“Fair share is a bullsh*t concept!”, ranted furious American billionaire and hedge fund CEO Leon Cooperman on a recent broadcast of CNBC. It comes after thousands of users from the social media site Reddit invested in stocks of the American video game retail giant GameStop and sent shares in the company skyrocketing, driving out large hedge fund firms and costing them billions of dollars. So why was Leon Cooperman furious? What is going on?
For Leon Cooperman, it seems that the idea of amateur investors from Reddit – who are supposedly “sitting at home, getting their checks from the government… [and] attacking wealthy people” – financially outsmarting Wall Street hedge funds in the same game that they have been playing for years is infuriating. Hedge funds such as Melvin Capital see that companies like GameStop go down the drain; the share price of GameStop fell from $15 in 2019 to under $5 in 2020. They’ve had to close 450 stores due to the Coronavirus pandemic and they’re ranked as one of the worst companies to work for in America. It is a failing company. So, what do investors do? They bet against GameStop in the hopes that their share price will fall even further. How do they do it? They borrow shares at whatever their current price is, immediately sell them, wait for the price of those same shares to go down, and then buy them back once again, pocketing the difference between when they first borrowed them and when they bought them again at a lower price. This is essentially what short selling is.
But when Reddit users noticed that Melvin Capital had placed aggressive short selling bets on GameStop stock, they took the opportunity to inflict huge financial damage on the very hedge funds that have been profiting from shorting company stocks for years. Cooperman’s TV meltdown is understandable; thousands of amateur investors from the internet were able to increase GameStop’s share price by a whopping 359%. Short selling is a high risk, high reward strategy and when the price of shares goes up instead of down for the Wall Street hedge funds betting, the music stops. The amount of money they risk losing from trying to buy back those shares is absolutely enormous – so much so that Melvin Capital was forced to close their trading position and receive a $3bn cash injection from other large hedge funds (like Point72 and Citadel) to avoid bankruptcy.
The price of GameStop’s shares went from less than $5 in December 2020 to $347 as of January 28th, 2021. However, this keeps changing as the Reddit-Wall Street war grows more volatile. The ever-growing chaos has ironically sparked calls for regulation by Wall Street themselves, since regular people are influencing the stock market and making money instead of rich hedge funds. Robinhood, the free stock trading app used by many members of the Reddit army, restricted trading, triggering anger from users who accused the platform of siding with Wall Street. The White House has taken notice of the situation and financial regulators across the world are discouraging people from engaging in turbulent stock trading. Elon Musk, however, seems to have spurred on additional Reddit users in his inspirational tweet: “Gamestonk!!”, which increased share prices by another 157%.
So, what’s next for Redditors? As GameStop stock prices have surged over the past week, selling their investments now while there’s still time will enable them to exit with a decent amount of cash. If they don’t sell, they run the risk of losing everything because GameStop is currently a bubble. Its share price is increasing, but the actual value of the company has stayed the same. Wall Street has been bailed out by the US government before, most recently during the 2008 financial crisis and the COVID-19 pandemic in 2020. What should be recognised is that Wall Street will be bailed out again if needed but the average person, the Reddit user who invested in GameStop stocks, will not be saved when the bubble bursts. They are on their own – but one thing we have learned from all this is that billionaires like Leon Cooperman are scared of regular people influencing financial markets and making money.