The GameStop revolution spreads — A sign for the future? — Washington takes note

From: POLITICO's Morning Money - Friday Jan 29,2021 01:03 pm

Jan 29, 2021

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Quick Fix

The GameStop revolution — The saga of GameStop (and AMC) shares continued to completely dominate market talk (and even Beltway chatter) as online brokerage Robinhood (along with others) at least temporarily slowed down or stopped trading in the shares to the massive outrage of much of the Internet. The anger, which tracks the populist trend coursing through our politics since the financial crisis, is quite easy to understand.

The moves by some brokers to slow down trading in these stocks — goosed to crazy levels by armchair chatroom investors – raised legitimate cries of unfairness to regular investors. And it felt to many, quite understandably, like efforts to limit losses to giant hedge funds and the prime brokers who extend them credit to make big short bets.

MM spoke with veteran market research analyst Jim Bianco, president of Bianco Research, who has no positions in any of the stocks currently roiling markets and raising uncomfortable questions for big Wall Street players.

“It certainly looks like brokers came to the conclusion that these short squeezes would keep going … and short-sellers might not be able to pay their brokers and the brokers would be on the hook.

“The question is who are the people who are really going to lose money? And the answer is Wall Street hedge funds. It sounds like the small investor won but then we basically had to bail out hedge funds because we couldn’t let this thing run its course because the losses would be too great and brokers themselves would be at risk.”

So is this a sign of the market future? — “It is a sign of the future. … For 20 years we’ve had more and more information available. Now you have zero commissions and fractional shares and you’ve removed any costs and disadvantages. …

“And this has been happening for a while. It happened with Tesla. … What people have done is found a weakness and exploited it … That’s basically the definition of capitalism.”

Washington takes note — Per a Hill staffer email to MM: “I am more worried about the power of the brokerages to unilaterally halt buying or selling in a certain stock, which will harm investors ability to get out the trade.

“I expect large class actions against Robinhood, etc. Also, question whether certain hedge funds, like Citadel, who are the brokers’ biggest customers and who are getting killed are leaning on the brokers to take any action. Of all of this, I think this is the area to watch the closest.” (More below.)

GOOD FRIDAY MORNING — Happy weekend everyone! If you are thinking of jumping on the meme-stock craze … don’t do that. Chances are you will get burned. Email me on bwhite@politico.com and follow me on Twitter @morningmoneyben. Email Aubree Eliza Weaver on aweaver@politico.com and follow her on Twitter @AubreeEWeaver.

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Driving the Day

MORE GAMESTOP FALLOUT — MM’s inbox lit up with takes on the situation. Most, though not all, strongly defended retail investors. A quick sample…

Charles Hsu: “As a fund manager myself, I find the sudden calls for regulation risible. What hypocrisy.”

Joseph P. Hofmann of Stevens & Lee: “It might be that the GameStop retail stock … phenomenon, to the extent it was designed to screw the hedge fund managers, might compel those hedge fund managers and many like them to re-think the long-term value of ‘shorting’ as a sound/ethical investment strategy.” (For the record MM has no issue with short-selling in general.)

Robinhood put out a statement explaining its actions: “Amid this week’s extraordinary circumstances in the market, we made a tough decision today to temporarily limit buying for certain securities.

“As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits. … Starting tomorrow, we plan to allow limited buys of these securities. We’ll continue to monitor the situation and may make adjustments as needed.”

THE REAL REASON IT HAPPENED — Bloomberg’s Matthew Monks and Michelle F Davis: “Robinhood … has drawn down some of its credit lines with banks … The firm has tapped at least several hundred million dollars … The company’s lenders include JPMorgan Chase & Co. and Goldman Sachs Group Inc.

“The behind-the-scenes rush to bolster Robinhood’s finances adds to signs that recent market havoc is putting a strain on the company, which has signed up throngs of retail investors for its app during the pandemic.

"The firm is among brokerages that clamped down on trading in shares of GameStop Corp. and AMC Entertainment Holdings Inc. on Thursday, setting off outrage among customers. Robinhood also told users it may close out some of their positions as it takes steps to reduce account risks.”

STRANGE BEDFELLOWS IN DC — Our Kellie Mejdrich: “The spectacular rise of GameStop's stock … rattled both markets and Washington, with some lawmakers demanding that regulators step in and others threatening action against brokers that suddenly kneecapped retail traders on Thursday. …

“The frenzy has increasingly drawn in policymakers throughout the week. It culminated in a rare agreement among Rep. Alexandria Ocasio-Cortez (D-N.Y), Sen. Ted Cruz (R-Texas) and Donald Trump Jr., who slammed … Robinhood …

"Their unity came after attention this week from a growing group of prominent lawmakers, including Sen. Elizabeth Warren (D-Mass.). The GameStop mania even came up repeatedly Wednesday in a press conference by Federal Reserve Chair Jerome Powell, who declined to comment on it.”

MERRILL LOCKS DOWN AS WELL — Via Charlie Gasparino on Fox Business: “Sources have confirmed to Fox Business Network that Merrill Lynch today, the biggest brokerage firm in the country, much more of a traditional house where you actually talk to brokers, human beings, locked down the trading in GameStop and as well as AMC.”

