’ would be anxious to ‘teach them a lesson. Moreover, the price increase in the upswing is to the disadvantage of small and big rentiers, and makes them ‘boom-tired.’

            It could be I am missing something very obvious, but it would seem that growth would benefit rentiers, without the problems the ‘captains of industry’ suffer from.

            1. Yves Smith Post author

              I think Kalecki may have underestimated the power of our modern rentiers as Marx did. Lower wages should in theory mean less ability to pay actual rents, like apartment rents.

      2. Tom Finn

        Can we hope for any “real” Roosevelt style jobs program out of Biden or will he fold. How many of those 600 bridges ever got fixed?

      3. Susan the other

        Thanks for this post. It gets more interesting by the minute. I’m usually critical of Liz but I thought her letter was pretty good. And funny you should mention Bhide saying there should be no public stock markets – because the public screws itself more or less by having no useful information. I woke up thinking (listening to the BBC in my dreams as usual) that we shouldn’t even have stock markets. Maybe they had been talking about the huge mess it has become. And Varoufakis’s statement that there should be no labor markets. If there’s no bedrock of value left then everything is arbitrage and people with all the good information will win every time. It’s like there really is no “good” information except the information that is made on the spur of the decision to buy or sell. It might be a different story if there were a coherent national policy, and fiscal investment to that end, to start greening America. Dare I say Make America Green Again? Green hats only.

        1. drumlin woodchuckles

          There already are such hats. Here is a bunch of images.


          I notice they don’t dare simply put the MAGA letters on a green background. Perhaps for fear of getting sued by the Trumps. But maybe getting sued would be wonderful publicity. Maybe they should just do it. White M A G A on a green hat.

      4. Science Officer Smirnoff

        Ah, ha. Last September (and earlier) Roubini was on about medium term stagflation.

  2. Mikel

    Just a musing about making valuation judgements about a company:

    “The only way to make this sort of investment intelligently is if you are privy to the company’s strategies and budgets and can assess its management. But that information is competitively sensitive and can’t be made public. So Bhide argues that the only way to invest in common equity sensibly is to have a venture-capital type relationship, as in be regularly involved in management discussions…”

    I’m not sure if that type of relationship provides all the knowledge and expertise. Anyone who has worked at a company has seen all the presentation theatrics and budget rewriting that goes on before a visit from investors or board members. Private or public companies.

    And now, more so than during the previous centuries, there is the hocus-pocus of valuing the “intangible assets” of a company.

    The manipulations start before a company ever comes to market – with the aid of people with venture-capital type relationships with the company.

    I don’t think the root of the problem is the ability of more people to bid on a stock price. The problem is the ability of more people to bid on a stock price after, for example, they are told, by alleged financial professionals, that companies like Apple and Tesla are worth more than the Milky Way Galaxy and everything in it – past, present, and future. And people accept it with a straight face and quietly collect their dollars. “Efficient markets.”
    With the Game Stop situation itself, there seem to be people buying who admit they do not care about the valuation of the company or losing money.

    1. Yves Smith Post author

      VCs ask VERY pointed questions and go over budgets and monthly results with a fine toothed comb. They don’t accept PowerPoint fluff. I worked for a while with a VC on some of its portfolio companies. They have their boots on management’s neck. Unlike a public company board, the execs and managers know the VC can fire anyone, so when asked to jump, they know the only right answer is “How high?”

  3. doug

    So perhaps Warren will become more sure-footed as her staffers get a better grasp of the issues. But right now, she looks a bit wobbly.

    Hopefully some will read this essay and gain some understanding. thanks for writing it in a way that it may be received and understood by those in charge.

    1. drumlin woodchuckles

      Maybe someone here knows someone who knows someone . . . who knows someone . . . who can get it to someone they know who is in charge.

  4. stefan

    What is the “true fact” real reason why trading on GameStop was suspended. I don’t quite get it.

    1. Louis Fyne

      True fact is that Robinhood didn’t have the collateral for the stock trades made by its clients to satisfy its clearing firm.

      Then Robinhood spun that true fact into patronizing doublespeak PR about “protecting its customers from volatility.”

      Then its customer base went into revolt as people “connected the dots” and started to see conspiratorial machinations left and right.

      1. Barry

        Who are Robinhood’s customers? The users of the app, or the companies that pay Robinhood for the datastream generated by the users?

        That sheds a different light on “protecting its customers from volatility”.

