IF you read the article you'd see It's illegal to sell stock when you have substantial financial information that isn't available to the public yet--which they did.
Even if the execs have said information, I believe it would be legal for them to pick a team to decide when to sell more stock, where that team doesn't have access to anything non-public.
The execs can then delegate the decision to the team without the knowledge, which would be legal (I think!).
Also, they can call a press conference, tell everyone the material inside information, and then sell the shares. This is completely normal: every company does when it has material non-public information and doesn't want to wait for the next quarterly earnings report.
I believe that is also tricky. In most companies, there are all kinds of incomplete and unreliable financial indicators mid-quarter. It's only when the accountants add it up and the end of the quarter and the auditors check it is it suitable for release to the public.
The incomplete information is considered "material non public info" which stops the execs buying shares, but it isn't considered reliable enough info for the company to publish without risk of execs being sent to prison for publishing false info.
I think it is still tricky. When the big boss assembles a team (which doesn’t happen normally) and asks “hey figure out whether we need to buy this stock”, it still could be construed as acting based on insider information.
It's the "lifestyle company" of a bunch of Microsoft Millionaires, who wanted to have fun making games. Then they were in the right place at the right time to make Steam. There is no realistic point in their history when they would have both seemed to be this successful, and would have entertained buyout offers.
The two-sided market structure makes it almost impossible for a new entrant in that area. Steam remarkably has good feelings from both gamers and developers and the current ownership structure helps keep it that way: not squeezing the last penny and not being inclined to throw Steam under the bus to chase the new shiny.
Buying a company isn't like buying a product off a store shelf. Valve wouldn't sell to GameStop and GameStop can't take control by buying shares because Valve isn't public.
I know sometimes buyouts can look easy but there's often some massive power imbalance at play. In some cases it's having enough money to make even the strongest willed person give in. In other cases it's a matter of knowing that you can't compete so you either sell or get destroyed by them a few months later anyway.
I am ignorant on finance. But if GameStop had considered to offer new shares, wouldn’t some investment bank have to agree to buy them on an exorbitant price, or could they just sell them on open market?
>They could also sell big lots to banks which planned to immediately flip them to retail investors
No big bank would touch this. An ATM offering had potential, but the amount of exposure this incident had meant that this was a risky grey area - legally and ethically.
Not sure about AMC, but AA certainly has the implicit support of the government. The minute GME became a populist symbol of Main Street vs Wall Street, I think it became toxic.
Of course, I'm speculating. But what else explains it?
It would have been unethical to be the boss of the company that offer new shares, got them bought on a market, but also unblocking all the short sellers in the process.
The consequence would be shorters would be happy, the price would drop, the people who bought into the hype would lose, and the gamestop boss would look like the guy who helped the hedge funds and stole from the common people.
They absolutely missed out on an opportunity. You can argues it would have been unethical for them to take advantage of it. But there was an opportunity to raise a substantial amount of money, which would help the company.
Unlike AMC and AA they couldn’t easily take advantage of it due to disclosure requirements.
As much as I am on the WSB side of this fiasco, I still agree it was mature and smart for Gamestop not to make an opinion or jump on this in any form. It would have been a legality mine field for them to cross and properly capitalize on. Public companies are under a lot more scrutiny than private ones. Dont assume inaction was just because they're stupid. Theres zero wrong with picking and choosing battles that you know you can win. They probably saw this as so drastically out of their control, it would be too difficult not to get swept up in the turmoil.
But I do believe they made some good on the momentum, just not publicly. Probably got some more exec's from other companies willing to come aboard that they're still negotiating with.
> it was mature and smart for Gamestop not to make an opinion or jump on this in any form
GameStop couldn’t. They were deep into the quarter and had non public financial information. The companies that could sell stock did.
If GameStock could have sold stock and didn’t, and if I were a shareholder, I’d sue. They have an obligation to current stockholders. And a duty to be honest to new ones. Nobody bought their shares at inflated prices under duress.
They already had shares that scheduled to sell but decided not to execute. It seems like the advice I always got from my company's legal department when I asked if it was ok to something: don't do it.
