So you want to know what’s going on with GameStop. Like 2015 The big short shows us that there is a reason why scanning a few headlines doesn’t make the situation clear to you: “Wall Street likes to use confusing terms to make you believe that only they can do what they do,” it says in a voice over on that drama of the 2008 financial crisis. But this week, Reddit Thread r / WallStreetBets proved that wrong when they made en masse decisions to buy a bunch of steadily declining stocks like GameStop and AMC (others were Nokia, Naked Brand Corp and Blackberry). With this surge in demand, share prices rose overnight – and short sales by hedge funds and investors fell sharply. Have I lost you again? Don’t worry, this is where Margot Robbie’s bathtub scene comes in.
While Robbie technically explains the seedy behavior that led to the 2008 financial crisis, her description explains what short selling means and why it happens, as an explanation of who lost money, as well as GameStop’s stock prices rose. In the film, she describes former hedge fund manager Michael Burry’s strategy of shorting the real estate market, just as hedge funds planned today to do GameStop stocks and other short sales.
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“Mortgage bonds have been amazingly profitable for the big banks. They made billions and billions, ”says Robbie. “But then they ran out of mortgages to take them out … so the banks started filling those bonds with increasingly risky mortgages.”
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“Our friend Michael Burry found out that those mortgage bonds that were supposedly 65% AAA were actually mostly full of shit,” she continues. “So now he’s going to be short selling the bonds, which means betting against it.”
In other words, if you suspect that something is going to go down in value, you can make money by getting this bet right. Here’s how it works: first, you borrow stocks while their value is high; Then wait for the price to drop and buy back the shares to return to the lender. If you borrowed and sold a stock while it was worth $ 500, and then bought it back when it was worth, say, $ 400, you would make a profit of $ 100.
With stocks like GameStop and AMC, Reddit’s WallStreetBets knew that both companies had steadily depreciated during the pandemic and were unlikely to rise again anytime soon – making them a perfect target for short sellers. So they decided to bet against Big investor bets against GameStop have done well. Individual investors have made tremendous returns, while hedge fund short sellers have lost up to $ 5 billion per game Markets Insider.
Short sellers lose money because they have yet to buy back GameStop, AMC, and other stocks in order to return what they borrowed, and at the prices these stocks have risen to, they will buy them back at a huge loss. This is the result Redditors had hoped for, beyond their own profit – but a shocking move by trading on the Robinhood app and similar platforms has slowed their momentum.
As of Jan. 28, Robinhood has been banning users from buying more shares in GameStop, AMC, Nokia and others that have soared due to talks on r / WallStreetBets. It didn’t take long to find out that Citadel, a hedge fund that could lose billions by shorting GameStop, was a key customer of Robinhood – and apparently the only one they wanted to protect.
A class action lawsuit has already been filed in New York against Robinhood accusing them of manipulating the market by preventing investors from joining the upswing. Politicians as diverse as Alexandria Ocasio Cortez and Ted Cruz have agreed on the app and others who followed suit, essentially banning regular citizens from engaging in a practice Wall Street traders have long enjoyed. Robinhood has sold itself off as a platform for democratizing the stock market from day one, and the obvious closing down of any way for its users to make a profit while protecting the interests of a hedge fund was a ridiculous step away from mission.
As soon as this became a story of individuals triumphing over a system that had long excluded them, it became again a story of how Wall Street will protect their own wealth at all costs. Watch again The big short You will keep getting mad about what happened in 2008. But if outrage is what you’re looking for, Robinhood and similar apps deserve a lot of it right now.
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