And on the other side of the argument, David L. Niefer emails: “You have to be kidding. Excess volatility unrelated to the financials of the underlying equity involved is not what markets are created for.

“What about the retail investors who were short on the stock as well? There is absolutely nothing wrong with regulators studying what is occurring and determining if there are reasonable ways to curtail excess volatility. Free market zealots can always come up with an argument against reasonable regulation.”

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YET MORE ON MICHAEL BARR — Via Univ. of Michigan’s Erik Gordon: “It would make as much sense for Stalin to claim Lenin wasn’t Marxist enough as it makes for ultra-leftists to claim that Barr isn’t interested enough in consumer protection. Disclosure: Barr and I formerly were on the faculty at the same time at Michigan Law School.”

Via Buzz Roberts, President and CEO of the National Association of Affordable Housing Lenders: “The attacks on Michael Barr are unfair. I have known and admired Michael since the 1990s. He has been a deeply committed and extraordinarily gifted and effective champion for consumers and communities, and especially for the underserved, low-income, and racial minorities.”

And via Cam Fine, President/CEO, Calvert Advisors and former President/CEO of the Independent Community Bankers of America: “I want to put in a strong endorsement for Michael Barr. I know the progressives are pushing back, which totally baffles me.

“If the progressives want a Comptroller and senior bank regulator who can be IMMEDIATELY effective, and crack down on Wall Street, and compliment the work at the CFPB, they could not ask for a better person than Michael Barr.”

DEMS VOW ACTION ON STIMULUS ONE WAY OR ANOTHER — Our Burgess Everett, Marianne LeVine, and Laura Barrón-López: “Democrats are vowing to move forward on a new stimulus package as soon as next week, with or without Republicans. Though Chuck Schumer and Nancy Pelosi have not officially said they plan to pursue a party-line approach through budget reconciliation, many Democrats now believe that’s the only way forward.

“Republicans in the bipartisan coalition are crying out for President Joe Biden to change course and embrace his long-standing bipartisan inclinations. Sen. Susan Collins (R-Maine) said a message from Biden to put the brakes on reconciliation ‘would be very helpful. And I think it’s what he believes.’”

OCC STOPS TRUMP-ERA RULE — Our Victoria Guida: “A key bank regulator … halted a last-minute, Trump-era rule that would prevent big banks from denying loans and other services to entire industries like energy or private prisons, a regulation that had drawn ire not just from Democrats but from banks themselves.

"The Office of the Comptroller of the Currency said the decision on the fate of the rule should be left to whomever … Biden names to head the national bank regulator.”

Markets

STOCKS CLAW BACK SOME LOST GROUND— AP’s Damian J. Troise and Alex Veiga: “Major stock indexes clawed back some of the ground they lost a day earlier in their biggest loss since October.

“Much of the market’s attention Thursday remained glued to the wild swings in GameStop, AMC and handful of other stocks which online investors have been buying feverishly in an effort to take on big hedge funds betting they will fall.

THE GAMESTOP RECKONING WAS A LONG TIME COMING — NYT’s Kevin Roose: “This week, the biggest story in the financial markets is the absurdist, pretty-sure-I-hallucinated-it drama involving GameStop, a struggling video-game retailer that became the rope in a high-stakes tug of war between Wall Street suits and a crusading internet mob.

“The simplest explanation for what happened is that a bunch of hyper-online mischief-makers in Reddit’s r/WallStreetBets forum — a clan of self-described degenerates with user names like ‘dumbledoreRothIRA’ and ‘Coldcutcombo69’ — decided it would be funny and righteous (and maybe even profitable, though that part was less important) to execute a ‘short squeeze’ by pushing up the price of GameStop’s stock, entrapping the big-money hedge funds that had bet against it.”

Fly Around

ECONOMY SHRANK IN 2020 DESPITE Q4 GROWTH — WSJ’s Harriet Torry: “The U.S. economy grew rapidly in the fourth quarter of 2020 and is forecast to continue recovering this year from the effects of the pandemic.

“Yet despite a strong rebound in the second half of last year, the economy contracted 3.5 percent in 2020, measured year over year, the first decline since the 2008 financial crisis and the largest since 1946. Measured from the fourth quarter to the same quarter a year earlier the economy shrank 2.5 percent.”

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INCOMING SENATE BANKING CHAIR PLANS HEARING ON STOCK MARKETS — Reuters’ David Shepardson: “Incoming Senate Banking Committee Chairman Sherrod Brown said on Thursday that he plans to hold a hearing on the current state of the U.S. stock market. ‘People on Wall Street only care about the rules when they’re the ones getting hurt,’ Brown said in a statement.”

HEDGE FUNDS’ TRADES ARE WORKING AGAIN AFTER WORST DAY IN HISTORY — Bloomberg’s Justina Lee and Lu Wang: “It won’t make the retail crowd any happier. But everything that had been making life miserable for institutional investors this week is reversing itself on Thursday.

"Bearish wagers beloved by hedge funds notched gains. Wall Street’s most-hated stocks plunged at last. The usual suspects from Amazon.com Inc. to Microsoft Corp. powered large-caps higher.”

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