Your lawsuit would be thrown out, there is no obligation in US law to issue stock in this scenario. "Fiduciary duty" has been quite well-defined by courts and this isn't even in the same galaxy.
It may have been outright illegal though. You're taking money from your future shareholders. This may very easily be seen as securities fraud, because you're basically selling shares in your company despite knowing that it's massively overvalued.
Exactly the reason why Hertz did not proceed to do the same when their price irrationally rose during the pandemic. They wanted to do it, but the SEC sent them a letter asking for clarification, and that was enough for Hertz to get the message.
It's not exactly the same. Hertz was actually in bankruptcy, making all equity shares essentially worthless by definition. That's much more problematic than the scenario described here.
Not exactly, it's way more interesting than that (to me anyway)...
Hertz actually did sell new shares into the price spike. They went to the bankruptcy judge and got permission to sell new shares to help pay off the creditors. Shortly after they started selling the SEC essentially said "lol no" and told them to stop.
Buying back shares knowing they're massively overvalued would be destroying shareholder value. Buying them back when you believe they're undervalued creates shareholder value.
If that's all true, selling shares when the market is over-valuing them seems like it's creating shareholder value to me. (It's unethical perhaps; perhaps it's illegal. Either of those would be reasons to think it's harming shareholder value, but the sale itself is creating value.)
> Buying back shares knowing they're massively overvalued would be destroying shareholder value.
That is an interesting way of putting it. Sam Palmisano took IBM on a massive buyback program a decade ago, and nothing about IBM since then has refuted your thesis!
You might be interested in reading about Henry Singleton, the Michael Jordan of capital allocation. While running Teledyne, he shrewdly issued shares in exchange for acquisitions when Teledyne's stock was expensive. When shares were cheap and he didn't have other investment opportunities, he smartly bought back stock.
Beat the pants off Jack Welch yet fewer people know about him.
It's like a battle between 2 humans and the ants are on one side. Retail traders may have started this, but they certainly didn't make up most of the shares holding. This is why the short squeeze is unlikely.
The short squeeze happened two weeks ago when the stock ballooned from $20 to $480. That's a 24x increase; VW's "infinity squeeze" comparatively only grew 5x from $200 to $1000.
People on WSB had some arbitrary price targets in mind and are in denial that the stock hasn't squeezed yet because they haven't hit those (completely made-up, with no basis in anything) targets.
> The short squeeze happened two weeks ago when the stock ballooned from $20 to $480
Almost certainly not. We will learn, in time, how much of the run was shorts closing out and how much of it was momentum.
Keep in mind, too, that most institutional short sellers hedge their risk with out of the money calls. Given the increase in volatility, those calls would have more than covered the short losses.
Overvalued is in the eye of the beholder, in this case the market. There were people willing to buy the stock at that price, why not sell it to them? If the buyers really believed it was going "to the moon", then you could just as well argue they cheated a lot of potential buyers out of the chance to get in on that action.
Finally, if you do think it's overvalued, arguably the best thing to do as a company is sell more stock, to maximize the amount of money per share you get. This is the way Tesla does it for example: they only sell more shares into the market when the stock price is particularly high.
It always boggles my mind when I think about how public companies' shares are valued based purely on "what the market thinks". It just seems so ripe for abuse. And I guess as someone who lived in a world of software, I don't like the lack of "logic" behind valuations.
I wonder if there are there any markets anywhere in the world where company shares are publicly traded, valued by a quantitative means, such as a multiplier of revenue or profit?
According to "regular" stock market philosophy, the "correct" price for a company is the sum of all of its future cash flows. However it is not really feasible to predict what the future profits of a company in a free-ish market are going to be, since at any point a new competitor might pop up and take some market share. In addition, you can't predict if a growing company will not start stabilizing at some point in the future, which would affect its future earnings and thus its price.
So the answer to your question must be no, there are no stock markets where shares are traded on a purely quantitative base. This is because the only way for price discovery on such a market is by perfectly predicting the future, which is not (as far as we know) possible.
I meant based on reported actual figures, rather than predicted ones. It was just a random thought though - the way our financial markets work is so entrenched that I'd be very surprised if anything like it did actually exist anywhere.
