The Daily - The GameStop Rebellion

Episode Date: February 1, 2021

This episode contains strong language.GameStop can feel like a retailer from a bygone era. But last week, it was dragged back into the zeitgeist when it became the center of an online war between members of an irreverent Reddit subforum and hedge funds — one that left Wall Street billions of dollars out of pocket.Today, we look at how and why the GameStop surge happened, as well as how it can be viewed as the story of our time.Guests: Taylor Lorenz, a technology reporter covering internet culture for The New York Times; and Andrew Ross Sorkin, a financial columnist for The Times. For an exclusive look at how the biggest stories on our show come together, subscribe to our newsletter. You can read the latest edition here.Background reading: GameStop shares have soared 1,700 percent as millions of small investors, egged on by social media, employ a classic Wall Street tactic to put the squeeze on Wall Street.A legion of young people — primarily male — have been pouring into digital trading floors for years, raised on social media and eager to teach themselves about stocks. These are the misfits shaking up Wall Street.It has been a weird time in the stock market, where a video game retailer has suddenly become the center of attention. Here are four things you need to know about the GameStop insanity. For more information on today’s episode, visit nytimes.com/thedaily 

From The New York Times, I'm Michael Barbaro. This is The Daily. What started as a story about Reddit versus Wall Street, the little guy versus the man, has revealed itself to be something larger, a kind of story of our time. A kind of story of our time. Today, my colleagues, technology reporter Taylor Lorenz and business columnist Andrew Ross Sorkin, sort through the meaning of GameStop. It's Monday, February 1st. So Taylor, I want to start where this story starts, which is far from Wall Street.

You write about internet culture for The Times. Tell us what you were observing in the weeks leading up to this becoming a huge national story. I spend a lot of time on Reddit, which is basically full of all of these little sub forums called subreddits. And there's one in particular called WallStreetBets that has a pretty notorious culture on Reddit. It's full of these essentially day traders, people that trade small amounts of stocks, big amounts of stocks. It's full of these essentially day traders, people that trade small amounts of stocks, big amounts of stocks. They're kind of individual traders that don't work for hedge funds or anything. It's mostly young men, a lot of people in their teens or 20s. It's very irreverent and it has its own language. They post kind of nonstop memes and jokes. They call winnings or gains tendies. It's a playoff tender, you know, like sort of

tender money. They called it chicken tenders and now tendies. So it's very customary, you know, when you have big gains on a stock to celebrate with a plate of fried chicken tendies. So it's kind of self-consciously poking fun at the normal world of stock trading. Yeah. It's like if the normal world of stock trading took a bunch of shrooms and started live streaming itself. So Wall Street Bets is kind of this place where the incentives of stock trading and incentives of the internet overlap and meet. It's not just about trading a stock and making money. It's also about maybe having a viral moment

or launching an online campaign or shaping culture somehow with your trades. And much the way that memes go viral overnight and are suddenly popular and everyone uses them for a while and then they kind of become passe, This community treats stocks like that almost. They're kind of hyping things up, they'll go really viral, it'll become funny or it'll become a meme and everyone will talk about it for a while and then they kind of fade away. And Taylor, how exactly are all these people,

including teenagers, affording this stock? How is that working? So Robinhood is key to all of this. Robinhood is a stock investing app. It basically makes it really easy for people with very small amounts of money to buy tiny pieces of shares of stock in a company. Fractions of shares. Exactly. Robinhood's whole goal is to democratize investing. So, you know, say I get 20 bucks from my lawn mowing job. I can put that into a Robinhood account and start investing tomorrow. It's really easy to sign up. You have to be 18,

but a lot of kids sign up under their parents' information and they start trading small amounts of money. And also with the pandemic, people have gotten really into this. A lot of people that used to bet on sports or used to spend their time, kind of maybe their leisure money elsewhere are kind of trapped at home. And Robinhood is almost gamified investing. It's allowed people to just kind of play around with the stock market, maybe throw 20 bucks in, see where it goes, almost as a pastime. So over the past few weeks, as I've been spending more and more time in this community, I noticed that there was one stock in particular that had really emerged. And it seemed

like at one point, every other post on the subreddit was about GameStop or GME, which is the stock ticker. Cheers, welcome, happy Friday. I hope y'all had a nice ass week. So there had been this one Reddit user called Deep F-ing Value who had been posting about GameStop nonstop. GameStop is one of the most compelling asymmetric opportunities in the market today. Really, I don't understand how you could disagree with that. Still in 2020, GameStop maintains a healthy market share within the gaming industry. GameStop's modernizing stores, partnering with vendors, and offering experiential products. This is the potential upside, and it's enormous. This guy, you know, he really believed in this company. If they succeed in carving out a sustainable niche, well, shit, that's the type of asymmetric upside I'm looking for.