        1. Yves Smith Post author

          Robinhood’s “customers” are customers only to the degree the SEC regs protect them. They pay nothing. I would never expect reliable execution from a free service.

  5. Stephen C.

    Thanks for this article. It would be great if you could expand on the productive investment of planting trees. Or maybe you can direct me to where you have already done so. Planting trees seems so, downright . . . real and practical and low tech, that it would be a hard sell to the PMC and other know-it-alls. Anyway, thanks again.

    1. Sierra7

      Stephen C.:
      re: planting trees being more popular:
      It would be if it was/is possible to plant with “smart devices while taking neat selfies!”

      As for all the hullabaloo about GameStop et al, it only appears to me that the financial hoi paloi are squealing like little piggies because they have been disrupted (blind sided) by the rabble……and are suffering under “squeezed short” syndrome.
      Gotta love “progress”!

    2. drumlin woodchuckles

      If an apple falls off a tree in the forest, and someone picks it up and eats it without paying anyone for it, was that apple worth anything?

  6. bold'un

    Another use of secondary markets and high stock prices is to enable market leading companies to buy out potential competitors and so to maintain oligopolies. Think Instagram, Youtube, Whatsapp. This may not be all bad, for instance, right now Gamestop management has an unplanned opportunity to sell stock to fund maybe an acquisition or a debt repayment or to hire some top-flight talent…
    But I do agree that squeezes and excess volatility can occur when outstanding derivative volumes become far larger than the underlying markets. Margins for derivative accounts depend on the financial situation of the client account but perhaps the SEC/CFTC could think up a more variable system of margin requirements that also depends on total open interest … indeed as more and more bets become tradeable, why not have options and futures on margin requirements themselves?

    1. Yves Smith Post author


      Hostile takeovers are so 1980s. But they allowed management to put in place golden parachutes. And what management cares about is what they get, and they have an investment bank provide a fairness opinion to justify the price at which the company trades hands.

      You don’t need public markets to buy and sell companies. Did you miss “private equity” as in that’s what they do? And big companies regularly sell divisions, which are not public.

  7. timbers

    Vaccines are responsible for asset bubbles and the GameStop thingy:

    “If you look at what’s really been driving asset prices in the last couple of months, it isn’t monetary policy,” Powell said. “It’s been expectations about vaccines…”

    1. Louis Fyne

      I can’t tell if your being ironic or taking Powell at his word….

      Stock market valuations out-of-whack from the textbook-consensus was well in place before corona. See Uber, Pelaton, Blue Apron etc. imo.

  8. freedomny

    Elizabeth Warren, from my perspective, seems to often speak out of both sides of her mouth and it’s hard to ascertain whether she is trying to play opposing political point of views or really doesn’t understand the issues. This thought comes to me a lot when I speak to people about Wall Street. Just had a convo with a brother in law who is a day trader and still blames what happened in 2008 on those “subprime losers” and people who don’t pay their bills on time.

    The Rising had part of this clip on their show this morning: https://www.youtube.com/watch?v=VMuEis3byY4. Kind of telling that Cramer says you can’t “foment” “but you do it anyway because the SEC doesn’t understand it”. Hasn’t the whole Gamestop situation shown what a failure the SEC has been – for many years?

    Not sure how we get out of our current situation but I feel that a plan has been formed by the “elites”. And yes – it will be down the neofeudalism road. As the World Economic Forum has told us – you will own nothing and be happy.

  9. shinola

    A quote from an econ. prof: “The stock market is the only form of gambling legal in all 50 states.”
    That statement was made in 1974.

    He did make an exception for IPO’s or subsequent issues (actual investing vs. outright gambling).

    He was also of the opinion that anyone who consistently makes money in the stock market was almost certainly trading on inside info.

    The more things change…

  10. Dan


    I notice that you defend short selling in your posts on this topic, but to me the idea that short sellers are merely promoting price discovery seems similar to the claim that stocks are priced based on fundamentals: that is, not often true in practice. Gamestop had 140% of its float shorted at one point in an attempt to drive it into bankruptcy, and there are many shorters whose motives are mainly predatory and not productive of anything. While I mostly agree with your take on this situation, I’m surprised that this aspect has not been more nuanced

    1. Yves Smith Post author

      That is a straw man. I never said the shorts were promoting price discovery. The price is already “discovered” by virtue of the stock having a traded market.

      What I said was the shorts were attempting to get more (management/broker tout conflicting) information out about companies.