It doesn't matter whether the rest of the world will do anything with it if we enjoy theorizing about it on the internet in our free time :)
I don't think reported actual figures are enough to form a good enough image of the worth of a company. The proverbial example would be of buggy whip companies (selling whips for horse drawn carts) reporting record profits the year that Ford opened his first automobile factory. Clearly the buggy whip companies did not have a bright future ahead of them, but you wouldn't be able to tell from reported figures.
Reported figures happened in the past though, it's the future cash flows which affect the price of a company and no one knows what those cash flows will be exactly, not even the company itself.
> The hedge funds vs. common people narrative is ridiculous.
Is it? Without the retail investors (gamblers) nothing of that would have happened. And Melvin Capital lost a couple billion dollars while quite a number of Redditors got a massive payout, so a net win for society.
Side note: As an European, the amount of GME-related "paid my student loan" and "paid my medical bill" posts on Reddit are heartbreaking to read.
Quite a number of redditors lost a lot of money too. If you sorted by new on WSB last week when GME plummeted, you could see lots of posts with 5, 6 and even 7 figure losses.
Given that 6 million of the current 8.5 million WSB subscribers joined after GME popped, I think most retail investors probably lost money. At this point it's a minority who got in early and made a lot of money.
> And Melvin Capital lost a couple billion dollars while quite a number of Redditors got a massive payout, so a net win for society.
And quite a lot of Redditors suffered massive losses. There's not shortage of WSB posts with 7 figure losses. Overall it's pretty hard to assess whether on net "Wall Street" made or lost money to retail. Melvin certainly wasn't the only player here.
It's likely that other funds jumped in on the squeeze, and were much better in terms of timing their exit. Some funds may have shorted on the way back down, and made a killing.
But most importantly, intermediaries like HFTs, option market makers, internalizers, and stat arb funds made a killing. Almost entirely at the expense of retail flow. It's like a casino. Some win, some lose, but the house rake always wins.
But even if retail on net made money, it probably wasn't a benefit to society. 20 people losing their life savings so that /u/deepfuckingvalue can become a multimillionaire isn't exactly a heartwarming story.
He is licensed, but it doesn't appear that he was an active broker. From what I have read, he was creating marketing or training videos of some type for Mass Mutual. He also resigned his position in January. Though not fully before everything blew up with gme.
> But even if retail on net made money, it probably wasn't a benefit to society.
It is, because the open corruption of the stock market, the absolutely disgusting behavior of major players and especially the arcane rules (like T+2 settlement, made necessary by the US's fossilized banking infrastructure) became dragged into the spotlight.
Wall Street claimed to have learned their lesson after 2008ff? GME proved that they all haven't learned a single damn thing.
> 20 people losing their life savings so that /u/deepfuckingvalue can become a multimillionaire isn't exactly a heartwarming story.
It's called wallstreetbets for a reason. I'm sorry but people dumping their life savings into the stock markets on a crazy bet by anonymous Redditors, that's just... dumb. (On a side note, such cases are why basic financial education should be mandatory at schools!)
(Disclosure: sunk a couple hundred into AMC and NOK, planning on holding all of it until at least the pandemic ends)
If you have a 7 figure loss you most likely had at least 7 figures in the bank.. not really the typical "simple man".
Also laying blame on deepfuckingvalue seems ridiculous to me. He was basically the only one that invested in Gamestop as a value investment.. about a year ago. Everyone told him he was stupid but he kept with his plan. Then at some point a horde of crazies jumps on the train and now he is taking money from "20 people losing their life savings"? meh...
This whole topic reeks of simplifications, misguided blame and populism.
> If you have a 7 figure loss you most likely had at least 7 figures in the bank.. not really the typical "simple man".
I do not think this is usually the case on WSB, where people regularly show off trading on margin several times larger than their total account size :)
Even without margin, it's not uncommon to see people freely admitting they put everything they have into a single position (and mods happily verify it).
It's similarly unethical for companies to be able to borrow at 0%, then use the money to conduct stock buybacks, but I guess the S&P500 and DJIE don't have to be tethered to economic reality anymore.