And that makes for a tremendous investment opportunity. And I think more and more people in the subreddit sort of started to see that he might have a point about this company. They sort of started to give it a chance. And at one point, I see this post that says, hello, my favorite paste eating rocket posting children. In a few hours, the market opens and the floodgates will begin. I'm all for GME. Then he goes on to say, you can control the power. GME is not going to the moon, but to the edge of the effing observable universe. And then he puts 10 rocket emojis, which in Wall Street best lingo is like, this stock is going to go up and up and up.

You better get on board now. Right. You pay seating, rocket posting children. So why GameStop? GameStop is one of these retailers from almost a bygone era when, you know, malls were king. In the 90s and the 2000s, you could walk into a GameStop and actually purchase physical video games. It was almost like a blockbuster. And so it has this nostalgic place in a lot of people's hearts. Now, there were legitimate reasons to think that it was being undervalued. The company had, it sort of had made a case that it could pivot to an e-commerce retailer. A former executive at

Chewy.com, which is a pet online retailer, had come in and was hoping to turn the company around. He had bought a bunch of stock in it himself. That was kind of the kernel that these people initially clung to. And it was like, maybe this company is being undervalued, but also maybe we don't want to lose it. You know, maybe we're not ready to let go of GameStop yet. But as the Redditors are kind of rallying around this stock and getting excited about GameStop, a bunch of large hedge funds felt the opposite. They had actually shorted the stock. Explain that.

Shorting a stock is betting against it. It's basically saying, hey, you know, the stock is valued at $10. I think it should be valued at $5. And I'm going to essentially stake my financial position on it going down. Right. And profit if it does, in fact, go down. Exactly. Profit off of it going down.

So say you think it'll arrive at $5. It's currently valued at $10. If it does eventually land on $5, you've made $5 cash. Right. Now, if the stock goes up, you lose money. You know, say the stock ends up going to $20, suddenly, you know, you're in the hole. Right. So Redditors discovered that a bunch of big hedge funds were bidding against GameStop. And so it kind of galvanized everyone, you know, whereas before it was like, hey, look, we want to invest in this nostalgia store. We really think that it's undervalued.

The conversation kind of changed to let's stick it to these hedge funds. You know, let's show them that they don't allocate value, that they can't say what a company is worth. We, the people, can say what the company is worth. So framed this way by this online community, what ends up happening? So this sparks this online war where this community on the internet is basically trying to get the stock as high as it can go and also is kind of gamifying it. Everyone is intrigued to see how high can this stock really go? And conversely, how badly can we screw these hedge funds over?

So three weeks ago, the price of GameStop's stock was under $20. And as this campaign online kind of started to get going, it started to rise. So first, by January 15th, it was $35. About a week later, on January 20th, it had risen to almost $40. And then on Monday, the stock had hit about $70. And on Tuesday, it was $80. I remember reading posts online where people were like, talking about buying at $80, but then being like, I don't know. I don't know, man. I don't know if it can go any higher. And then people being like,

let's get it to 100. I think it can go to 100. Wednesday is when things went bananas. Overnight, the stock price had gone up to $342. Unbelievable. Keep in mind, that's per share. You know, three weeks ago, the stock was less than $20. Now it's worth almost $350. So that's kind of when the whole internet broke. The people that had the stock were like throwing it in everyone's face,

just talking about how much money they made. People were posting screenshots. In some cases, showing that they had made millions of dollars. And just when you think it can't get any higher, it goes up to $469. Right. I mean, just to put that into perspective, I used to be a business reporter. Share price swings like that do not happen on Wall Street. I mean, you could spend 50 years waiting for a stock to go from $20 to $50, let alone $20 to $400. So this was like a nuclear bomb in the world of finance. Yeah, and it was crazy because all of these people,

they saw so much money come at them so fast. And as the stock is peaking, all of these people are hopping into online chat rooms. They're on the subreddit, and they're in this app called Discord, which is basically a chat app. They're screaming, don't sell now. People are spamming the chat with like, you know, these long emoji laden posts just saying, do not sell, hold the line.