    2. vlade

      This is nonsense.
      a) share price 0 and bankruptcy is not equivalence. Even if shorters drove GME price to 0 – which they can’t, because if a stock is < small amounts for some time, the stock gets delisted – it has no, zero, nada, impact on the company (except for some very very specialised cases). Debt, which is a real commitment by the company, can. Standard equity cannot.
      b) a publicly traded company can delist. In fact, for a lot of companies listing is more of a badge of honour than any real need. You want the badge, you pay the price.

      Predatory? Sure. But predators are crucial for an ecosystem, as they help to cull the sick and weak.

      Let's look at GME. GME was, first and foremost, a brick and mortar specialised chain. Most of what they sell can be had online at the same or better price, and a number of products they can't even stock because they are digital-only (most indie games go straight to digital, and GME doesn't have a digital distribution platform that could compete with Valve/Epic/CDR).

      For all its cash, GME looks like a Blockbuster in 00s. The shorts were betting that the management could not turn it around (same as Blockbuster's could not).

      For all the furore now, the GME may _still_ fail in exactly the same way, because tons of companies fail w/o shorters making money out of it.

      But the shorters put a spotlight on the GME, very publicly saying "we do not believe you'll deliver". The onus is then on the management to a) persuade the shareholders they will deliver and b) then deliver.

      Do you truly believe that holding the management accountable is unproductive?

      I'll admit that there are shorters that are beyond ecosystem predation, and truly unproductive, which disseminate false or misleading news for short term gain. But there are longs who do exactly the same – ever heard of pump and dump? They are beyond unproductive, and if they prey, it's expicitly on retail investors, not the companies.

      And such behaviour, for both shorts and longs, is illegal.

  11. Steven Greenberg

    Is there an executive summary of this article? I am at a complete loss as to the point the article was getting to.

    1. Yves Smith Post author

      You are admitting to having a reading comprehension problem. Did you miss the headline? No one else has your issue.

      This is a finance and economics blog. We assume a reasonable level of knowledge about financial markets but still unpack a fair bit of tradecraft, more than most finance sites do. The onus is on you to bone up if our not-terribly-technical discussions are over your head.

  12. ScottS

    I don’t disagree that the pandemic, the insurrection, and the broader economy are much more salient problems.

    I have been wrapt in the whole WSB debacle, however, even to the point of buying a couple shares of GameStop. Do I expect to get my money back? No. Do I enjoy the tsuris it’s giving a particular hedge fund? Yes. Am I fascinated by the pearl-clutching and psyops misinformation from cable TV? Definitely.

    I feel there are some analyses that capture the spirit I’ve felt from inside WSB:
    * Matt Taibbi’s “Suck It, Wall Street
    * Jacoban’s “The GameStop Bubble Is a Lesson in the Absurdity and Uselessness of the Stock Market
    * Popular Information’s “The merry adventures of Robinhood

    Ultimately, I think this will give reformers like Liz Warren a stick to beat Wall Street with. I feel that short-selling isn’t productive since the same research to validate a security’s “shortworthiness” is the same to validate its “longworthiness” and with shorting it is easier to pour gasoline on a company and light a match with trash talk on CNBC.

    I’m less down on the stock market as a whole — I’d like to have something invested and retire one day and pensions aren’t a thing anymore.

    Introduce a Tobin Tax and let’s be done with it.

    1. Yves Smith Post author

      Taibbi is all wet on this topic. We’ve occasionally had to shellack him in the past, see:


      Taibbi also scaremongers about Federal government debt.

      As to the substance of your actions, first, you appear not to understand that your participation in the GameStop money arm wrestle is increasing Wall Street profits. If you pay any attention to the financial press, you would have regularly encountered stories attributing weak profits for Wall Street players like Goldman and JP Morgan to placid markets. Volatility is highly profitable to them and you are acting as an enabler. In other words, and I hate to be so blunt, but you are a dupe if you think placing bets in a casino is going to hurt the casino.

      These hedgies are so bad at risk management that they would have blown up at some point. The founder of Melvin Capital was implicated in insider trading when he was at SAC. Oh, and despite being a pretty big hedge fund, Melvin has only seven clients…the biggest of which is SAC. Given how desperate dumb money (public pension funds) is for alternative investment, the bizarrely small client list suggests what Melvin does wouldn’tstand up to the virtual non-scrutiny that public pension and endowment investors would give.

      Second, you are incorrect about shorts. They regularly go and develop information that isn’t in the normal domain of what investors look at. They have to be very convinced of their point of view to take a short stake. As we indicated in the post, Warren isn’t targeting the shorts for being shorts, she’s asking if there’s been market manipulation, and here that fingers the longs way more than the shorts.

