Gamestop: Secretary Of Treasury Stops Her Own Game


Short selling is extremely dangerous to those who sell short. On the face of it, it should not be unlawful. However it should be open to… everybody. Other financial strategies used by financiers of the Democratic Party should definitely be unlawful: high frequency trading, especially when leading the markets. Let me explain.

In Jan. 2021, short squeezes occurred on several stocks of companies which tend to be in difficulty, typically for obsolescence, including GameStop Corp. (GME) and AMC Entertainment Holdings Inc. (AMC), but also Blackberry, Bed Bath And Beyond, etc… Following efforts by individual traders on Reddit to drive up the price of the stocks. This resulted in large price spikes as short sellers were forced to cover their short positions for substantial losses. These volatile price movements were not driven by fundamentally new factors about the companies. Investors should be particularly cautious when considering trading stocks during short squeezes: highly leveraged institutional investors maybe forced to sell to raise cash from unrelated investment, putting pressure over the entire market (as happened in the last week of January. So broker-dealers reduced the buying of the highly successful mRNA company Moderna to just one share per account. With other stock, buying was outright blocked. This is often presented by the simplistics as a conspiracy of the wealthiest to get even wealthier… But that is not the case: instead to push the price of unworthy stock to the sky is simply a mechanical, let alone financial, impossibility.

Nice “short squeeze”. Gamestop price per share went from basically zero (actually $19) to around $500 dollars and back down again, all in less than three weeks. An institutional short seller investing twenty million dollars short at say $10 would have lost one billion dollars. Citadel, which funded ex-Fed chief and now Treasury Secretary Yellen with around a million dollars last year had to lend three billion dollars to another hedge fund which was collapsing in this short squeeze. A hedge fund lost 53% of its value. For comparison the famous collapse of LTCM in 1998 put 4.7 billion dollars at risk, and cause a worldwide panic and massive Fed intervention. Here the losses were larger, and the Fed no doubt intervened on a much larger scale than it did in 1998 (in 1998, the Fed only DIRECTED a number of banks, seven of them European, to intervene). That’s what I say.

In short selling, the seller opens a position by borrowing shares, usually from a broker-dealer (who is distinct from a market maker; Robinhood is such a broker-dealer; Citadel, which gave 810,000 dollars to the ex-Fed Chief and present Treasury Secretary Janet Yellen is a market maker… and also a hedge fund). The short seller tries to make money by selling, at a lower price, those shares it borrowed from the lender.

To open a short position, a trader must have a margin account, and only high worth entities can do this, considering the dangers involved, and will pay interest on the value of the borrowed shares while the position is open. As usual, the Financial Industry Regulatory Authority, Inc. (FINRA), which enforces the rules and regulations governing registered brokers and broker-dealer firms in the United States, the New York Stock Exchange (NYSE), and the Federal Reserve have set minimum values for the amount that the margin account must maintain—known as the maintenance margin.

 If an investor’s account value falls below the maintenance margin, that’s a margin call: more funds are required, or the position might be sold by the broker.

Selling short can be costly if the seller guesses wrong about the price movement. A trader who has bought stock can only lose 100% of their outlay if the stock moves to zero. However, a trader who has shorted stock can lose much more than 100% of their original investment. Having invested $10,000 in a ten dollar per share stock which shoots up in seconds to $100, one will lose one million dollars. The risk comes because there is no ceiling for a stock’s price, it can rise to infinity.

Short selling is not necessarily toxic: it can uncover crooks, or wildly exaggerated stories, such as Nikola, an electric vehicle company which claimed to have mastered technologies it does not have (after short sellers destroyed it, serious car companies discovered they were right, and ended their collaborations with Nikola). However, telling lies and conspiring to lower a stock price, as many short sellers have done, should be, and is illegal (this is the Wolf of Wall Street story, as related in the eponymous movie).

The real problem is that not everybody, but only a fraction of the top 1% can invest in hedge funds: that’s sheer inequity and inequality.

Reforming the financial market should aim at more equality and equity, and thus, to enact them, more transparency.

In particular high frequency trading, especially in connection with leading the market, should be made unlawful. However entities which became immensely wealthy and powerful so doing are the greatest donors to President Biden.
https://patriceayme.wordpress.com/2021/01/31/hedge-funds-and-financial-bandits-financed-biden-the-list/

I am advocating to open participation in hedge fund and short selling to all citizens… In the name of LEF, LIBERTY EQUALITY FRATERNITY… And that can already be done through some types of (new) ETF… However that does not mean that hedge funds that can collapse because of imprudent positions should be tolerated by the financial authorities: they should not. Nor that does it mean that I will do more short selling myself: my life is already dangerous and complicated enough…

Patrice Ayme

***

P/S: 1) Treasury Secretary Janet Yellen got all the regulators together today February 4, 2021, to look at what happened. As she got epically financed by the Gamestop market maker Citadel, which lent three billion dollars to another Hedge Fund, Malvin, she recused herself. This amply demonstrates how the elite operates, and how elitist the Biden elite is, and also how much a supposed leftist as Yellen is well fed by the financial industry… How do all the ‘progressives’ feel?

2) So let me repeat slowly: regulators and legislators should focus not on outlawing short selling, but on technical fixes such as quicker reaction when a vicious short squeeze surfaces. HOWEVER, high frequency trading and leading the market (as Renaissance technologies, a major “Democratic” donor, does, should be made unlawful, ASAP)

I have long suggested this. Here it is:

REFORMING WORLD FINANCE.

MAKING WORLD FINANCE SANE, EFFICIENT, AND DEMOCRATIC.
November 28, 2008.
***

The new US government of Barack Obama should push to reform the world financial system. Clearly the old order was not just unsatisfactory, but it outright collapsed. It has also collapsed in a highly unfair way, with some of the richest even profiting from the crash. If the old system is not reformed now, it never will be, because the need to do so will never be as strong

http://patriceayme.com/ltr_039-reform.html

Of course, Oblahblah did nothing much, as usual… Will Biden and Yellen do better? Right, Obama was ignorant, so he is excused that way. He did what he was told by his superiors, so he is inexcusable that other way. But Yellen and Biden are very old hands, they are not ignorant of the financial system… So they may well reform it along the lines I suggest (I am not ignorant either, at least in this domain, nota bene…)

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2 Responses to “Gamestop: Secretary Of Treasury Stops Her Own Game”

  1. ianmillerblog Says:

    A good explanation (Better than mine.) As you say, the problem is not the betting, but the power brokers who like to feed at the trough but like to be exclusive and adjust things so they maximise their chances of avoiding losses.

    Liked by 1 person

    • Patrice Ayme Says:

      Thanks Ian, you have very generous.
      But of course, I cheated… As have practiced shorting… For the first time… decades ago… There are safer ways to get leverage…
      In that GameStop, Robinhood debacle it is NOT clear that the law has NOT been violated.
      I consider that getting huge money from Citadel, as Yellen did, is immoral, and should be illegal.
      But then it’s the entire Biden administration which is feeding at the through of inequality.
      Now where I live (Silicon Valley), if you say that, they hate you… I mean even those who have no money hate you… It is a real weird study in sadomasochism…

      Like

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