There's this one post that was, you know, a person basically bragging about buying in at the highest price and people below them also buying in. It was like, you know, I'm buying in at $350 and I'm holding the line. And then people would be like, $360 reporting in here, then $380, you know, almost celebrating how much they were paying for this stock, which is kind of unheard of. You usually celebrate getting in early. You don't brag about buying high. Yeah, but in this case, it was sort of like everyone wanted to be part of this. I'm mindful that a big motivating factor here, Taylor,

was proving Wall Street wrong when it comes to GameStop. And as this stock price is surging and surging and surging and going places no stock ever goes, it sounds like that plan worked. Yeah, it did. I mean, people were celebrating. People were kind of dancing on Wall Street's grave. They were saying that this is the beginning of a revolution

and this is going to change things forever, and finally the people are getting the recognition they deserve. You know, Wall Street traditionally considered day traders, quote unquote, dumb money. You know, people that they're not super informed investors. They're not, you know, people that make millions of dollars a year on Wall Street. And so I think finally they felt a little taste of victory. The message was we determined the value. You know, not you guys in suits with your business school degrees. It's the people.

And if enough people on the Internet get together and collectively agree that something is worth a billion dollars, you know, who's to say that it's not? Or in this case, almost $30 billion. Yeah, or in this case, almost $30 billion. Yeah, or in this case, almost $30 billion. Thank you, Taylor. We appreciate it. Thanks for having me. So, Andrew, the people are crushing the establishment. It must be time to change the rules, right? Well, you know, that's what some people would say.

And some people look at this as a stick-it-to-the-man opportunity. And they say that the system has been rigged all along. This is a company now, GameStop, that is, that has a market cap of something on the order of $24 billion. You could buy Delta Airlines or you could buy GameStop. I think there's a lot of people that are being drawn in by the likes of Elon Musk and others who think that they're sticking it to the man. But the question is whether they're ultimately going to be sticking it to themselves. After the break, Andrew Ross Sorkin on how changing the rules of the stock market may have unforeseen consequences. We'll be right back. Andrew, I want to pick up where we left off with our colleague Taylor Lorenz, which is this moment of comeuppance for Wall Street.

These regular investors are celebrating having proven Wall Street, these hedge fund managers, these fancy bankers, all of them wrong. And you are someone who has reported on Wall Street for years. You co-host a CNBC show about Wall Street. You know the players in that world really well. So how did it look to the folks in that world of finance as shares of GameStop are surging to these wild levels? Total freakout. Total shock. Total confusion. Total consternation.

A sense of what is happening here. This is Alice in Wonderland. Everything has just been turned upside down. To them, this was a system upended. This was not supposed to happen in their minds. Because to Wall Street, things are supposed to be tied to revenues and profits and fundamentals. Here, all of a sudden, was a stock that was almost divorced from any of those things, and purposely so. These were investors who were publicly saying they weren't investing based on those things, that this isn't an investment about making a profit in that way. This is about making a profit to demonstrate that they can manipulate the system as well, if not better, than the professionals. Right. What turned out to be the actual consequences of all this on Wall Street, besides confusion and frustration, toward the end of last week?

Well, in very real terms, some of these hedge funds were losing billions of dollars with a B. The Reddit traders won, and Wall Street was losing and losing billions of dollars, real dollars. In one case, Melvin Capital, which had been one of the more prominent firms out there that had shorted or bet against GameStop, literally was on the verge of bankruptcy, lost over $3 billion, and needed to be bailed out by other hedge funds. All of this is completely jarring to Wall Street, to policymakers. Debates are breaking out everywhere about what should happen here. Should regulators step in? Should the stock exchanges step in? Should something happen when you see what is clearly manipulation of some sort? What's supposed to happen here? sort, what's supposed to happen here? Right. Because theoretically, now that this has been proven to be something that small investors mobilized online are capable of, what's to stop it from happening again and again and again? Theoretically, if tens of thousands of hundreds of thousands of people are willing to put up $25, $50 to effectively go after and push up the stock of a company. They could.