      Third, this Robinhood controversy is distracting Warren from what would be the single most powerful reform incoming SEC chief Gary Gensler could implement, which is forcing public companies to disclose political donations, including to lobbyists, PACs, and dark money pools. You could get at private equity by requiring all IPOs to make the same disclosure for the three years prior to the IPO (private equity would not want to have to preclude an IPO as an exit.

      We’ve already and repeatedly advocated a transactions tax. Notice Warren is not. She seems to be all in with stock market mythology and is unhappy to find it doesn’t work that way in practice.

      1. somecallmetim

        Maybe Warren was just addressing the immediate politics at hand – a March 2020 Brookings article on financial transactions tax basics mentions she was among the Dem POTUS candidates supporting a 0.1% tax on across the financial transactions board. The aim of ftt to reduce trades based on gaming (no pun intended) instead of investing sounds like something she’d support.

        1. Yves Smith Post author

          She was for a financial transactions tax as a revenue measure, when the proper use of a transaction tax is to reduce the not-desired activity. Revenues are a welcome by product.

          I think she would actually have trouble with the argument for a transactions tax as discouraging trading. I’ve seen Warren go on about how she loves markets. She would not be willing to say more trading is bad in the abstract.

      2. vlade

        Shorts regularly do things like
        – visit the premises
        – counting the trucks leaving the factories/warehouses
        – detailed talks with suppliers
        etc. etc. Which most of the long investors don’t they look at the information provided by the company.

        Shorts that are good at establishing workable theory for a short often make an assumption that company has somethign to hide, while long investor (not speculator) must implicitly believe what the company gives them.

        And the shorts must be extra diligent, because for them, it’s the upside that’s limited, while the downside that’s unlimited. When you’re making a risky bet like that, you’d better cover your bases.

        Which these shorters didn’t do. They might have had a good long-term story, but their risk management was crap IMO.

  13. sawdust

    Without a public stock market, where does the populous invest their retirement and other savings? Are we primarily corp/treasury/municipal bonds?

    Seems like buying equity in a company becomes the wild west. I’m not really criticizing the alternative scenario just trying to picture how this would play out in today’s world. And how much would this actually reduce our finance sector? Definitely some. Seems like fewer finance billionaires and many more millionaires in the age of disinformation…

    1. Yves Smith Post author

      Stocks were considered too speculative for all but sophisticated investors to own. Even pension funds held mainly/only laddered bonds (to match the expected payout profile) until the Department of Labor changed its interpretation of ERISA rules in the late 1970s, IIRC 1976. Even when I was a kid at Goldman, stock was considered a bit dodgy. And some people still have that attitude. When my mother applied to a fairly pricey retirement center (and this with ALSO having a large but 80% refundable deposit), they looked at her portfolio and were horrified that she was “in the market”. They apparently severely haircut any equity holdings.

    2. NCdoc

      Where the middle class stores its wealth is a big problem. The Fed has destroyed this for us. Savings and bonds yield nothing and have risk of the bank not paying you when things go south. Stocks very risky- very overpriced now. Real estate over priced. Physical precious metals, personal health (fitness, nutrition), arable land and the ability to grow/raise food, trusting social relationships… these are things which still seem valuable.

      1. Yves Smith Post author

        I should have said earlier….the old economic model for retirement was homeownership, and to some degree, worker pensions. The 30 year mortgage was designed to match a typical profile of buying a house just before the age of 30 and paying the mortgage off right before retirement, so you could live at much lower cost in retirement and maybe sell the house and downsize but it was also common to pass the house to heirs. My uncle was able to live below the poverty line in his old age because he’d wound up with his maternal grandparent’s house and had healthcare through the VA.

        But that tax-advantaged forced savings model went out the window when fewer and fewer people could live in the same community through their career. It also used to be the norm that an employee could expect to stay with his employer unless he was crooked or really bad at his job, or his employer went out of business. And back then, labor markets were tighter, so unless you had a pretty senior position, you had good odds of finding a new post quickly in the area if you did lose your job. The transactions cost of selling and buying a house chews up a lot of your equity.

  14. Fazal Majid

    Stock prices matter hugely in the tech industry where they form part of compensation in the form of stock options. Microsoft’s long share price stagnation under Steve Ballmer hurt its ability to hire top talent. And that’s despite Microsoft being notorious for “managing” its earnings

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