Because the purpose of state-sanctioned cheap capital is to defray the cost of investing in your business...hiring people, buying capital equipment, investing in R&D. Not spiking your own share price by bidding it up on public markets. That does nothing except help managers' stock options more profitable.
I think it’s unethical for a highly overvalued company NOT to issue shares. Good capital allocation means issuing shares when you’re at an insane valuation and buying them in when you’re severely undervalued. They could have issued shares, paid off debt, or used the cash to launch new products, etc.
> It would have been unethical to be the boss of the company that offer new shares, got them bought on a market, but also unblocking all the short sellers in the process.
Why? What general rule of ethics is this violating? How could you write this as a general rule to be applied in the future?
>It would have been unethical to be the boss of the company that offer new shares, got them bought on a market, but also unblocking all the short sellers in the process.
The stock market exists so that companies can access capital. If Gamestop were able to raise money, pay off some debt, avoid closing some stores and laying people off in the future, and fund a turnaround plan, that would have been the best possible outcome.
The only ethical issue is whether all the information is out there for investors, and in this it wasn't, so they couldn't raise money until whatever they are holding on to is announced.
I'm sorry and I don't mean to throw stones but this is an incredibly myopic view.
- It would be unethical to issue debt the company doesn't have the cash flows to pay without assuming refinancing is possible (the ENTIRE high yield market)
- It would be unethical to buy back debt in the open market at a discount ... they should pay what they borrowed!
- It would be unethical to raise capital by selling overinflated stock, the proceeds of which may lead to the life or death of the company.
The board has a fiduciary responsibility to it's shareholders to take the best course of action to maximize share-price. Assuming they actually could pull off a capital raise in the short amount of time the reddit bubble lasted, it would arguably be unethical NOT to do so. They didn't raise not because they are altruistic saints, but because it's an involved process that typically can't be done spur of the moment without planning.
Would the SEC have even allowed them to issue shares? Hertz tried to issue new shares when their stock price was irrationally bid up but was blocked by the SEC. Its a little bit different because Hertz was going bankrupt but otherwise the situations are very similar.
> Would the SEC have even allowed them to issue shares?
From the article:
“Other companies in the midst of the Reddit frenzy whose financial quarters finished at the end of December and had already updated investors on their latest financial performance, were able to sell stock when their shares rallied at the end of January.”
Hertz was a bankrupt company. Their shares were legally worthless. And they didn’t have a shelf offering already authorised. Different facts and circumstances.
Correct me if I’m wrong, but I thought the new AMC shares came from Silverlake exercising its convertibles, not AMC itself. Of course it still benefited AMC by reducing its debt load.
A practical win-win-win outcome might've been for the GameStop board to issue expensive shares to institutional short coverers and then to declare a one-time special dividend-- not quite $300/share, but something that'd appear to serve "the interests of the shareholders".
(Years later, there'd be scholarly works about how the GameStop Maneuver differs from a Ponzi Scheme.)
I think selling stock with proper disclosures to the people who wanted it should have been achievable.
This was in fact the biggest bull case I could think of: that by getting maybe $1B on the balance sheet they would be well capitalized to take on projects to revamp themselves.
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[ 3.1 ms ] story [ 56.4 ms ] threadThe execs can then delegate the decision to the team without the knowledge, which would be legal (I think!).
It’s not uncommon for a finance team to spend weeks preparing for even normal SEC filings.
The incomplete information is considered "material non public info" which stops the execs buying shares, but it isn't considered reliable enough info for the company to publish without risk of execs being sent to prison for publishing false info.
The article really isn't very long, I suggest reading it!
If they wanted to be public, they surely would be already.
It's the "lifestyle company" of a bunch of Microsoft Millionaires, who wanted to have fun making games. Then they were in the right place at the right time to make Steam. There is no realistic point in their history when they would have both seemed to be this successful, and would have entertained buyout offers.
The two-sided market structure makes it almost impossible for a new entrant in that area. Steam remarkably has good feelings from both gamers and developers and the current ownership structure helps keep it that way: not squeezing the last penny and not being inclined to throw Steam under the bus to chase the new shiny.
I know sometimes buyouts can look easy but there's often some massive power imbalance at play. In some cases it's having enough money to make even the strongest willed person give in. In other cases it's a matter of knowing that you can't compete so you either sell or get destroyed by them a few months later anyway.