They really could. And that is something that I don't think was ever on anybody's radar screen. And as all this is swirling, Robinhood, which is the platform of choice for so many of the traders who were buying GameStop shares literally suddenly stops letting people buy GameStop on it. And Andrew, what was the understanding of what motivated that decision? Because right away, there was a lot of outcry

over Robinhood making that decision. And to many, of course, it seemed like Wall Street was striking back, protecting itself at the expense of the small investor. I mean, the outrage was everywhere because nobody really knew what the rationale was. People thought the regulators must have secretly called and told them they had to shut this down. They thought maybe hedge funds were telling Robinhood to shut this down. There were all sorts of conspiracies

and allegations made about what Robinhood, which is entire brand, is about helping the little guy, had all of a sudden done. And it looked like they were helping the big guy. And what turns out to be the truth behind that decision? I want to bring in the CEO of Robinhood. Vlad Atenev is with us right now.

So that night, I ended up interviewing the CEO of Robinhood on exactly that. First of all, I want to address some of the misinformation that's been out there because there's a lot of it. We absolutely did not do this at the direction of any market maker or hedge fund. The truth is it was complicated, but so much more complicated than the speculation, and in many cases worse than the speculation, because the true answer was that Robinhood itself was worried that it was on the verge of collapse. that Robinhood itself was worried that it was on the verge of collapse.

The reason we did it was because Robinhood is a brokerage firm. We have lots of financial requirements, including SEC net capital requirements. It had turned out that Robinhood was running out of money to continue making these trades. Every time somebody makes a trade on Robinhood, the firm has to put up money. And because there was such a velocity of trading taking place on this small group of stocks, they literally couldn't keep funding it. It sounds to me, though, that you're suggesting that there was a liquidity problem inside the firm. And my question about that then raises all sorts of new questions about whether there's a systemic issue underneath the system and underneath the company unto itself.

You know, I pushed him really hard on whether this was a genuine liquidity crisis. No, no, there was no liquidity problem. And to be clear, this was done preemptively. So we did this proactively. He did not want to use those words. It was clear he couldn't bring himself to say the words liquidity crisis. But if you read between the lines, it was very clear that the company was truly on the precipice. Right. It was worried about running out of money. Exactly. Okay. So this is all wreaking a certain amount of havoc on Wall Street, on hedge funds, on trading platforms. But Andrew, wasn't that the point? To make a bunch of

well-off financial types shake in their boots and to show them that there is a new power dynamic. And I'm sure you saw this too over the past week or so, that a fair number of regular investors ended up making a lot of money off this. I mean, in one case, the Times wrote about this, a teenager whose mom bought him GameStop shares as a gift and $60 turned into $3,000. And it was hard not to cheer for that. Totally. It has been unbelievable to watch the little guy beat the big guy at their own game. No question. But it also assumes that the game is over.

And what has a lot of people fearful is that the game is far from over and that some of these individual investors, especially those who bought into the stock recently at $300, for example, stand to lose a lot of money if, in fact, it drops back down to $30 because of this manipulation, and whether the professionals who, by the way, are also now in this stock, too, trying to ride this in all sorts of directions may ultimately take advantage of them and win. Remember, there are a number of investors here who have borrowed money to invest. Some of them have used their rent money and levered that up or their stimulus check. And since the price of this stock is arguably not sustainable, and we'll see when it falls,

that's money lost. Well, forgive this question, but what if they all just get out of this stock right now? Everyone just sells GameStop at once and everybody does well by it. That's not really how it works. It's going to happen over some period of time. Maybe it's one day, maybe it's a couple of hours. But as the stock falls, individual investors, hedge funds, whoever's in it, are going to lose if they bought at a higher price. There's no way for everybody to get out at the same time. It just doesn't work like that. Right. Andrew, you have come under a fair bit of heat in recent days from the Reddit crowd, the folks from WallStreetBets, for comments that you have made about this not being a simple

good news story or a clear victory for smaller investors. Is that what you're talking about, that people are underestimating the risk that this GameStop run-up poses to small investors, the supposed winner in this story? Look, we've seen other examples of manipulated schemes like this over the years, just never at this scale. And they historically have ended badly for the individual investor. The professional investor has almost always come in and effectively, in a predatory way, been able to succeed where the individual investor has not. Professional investors have better access to information. They have better access to data. Some of these big hedge funds are seeing the actual flows of trading. These are things the individual investor typically does not have. how to pull this off. There is a whole number of people who effectively were induced into this, hoping to make a profit, who may not have the same background that they do.

