On The Money: Five questions about the GameStop controversy | Biden, Yellen call for swift action on new aid

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THE BIG DEAL—Five questions surrounding the GameStop controversy:

The rapid, Reddit-fueled rise of stocks like GameStop, AMC Entertainment and others have dominated the financial world, raising myriad questions about who will benefit, who gets harmed and how it all happened to start.

Here are five questions lingering over the mind-bending week on Wall Street:

How did we get here?

The sharp rise in shares of GameStop and other struggling companies is the latest iteration of a short squeeze — a tactic used by investors to force short sellers of a certain stock into a cycle of deep losses by driving the price of that stock higher.

As more investors buy the shorted stock for higher prices during the “squeeze,” those who bet against the stock are also forced to buy shares to fulfill their bets — putting more upward pressure on the share price.

GameStop is not the first stock to be short-squeezed. But the intensity of GameStop’s run and the similar rise of other heavily shorted stocks is largely due to a pandemic-driven surge of stock market activity and the increasingly viral nature of stock market moves.

“Fads and short squeezes aren’t going away. It’s human nature to follow the crowd, especially when it looks like the crowd is right. When you’re stuck at home with nothing to do, stock speculation may be extra enticing,” wrote Lindsey Bell, chief investment strategist for Ally Invest, in a Friday research note.

Who are the big players?

It’s hard to know who exactly is behind every purchase and sale of GameStop stock, or who is profiting the most from the volatility. But a few major companies and communities have emerged as the center of gravity—for better or worse. 

• r/WallStreetBets: A Reddit subforum that engineered the short-squeeze on GameStop, targeted other highly shorted stocks, and has rapidly grown throughout the week.

• Melvin Capital: A hedge fund that invested heavily in shorting GameStop, drawing the attention and ire of WallStreetBets.

• Robinhood: An online trading platform intensely popular among WallStreetBets users—until they blocked the purchase of GameStop and 12 other highly volatile stocks Thursday, drawing bipartisan outrage and at least one lawsuit.

• Citadel Securities: A prominent company that buys and sells stocks to brokers and facilitates transactions. It’s one of several market makers that pays Robinhood millions to process trades placed by users, but has become the subject of conspiracy theories because of its loose connection between Citadel, LLC, a hedge fund that bailed out Melvin Capital when it lost billions on shorting GameStop.

What will lawmakers do?

The House and Senate committees that oversee the financial sector will hold hearings on the state of the stock market, giving lawmakers a chance to vent their anger and play up their anti-Wall Street credentials to constituents. But it’s hard to see viable path to bipartisan legislation that will make an impact.

• Progressive Democrats like Sens. Elizabeth Warren (Mass.) and Sherrod Brown (Ohio) have called on the Securities and Exchange Commission (SEC) to write clearer, tougher rules to prevent market manipulation by amateurs and professionals alike.
• But Republicans such as Rep. Patrick McHenry (N.C.) have warned against regulators preventing Americans from making their financial own decisions—however risky—as long as they’re legal.

“These are people that are making decisions with their own money, and as a government official I shouldn’t be telling them how to do that,” McHenry said during a CNBC interview.

How will regulators respond?

The SEC said earlier Friday that it will investigate why certain online trading platforms blocked users from purchasing highly volatile stocks and if illegal market manipulation spurred the recent surge. 

“The SEC may view what is happening as a new breed of market manipulation, but it is unclear whether they will be able to make out a case,” said Philip Moustakis, counsel at Seward & Kissel LLP and former senior counsel in the SEC’s enforcement division.

“This feels more like a collective mania: In the joy of gambling, in the joy of ‘owning’ the hedge funds who shorted the stocks.”

Where does this end?

No one can say for sure, but history shows that short squeezes can lead to insane profits for those who time it correctly — and deep losses for those who jumped in too late.

“It’s tough to sort through what’s legitimate and what’s not, and many fad stocks’ stories can end poorly,” Bell wrote. “Gains are rarely this easy though.”

LEADING THE DAY

Biden, Yellen call for swift action on coronavirus relief package: President Biden on Friday pushed Congress to act urgently on his proposed economic relief package as the White House scraps to garner bipartisan support.

“The choice couldn’t be clearer. We have learned from past crises that the risk is not doing too much. The risk is not doing enough. And this is a time to act now,” Biden said during a meeting with top economic advisers in the Oval Office.

• Biden cited studies that show inaction could lead to massive long-term job losses and further delay the economy from getting back on track amid the coronavirus pandemic.
• Treasury Secretary Janet Yellen, who joined Biden for the meeting, pointed to data released a day earlier that showed 847,000 Americans filed for unemployment claims as the economic recovery lags and the pandemic worsens.

“The president is absolutely right. The price of doing nothing is much higher than the price of doing something, and doing something big,” Yellen said. “We need to act now, and the benefits of acting now and acting big will far outweigh the costs in the long run.”

The Hill’s Brett Samuels has more here.

Judge orders tax lawyers to hand over Trump organization docs to NY AG: A judge in New York on Friday ordered a law firm serving as counsel to the Trump Organization to turn over documents related to the former president’s business to the state’s attorney general.

New York State Supreme Court Judge Arthur Engoron said in an order that he had completed a review of documents from the firm Morgan, Lewis & Bockius and determined that at least some of them were not privileged and should be handed over to the attorney general’s office, which had subpoenaed the firm and the Trump Organization.

• New York Attorney General Letitia James (D) is investigating whether former President Trump’s company had falsified the value of certain assets in order to secure loans, tax breaks and investors.
• James’s office is seeking documents related to the firm’s work on Trump Organization properties, including the Seven Springs Estate in Westchester County, N.Y.
• Prosecutors have said in court documents that they are looking into whether the Trump Organization may have inflated the value of Seven Springs in order to gain a $21.1 million tax deduction in 2015.

The Hill’s Harper Neidig explains here.

GOOD TO KNOW

• Consumer spending in December dropped 0.2 percent, the second monthly decline in two months and a sign the economic recovery is slowing amid rising coronavirus cases over the fall and winter.
• Lawmakers in the House and Senate from high-tax, Democratic-leaning states introduced legislation on Thursday to repeal a provision in former President Trump’s 2017 tax cut law that limits the state and local tax (SALT) deduction.
• Stocks dropped Friday after two pharmaceutical companies said their vaccines were somewhat less effective against the South African strain of COVID-19.

ODDS AND ENDS

• Google deleted negative reviews of the stock trading app Robinhood after backlash over the company’s decision Thursday to block users from buying or trading stocks that were popular on a Reddit subforum.
• Apple CEO Tim Cook told President Biden in a letter Friday that providing permanent legal status for “Dreamers” is a crucial part of any comprehensive immigration reform.