They could also sell big lots to banks which planned to immediately flip them to retail investors.
No big bank would touch this. An ATM offering had potential, but the amount of exposure this incident had meant that this was a risky grey area - legally and ethically.
Hire a little bank. Indemnify them.
Also, the big banks gladly sold AMC and American Airlines stock.
Of course, I'm speculating. But what else explains it?
The reasons in the article.
It would have been unethical to be the boss of the company that offer new shares, got them bought on a market, but also unblocking all the short sellers in the process.
The consequence would be shorters would be happy, the price would drop, the people who bought into the hype would lose, and the gamestop boss would look like the guy who helped the hedge funds and stole from the common people.
Unlike AMC and AA they couldn’t easily take advantage of it due to disclosure requirements.
But I do believe they made some good on the momentum, just not publicly. Probably got some more exec's from other companies willing to come aboard that they're still negotiating with.
GameStop couldn’t. They were deep into the quarter and had non public financial information. The companies that could sell stock did.
If GameStock could have sold stock and didn’t, and if I were a shareholder, I’d sue. They have an obligation to current stockholders. And a duty to be honest to new ones. Nobody bought their shares at inflated prices under duress.
It would be a disclosure lawsuit. Lesser claims have been settled. The bar for throwing out cases is pretty low.
Hertz actually did sell new shares into the price spike. They went to the bankruptcy judge and got permission to sell new shares to help pay off the creditors. Shortly after they started selling the SEC essentially said "lol no" and told them to stop.
If that's all true, selling shares when the market is over-valuing them seems like it's creating shareholder value to me. (It's unethical perhaps; perhaps it's illegal. Either of those would be reasons to think it's harming shareholder value, but the sale itself is creating value.)
That is an interesting way of putting it. Sam Palmisano took IBM on a massive buyback program a decade ago, and nothing about IBM since then has refuted your thesis!
https://mbiconcepts.com/do-stock-buybacks-work.html
Beat the pants off Jack Welch yet fewer people know about him.
http://csinvesting.org/wp-content/uploads/2015/05/Dr.-Single...
https://www.sec.gov/corpfin/sample-letter-securities-offerin...
I do agree that it would have been unethical (or at least pretty dubious) for the company to sell the stock knowing it’s massively overvalued.
Edit: I was just nitpicking the analogy, I agree that the “common folk vs hedge fund” narrative is totally delusional.
People on WSB had some arbitrary price targets in mind and are in denial that the stock hasn't squeezed yet because they haven't hit those (completely made-up, with no basis in anything) targets.
Almost certainly not. We will learn, in time, how much of the run was shorts closing out and how much of it was momentum.
Keep in mind, too, that most institutional short sellers hedge their risk with out of the money calls. Given the increase in volatility, those calls would have more than covered the short losses.
Overvalued is in the eye of the beholder, in this case the market. There were people willing to buy the stock at that price, why not sell it to them? If the buyers really believed it was going "to the moon", then you could just as well argue they cheated a lot of potential buyers out of the chance to get in on that action.
Finally, if you do think it's overvalued, arguably the best thing to do as a company is sell more stock, to maximize the amount of money per share you get. This is the way Tesla does it for example: they only sell more shares into the market when the stock price is particularly high.
I wonder if there are there any markets anywhere in the world where company shares are publicly traded, valued by a quantitative means, such as a multiplier of revenue or profit?
So the answer to your question must be no, there are no stock markets where shares are traded on a purely quantitative base. This is because the only way for price discovery on such a market is by perfectly predicting the future, which is not (as far as we know) possible.
I don't think reported actual figures are enough to form a good enough image of the worth of a company. The proverbial example would be of buggy whip companies (selling whips for horse drawn carts) reporting record profits the year that Ford opened his first automobile factory. Clearly the buggy whip companies did not have a bright future ahead of them, but you wouldn't be able to tell from reported figures.
Is it? Without the retail investors (gamblers) nothing of that would have happened. And Melvin Capital lost a couple billion dollars while quite a number of Redditors got a massive payout, so a net win for society.
