When internet-culture reporter Taylor Lorenz writes a story about a short squeeze that appears above the fold on the front page of The New York Times, it’s time to pause and ask: Just what the hell is going on here? How did a tale about GameStop, a struggling retailer of gaming software, become the biggest financial story in the world? It got so, shall we say, out of control, that Chris Hayes, the MSNBC anchor, did a five-minute segment at the end of his show Wednesday night on the GameStop phenomenon, a riff that so enthralled the incomparable Rachel Maddow that instead of the usual handoff—“Thank you, my friend”—she couldn’t resist telling Hayes that if he were to write a book about the GameStop saga, she would love nothing more than to have him on her show for an extensive segment in order to make that book a best seller.
You may ask yourself: How did we get here?
What we have here—or had (the GameStop stock plunged today)—is little different than any of the other market manias that have captured the public’s attention over the centuries—and ended badly. In 1636 and early 1637, in Holland, there was the “mania” related to Dutch tulip bulbs, which sent their price soaring to ridiculous levels before it collapsed in February 1637. In 1720, there were bubbles in two European countries, both of which ended in financial ruin: the South Sea Bubble, in Britain, which was an ill-fated idea where the British government granted the South Sea Company exclusive trading rights with South American countries in exchange for the company refinancing Britain’s debt; and the Mississippi Bubble, in France, a strange scheme by a Scottish economist named John Law to try to compensate a frustrated French populace with shares of a company that had been created to exploit the supposed riches of the land that France owned in the Mississippi River valley, now known as Louisiana. In the end there was nothing to be found in Louisiana at that time, although there was plenty of speculation about what might have been there and whether the French government would back the investments with gold or with paper money.
The GameStop story is really just an accelerated version of these historical events. And it bears a close resemblance to the same thing that happened a few years ago when the billionaire hedge fund manager Bill Ackman decided to short the stock—betting that it would fall—of Herbalife, the publicly traded weight-loss supplement distributor. Ackman announced that he had bet around $1 billion that Herbalife would collapse because he believed it was a corrupt pyramid scheme that preyed on defenseless immigrants who didn’t know better. At first Ackman’s bet seemed to be paying off. He is a bit of a market guru, and plenty of people followed his lead. They sold their Herbalife stock, and the stock fell. It looked like Ackman had made several hundred million dollars of profit, on paper.
Then two other billionaire hedge fund managers—Carl Icahn and Dan Loeb—decided to try to have some fun, and make money, at Ackman’s expense. They decided to buy hundreds of millions of dollars of Herbalife stock to squeeze him. Because the price of a stock is, in theory, nothing more than a function of supply and demand, by buying so much Herbalife stock, Icahn and Loeb were driving its price up. Ackman’s paper gains turned into paper losses. The fundamentals of the Herbalife business almost didn’t matter anymore. All that mattered were the forces pressing down on its stock. Soon enough Loeb took his gains and exited. Icahn stuck with it—he and Ackman had a blood feud at that point, some of which played out on CNBC for all to see—and kept buying, driving the Herbalife stock further up. He was Herbalife’s biggest shareholder and ended up with five board seats. Some five years after Ackman began his short bet, he threw in the towel, perfecting a loss of nearly $1 billion. Eventually, Icahn mostly sold out of Herbalife too, with a huge gain. Icahn had taught Ackman a valuable lesson. (Ackman says now he no longer shorts individual stocks. He did short the market in early 2020 and made around $2.6 billion in profit in three weeks when it collapsed that March, before recovering.)
There are two differences between what happened with Ackman and Icahn in Herbalife and what has been happening in recent days with GameStop. First, the current mania has been unleashed in the blink of an eye. Ten days ago GameStop was trading at around $40 a share. Thursday morning it hit a high of $483, driven up by the hype. Again, this has nothing to do with the fundamentals of how GameStop is performing as a company—it is still struggling—and everything to do with the power of supply and demand. The second difference is that, apparently, the “short squeeze” put on the hedge funds that had shorted GameStop—because, like Ackman with Herbalife, they believed it had operational flaws that would drive the stock down—was organized by individual investors on Reddit looking for a way to screw the man. In the case of Herbalife, it was billionaire hedge fund manager versus billionaire hedge fund manager. With GameStop, we are led to believe it was the retail investors getting payback on the hedge-funders.
The prevailing narrative—virtuous little guys against the evil hedge funds—is a perfect coda for our times. We’ve just come off a tumultuous four-year reign of chaos, supposedly driven by a president sowing his populist oats. That was a farce, of course. We are all suffering from the PTSD of that experience, unable to process it completely. The Donald Trump fiasco is a case wherein objects in the mirror are not as close as they appear.
And now the GameStop farce appears to be over too. Today the stock is crashing. Robinhood blocked trading in GameStop stock, shutting off one avenue of investing for “the little guy.” The stock is down 64%. And it didn’t take that long either. This round trip was 10 days, and it was entirely predictable. Who lost? All those “individual” investors who bought GameStop yesterday or the day before or this morning are facing a 64% loss in hours. Melvin Capital, the hedge fund that threw in the towel on Tuesday because of the run-up, also likely lost hundreds of millions, if not billions. (Two other hedge funds, Ken Griffin’s Citadel and Steve Cohen’s Point72, injected some $3 billion of capital into Melvin to keep it from collapsing.) So that’s two losers. The winners are those early Reddit investors on the /r/WallStreetBets feed and others—some of whom were likely other institutional investors who piled on—who seem to have organized themselves to make this happen, and who have been selling as the stock has reached astronomical and unsustainable levels. DFV (for DeepFuckingValue), who is supposedly behind the Reddit action, is said to have made a $47 million profit. One Wall Street trader tells me DFV is the “KING of REDDIT.”