You know, I'm not the only one who has expressed anxiety about this. People like Senator Elizabeth Warren, an icon of populism on the left. She's been a champion of the American consumer. On Friday, she came out and she said, wait a minute, hold on. She doesn't like this either. And she wrote a letter to regulators where she spoke of what you call the, quote, flash mob of money. And she went on to write, I am deeply concerned that these casino-like swings in the value of GameStop and other company shares are yet another example of the gamesmanship that interferes with the fair, orderly, and efficient function of the market,

raising obvious questions about public confidence in the market and those trading in it. In other words, the champion of the little guy is not seeing this as a victory for the little guy. I imagine that she has the same concerns that I do and others do, which is that along the way, there are going to be people who are going to get hurt and lose money. I'm also mindful that a lot of this feels deeply rooted in a kind of populist sentiment, the belief that the system is broken, that Wall Street is broken and unfair, that the little guy doesn't really have a fair shot. So isn't there a case that this is what a revolution would look like? That maybe the logic you are applying to this

of what the ultimate risks might be, or that it might not be the best financial decision, people aren't foreseeing all the different downsides, that none of that really matters to people or is what it's really about? Oh, the truth is, this is not about profits and losses. This is about how rigged and unfair the stock market is, how it is not a level playing field, how much distrust exists in the American public. This even goes beyond the stock market. This is about inequality in America and the haves and the have-nots and what the opportunities are for people and what the special opportunities that have been

created for those who already are wealthy and how they have opportunities that others don't. To the degree that you believe that this truly is a genuine protest with aggrieved parties, that's what this is about. So even if this ends up hurting small investors, this protest, is it ultimately, and feel free to push back, some kind of required step in this larger quest to make an institution like Wall Street, to make a place like American Finance fairer? possibly. In fact, I hope so. I hope if anything comes out of it, it's an awakening for policymakers. It's an awakening for people on Wall Street to realize that the system isn't fair, that people don't trust it. And then when people don't trust it, that's a problem. It shouldn't be something that can be manipulated by the big guy or the little guy. And hopefully that is a lesson of this. And I don't want to say that every investor in GameStop is monolithic. There are some people who

are investing in this as a protest movement, and they don't care if they lose their money. There are other people who are investing in GameStop to make a profit. And invariably, there are also professional investors who have jumped into this in the same way, in fact, that in any good protest, they often get co-opted by looters and opportunists. And in this case, I'm sure that the looters and opportunists have also arrived. And so it's a very mixed group that's involved in this quote-unquote trade. But if there's anything beyond this trade, the trade is for trust. That's the real trade here. And it's an American story. It's an American story of distrust that we're all struggling with in so many parts of society.

Right. It sounds very much like the story of 2021. Absolutely. Andrew, thank you very much. We appreciate it. Thank you, Michael. As of this morning, shares of GameStop are valued at $325, a 1,700% increase from one month ago, but down from a high of $483 last week. Meanwhile, Robinhood has ended its ban on purchasing shares of the company. It will now allow users to buy limited quantities of the stock.

We'll be right back. Here's what else you need to know today. Five of the lawyers who plan to represent former President Trump during next week's Senate impeachment trial have left his legal team. The departures appear to revolve around disputes over his strategy for defending himself against the charge of inciting violence at the Capitol. The Times reports that Trump had urged the lawyers to focus on the false claim that the election had been stolen from him. And...

For the second weekend in a row, thousands of supporters of Alexei Navalny took to the streets of Russia to protest his detention in the latest show of disapproval for the country's president, Vladimir Putin. In response, Russia's government unleashed a wide-ranging crackdown, including mass arrests,

the closure of transportation systems, and brutal confrontations with demonstrators. of transportation systems, and brutal confrontations with demonstrators. Today's episode was produced by Stella Tan, Jessica Chung, Alexander Li-Yang, and Aastha Chaturvedi, with help from Diana Nguyen. It was edited by Dave Shaw and Lisa Tobin, and engineered by Chris Wood. Satoban and engineered by Chris Wood. That's it for The Daily. I'm Michael Bilbaro. See you tomorrow.