Hedge clippings
Billionaire Ken Griffin bails out fellow hedge fund in ‘meme stock’ raid after leading fight against graduated income tax
Renegade stock traders have boosted the value of GameStop, putting at risk a prominent hedge fund that had been betting on the firm’s collapse. Illinois billionaire Ken Griffin came to the rescue, something he was unwilling to do for Illinois taxpayers. (Wikimedia Commons/Michael Rivera)
By Ameya Pawar and Ted Cox
If only GameStop had ever sold a video game half as interesting as what’s going on with its stock value right now, it might still be a thriving business instead of a poster child for “meme stock” barbarians storming the gates of Wall Street.
The sudden crisis reached a point this week where Illinois billionaire Ken Griffin had to step in as part of a $2.75 billion bailout for Melvin Capital, a hedge fund that had been betting that GameStop would collapse — only to be blindsided by renegade retail traders who joined together to drive the stock price up.
(Wikimedia Commons/Unreo)
Griffin was there for a fellow robber baron — and he had the extra pocket change to hand — because he had rejected help for his fellow Illinois taxpayers by spending heavily to defeat the state’s proposed graduated income tax. But we’ll get back to that pet peeve in a moment.
For now, let’s try to put the complex dynamics of the GameStop stock value in the simplest possible terms. Melvin Capital is known for being a short-selling hedge fund that typically bets on companies collapsing, and it’s amassed a huge fortune that way. According to the Wall Street Journal, Melvin averaged a 30 percent annual rate of return since its founding in 2014, and it had $12.5 billion in managed assets at the start of this year.
That was before GameStop, a dying retail video-game franchise, became the darling of renegade day traders exchanging information on what’s become known as “meme stocks” on the Reddit forum r/Wallstreetbets, which has 2 million subscribers, and trading through apps like Robinhood. Their strategy was radical but sound: buy up the stock, elevate the price, and force the hedge funds to hedge their own bets by buying up stock as well, thus elevating the price still further. The practice picked up the internet “meme” label as Hertz and Kodak saw similar rises last year, according to the “Money Talks” column on the Marker website, and “AMC, Nokia, and BlackBerry (which is, yes, still in business) have also caught Redditors’ fancy” this year, along with Bed, Bath & Beyond, another Melvin target.
When to get out and claim a profit is the dicey part for the renegade traders, but it’s not hard to see that a nostalgic fondness for GameStop — a kid video gamer’s paradise for decades, complete with cheap resold products, only to be threatened with a sudden Blockbuster Video obsolescence in the streaming age — heightened the interest for the gaming kids who grew up to be day traders. According to The New York Times: “Its stock is up 1,600 percent so far this month, including Wednesday’s climb of 120 percent. AMC Entertainment was up 225 percent on Wednesday, and BlackBerry is up more than 250 percent this month.”
Make no mistake, though: there’s also a gleefully barbarian, anti-establishment quality to it all. Many Wall Street analysts defend hedge funds as a balance that sets a more accurate stock price. But as “Money Talks” pointed out, the “meme stock” phenomenon “taps into the long-standing distaste for short sellers, and gives meme-stock traders an enemy to focus on. … Anyone who is betting that stocks will go down is seen as a killjoy at best and an enemy of the state — or, in this case, of the community — at worst.”
Cut to Griffin’s Citadel Investments and Steve Cohen’s Point72 ponying up $2.75 billion to prop up Melvin Capital, all because a bunch of retail traders organized their money against rich folks’ money, and now the fun begins.
Because there is a long history of capital being very wary of working people or other non-elites having capital as well and putting it to use for their own purposes. There’s always been a suspicion amongst the capital establishment about regular people organizing their money, whether in labor (see the postwar Taft-Hartley Act limiting the fiscal power of unions) or in retail (the fearful dread of product boycotts or simple fickle fads). When plain folks have money and begin to use it to flex their power, rich folks get nervous.
Rich and powerful business interests don’t like government regulation, except when it’s government regulation to assure their profits and squeeze out interlopers. On that note, the Times reported that “Jen Psaki, the White House press secretary, said Wednesday that the Biden administration’s economic team is ‘monitoring the situation’ surrounding the volatile trading in some stocks.”
So that’s what we’re likely to see here, but the hypocrisy doesn’t end there. Griffin, you’ll recall, took a $200 million federal government bailout to prop up Citadel in the Great Recession a dozen years ago. True, if Citadel had gone under it could have had a global impact, thus justifying the bailout. But how does Griffin repay the public that was there for him when he needed it? He spends $48 million to defeat the Fair Tax Amendment last November, with its progressive income tax raising rates only on the top 3 percent of taxpayers. And then he turns around to prop up a fellow hedge fund with $2 billion, as Crain’s and Bloomberg reported Thursday, with Cohen chipping in the other $750 million after already investing $1 billion in Melvin.
Bruce Rauner made money in hedge funds, and it’s worth noting that Illinois Policy Institute head John Tillman and the Warlander Asset Management hedge fund were basically betting on state finances to fail and collapse when they filed what even then was called a “garbage” suit against a bond deal bolstering state finances a year and a half ago.
When you allow people like Griffin and Rauner and Tillman to bet and gamble against people’s lives and livelihoods, so that they can get filthy rich, but then they look to government for a bailout in times of urgent need, while resisting any call for them to pay more taxes in return and even attempting to bankrupt the state, well, that needs to be called out, the hypocrisy needs to be called out.
This is the planned economy they asked for, and that they rigged in many ways to assure their own profits, so deal with it. On this one, we’re with the financial barbarians and the grown-up GameStop fanboys out to save — however briefly — their beloved childhood franchise, and if they ruffle the feathered beds of the well-to-do along the way, so much the better.
One more thing, though: U.S. Sens. Tammy Duckworth and Dick Durbin and the other members of the Illinois congressional delegation should turn a jaundiced eye on any new pandemic relief package that includes any sort of bailout or relief for hedge funds. Let’s give money to the people who need it before we once again reward billionaires who find themselves in a jam of their own devising.