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A federal judge on Tuesday granted Texas Attorney General Ken Paxton’s request for a nationwide temporary restraining order blocking the Biden administration’s halt of a 100-day pause in deportations of noncitizens for 14 days. It’s safe to say our podcast hosts have some thoughts! Stick around to hear David and Sarah chat about an indictment against pro-Trump Twitter troll Ricky Vaughn in response to his voter disinformation campaign, a wonky First Amendment case, and what’s behind this week’s GameStop rally.
Show Notes:
-Giboney v. Empire Storage & Ice Co. and Expressions Hair Design v. Schneiderman.
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I heard Sarah mention that Madison Cawthorn has packed his staff with comms personnel. 1) I can’t find articles that actually detail this occurrence. 2) I think there’s an important point to be made, with Cawthorn and/or Gaetz as examples, marrying the rise in Executive Orders, and congress not taking the job of legislating seriously.
I’d love to see that in print.
As a non-lawyer I really enjoy your analysis, even if a lot of the time it's a touch over my head. And I'm always incredibly impressed with the level of detail and precision. (This was especially true when it came to Sarah's chicken sandwich study). But as someone who spends a fair amount of time trading (and occasionally short-selling) I feel I have to clarify a couple things you got wrong about the GameSpot trade, and short selling in general.
Short selling: The way this actually works is pretty weird, but relatively simple. Supposing a stock is trading at $100, and I believe it's going to go down to 80. And suppose you own 50 shares of that stock. I can borrow 50 shares of stock from my broker, who in turn borrows it from you. This transaction is invisible to you, except that you will receive interest payments on the loan of the stock. How much you will receive will depend on how scarce shares available to short are. So I borrow your 50 shares, and I sell them at 100, collecting $5000. If the stock goes down to 80, as I predicted, I can buy the stock back at 80, for $4000, and I will have made a $1000 profit. If the stock goes up, however, I can get into trouble. If it only goes up a little, I can just buy it back at the higher price, and take a loss, but if it goes up a lot, I can be forced to buy it back (because my margin ratio exceeds the amount allowed by my broker, usually 50%).
In the case of GameStop, what happened was not quite as David described it. GME was not a failing company. They were in no particular danger of bankruptcy on the merits, they had decent revenues, and a relatively healthy balance sheet, but they did have declining profits and revenues, and "everybody knew" that brick and mortar retailers of video games were "doomed" in the long term. Some big hedge funds sold them short, partly using the mechanism described above, and partly using "put options" which ends up amounting to the same thing for reasons I won't go into. Then a year and a half ago, a few retail traders noticed that the price of the stock didn't really accord with the inherent value of the business (in their opinion, which they analyzed at some length). They bought heavily into this investment thesis, using "call options" to leverage their relatively small investments (on the order of 10's of thousands of dollars).
Their approach, and the fact that they publicised what they were doing, and probably got a few people to join them in the trade (although to be fair, they were widely mocked for their idiocy in the early days), led to an increase in the stock price. Nothing crazy, but enough to put the short sellers underwater. The short sellers responded by doubling down, and eventually put themselves in a position where they had borrowed more stock in the company than actually exists. Their intention had to be to put GME out of business, because as far as I know, that's the only way they were going to get out of their position (how are they going to buy back more stock than is actually available in the market?) It is _this_ action which has led to the insanity. Normally you look at a situation where the price of a stock is untethered from its intrinsic value, and the only justification for buying it is the "greater fool theory". Some greater fool must come along and buy this asset at a higher price. But what if you know for a fact, that there are fools out there who have borrowed 140% of the total available stock, and will be paying interest on that loan until they close it (current interest rate appears to be 31%). Well, those are some locked in fools, and it's not necessarily insane to buy, even at these prices. (disclosure, I did so, yesterday at 290, with an amount of money I'm quite prepared to lose entirely). Will some retail investors get burned? Yeah, probably. But that's very much a dog bites man story. The man biting the dog here is that the short selling hedge funds are being undone using one of the very strategies that they themselves use to (legally) manipulate the market every day.
I'm not sure how this thing is going to end. I'm not enough of an expert to know how the funds are going to be able to close these positions, because the one thing that's pretty certain now is that GME isn't going out of business any time soon, but I'm quite sure that all the experts going on TV and bemoaning the inevitable harm coming to some small retail investors are being thoroughly disingenuous. Some will be harmed, some will make a lot of money, some will make a little money, depending on how they play it, but none of them are in a multi-billion dollar unexitable position that they entered because they thought it was inevitable that GME could be forced into bankruptcy.