The GameStop Rebels vs. “Too Big to Fail”, by Ryan McMaken

Will the nefarious “Too Big to Fail” policy that destroyed public confidence in financial markets during the collapse of 2008-2009 become “Too Big to be Hung Out to Dry by Small Traders Making Political Statements”? Probably. From Ryan McMaken at mises.org:

Last week, a large number of small-time investors drove up the price of GameStop’s (GME) stock a historic 1,784 percent. But this was no mere spike in some obscure stock. The stock’s price spiked in part as a result of efforts by “an army of smaller investors who have been rallying on Reddit and elsewhere online to support GameStop’s stock and beat back the professionals.” These professionals were hedge fund managers who had shorted GameStop’s stock. In other words, hedge funders were betting billions that GameStop’s stock would go down. But the price went up instead, meaning hedge funds like Melvin Capital (and Citron Research) took “a significant loss,” possibly totaling $70 billion.

There surely were plenty of insiders on both sides of this deal. Given the complexity of various schemes employed by seasoned investors, it seems it is very unlikely that this is just a simple matter of little Davids taking on Wall Street Goliaths. But it also looks like that’s not all that was going on. Had this only been just another scheme by some Wall Street insiders against some other Wall Street insiders the story would probably have ended there.

But that’s not what happened. Rather, it appears that, for many of the smaller investors who were involved, much of this “short squeeze” was conducted for the purposes of throwing a monkey wrench in the plans of Wall Street hedge funds which exist within the rarified world of billionaires and their friends.

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