Side note: As an European, the amount of GME-related "paid my student loan" and "paid my medical bill" posts on Reddit are heartbreaking to read.
Given that 6 million of the current 8.5 million WSB subscribers joined after GME popped, I think most retail investors probably lost money. At this point it's a minority who got in early and made a lot of money.
And quite a lot of Redditors suffered massive losses. There's not shortage of WSB posts with 7 figure losses. Overall it's pretty hard to assess whether on net "Wall Street" made or lost money to retail. Melvin certainly wasn't the only player here.
It's likely that other funds jumped in on the squeeze, and were much better in terms of timing their exit. Some funds may have shorted on the way back down, and made a killing.
But most importantly, intermediaries like HFTs, option market makers, internalizers, and stat arb funds made a killing. Almost entirely at the expense of retail flow. It's like a casino. Some win, some lose, but the house rake always wins.
But even if retail on net made money, it probably wasn't a benefit to society. 20 people losing their life savings so that /u/deepfuckingvalue can become a multimillionaire isn't exactly a heartwarming story.
Works(ed?) for Mass Mutual.
It is, because the open corruption of the stock market, the absolutely disgusting behavior of major players and especially the arcane rules (like T+2 settlement, made necessary by the US's fossilized banking infrastructure) became dragged into the spotlight.
Wall Street claimed to have learned their lesson after 2008ff? GME proved that they all haven't learned a single damn thing.
> 20 people losing their life savings so that /u/deepfuckingvalue can become a multimillionaire isn't exactly a heartwarming story.
It's called wallstreetbets for a reason. I'm sorry but people dumping their life savings into the stock markets on a crazy bet by anonymous Redditors, that's just... dumb. (On a side note, such cases are why basic financial education should be mandatory at schools!)
(Disclosure: sunk a couple hundred into AMC and NOK, planning on holding all of it until at least the pandemic ends)
Also laying blame on deepfuckingvalue seems ridiculous to me. He was basically the only one that invested in Gamestop as a value investment.. about a year ago. Everyone told him he was stupid but he kept with his plan. Then at some point a horde of crazies jumps on the train and now he is taking money from "20 people losing their life savings"? meh...
This whole topic reeks of simplifications, misguided blame and populism.
I do not think this is usually the case on WSB, where people regularly show off trading on margin several times larger than their total account size :)
Even without margin, it's not uncommon to see people freely admitting they put everything they have into a single position (and mods happily verify it).
AMC raised $300M in the rally and no one seemed to mind.
People who bought into the hype lost anyway.
Why? What general rule of ethics is this violating? How could you write this as a general rule to be applied in the future?
The stock market exists so that companies can access capital. If Gamestop were able to raise money, pay off some debt, avoid closing some stores and laying people off in the future, and fund a turnaround plan, that would have been the best possible outcome.
The only ethical issue is whether all the information is out there for investors, and in this it wasn't, so they couldn't raise money until whatever they are holding on to is announced.
- It would be unethical to issue debt the company doesn't have the cash flows to pay without assuming refinancing is possible (the ENTIRE high yield market)
- It would be unethical to buy back debt in the open market at a discount ... they should pay what they borrowed!
- It would be unethical to raise capital by selling overinflated stock, the proceeds of which may lead to the life or death of the company.
The board has a fiduciary responsibility to it's shareholders to take the best course of action to maximize share-price. Assuming they actually could pull off a capital raise in the short amount of time the reddit bubble lasted, it would arguably be unethical NOT to do so. They didn't raise not because they are altruistic saints, but because it's an involved process that typically can't be done spur of the moment without planning.
From the article:
“Other companies in the midst of the Reddit frenzy whose financial quarters finished at the end of December and had already updated investors on their latest financial performance, were able to sell stock when their shares rallied at the end of January.”
Hertz was a bankrupt company. Their shares were legally worthless. And they didn’t have a shelf offering already authorised. Different facts and circumstances.
(Years later, there'd be scholarly works about how the GameStop Maneuver differs from a Ponzi Scheme.)
This was in fact the biggest bull case I could think of: that by getting maybe $1B on the balance sheet they would be well capitalized to take on projects to revamp themselves.