Opinion: Ken Griffin's Citadel Bets Big on Goliath as David Grabs his Sling
You'll have to forgive the biblical metaphor in the headline. Despite my disdain for the whole world succumbing to all-consuming hyperbole every waking minute of every day, I'm a sucker for metaphor as much as anyone.
First, let's get something out of the way. There is no doubt that Ken Griffin is smarter than I am. He's 6 or 7 zeroes in his bank account smarter than I am. But remember, ladies, it's all about how you use it.
That's not false self-deprecation. I don't make great decisions with money. Like trying to bootstrap a small media company in the early 21st century when everyone knows the money printer goes brrrrr and the world is run by Charles Ponzi in a Bozo the Clown costume. If I were intelligent, I would push it all into the Holy Market and laugh my way to a private island because, apparently, there are zero repercussions for the Holy Market's High Priests in any way, shape, or form.
Aw shucks, what can I say? Sometimes a man has to have principles. Playing fast and loose with anyone's livelihood isn't my thing, I guess. Definitely not my own.
Yep, any way you look at it, Ken Griffin is smarter than me. I suppose that's why I was so surprised with his decision to shovel $2 billion toward Melvin Capital and insert himself into the current soap-opera centered around GameStop Corporation that is consuming all business internet drama the last few days.
It was a rare mistake and a worse look. The spotlight spun around to land right on him. A mistake rare enough and ugly enough it may cost him and his hedge fund dearly amidst a scandal that may cost all hedge funds and perhaps the whole financial industry dearly.
Well...um...it should...but...you know...
...the money and power thing...
In case you've been under a rock and are unaware of what's happening on this week's episode of The Bulls and the Bears, I'll do my best to explain as briefly as possible.
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A bunch of hedge funds and institutional investors bet on GameStop failing, short sold GameStop stock, and kept going back for more.
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Someone notices GameStop Corporation stock had been over-short sold near 140%, far greater than the amount of stock available, and notes that there's no limit to the losses that can accumulate if a short sale goes awry.
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Another someone or the same someone casually mentions this to the internet via the lovably insane users over at r/WallStreetBets, and this knowledge explodes across the rest of the internet.
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Blah, Blah, Blah...
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Utilizing relatively new retail investment apps made possible by monumental changes in the global technological marketplace against a backdrop of worldwide economic, political, and cultural chaos further exacerbated by poor policy-making and legal frameworks...
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Yada, Yada, Yada...
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One thing leads to another...
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And the little retailer GameStop Corporation finds itself smack dab in the center of a genuine shockwave event that could ripple out through the furthest reaches of the international finance industry and, without serious reevaluation of the fundamental questions of our modern financial systems and concrete, codified solutions fair to all rather than the few has the very real possibility of changing everything about how we move forward as a society, let alone how the international finance industry continues to function as a business model period.
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You are HERE.
Now that last bit, I admit, I'm being a little facetious. As with most things that involve the internet, let's say this all got a little out of hand, shall we?
All of the above is what they want you to believe happened. Well, what someone wants someone to believe happened. Who? I don't know. Remember, it's all a game.
For now, I'll ignore that it's illegal to overshort a stock/can't really be done. I'll also ignore that I don't believe for a second it would even be possible for a bunch of self-described "autistic retards who found a Bloomberg terminal" sitting at home all day trading their COVID stimulus checks on their cell phones to manipulate the market the way we saw GameStop stock explode the way it did. Further down the road, I suspect that a review of the actual trading volume and massive positions that were taken will eventually reveal there were more than a few actual institutional investors and market makers and oligarchs and perhaps even foreign powers involved that were all too gleeful to have r/WallStreetBets be such a willing cover they took advantage of such a rare opportunity to significantly damage a competitor.
Let's set that aside and reconsider some of the finer details for those who want it. We're Chicagoans, after all, and this story heavily involves a famous Chicagoan.
Somewhere in the above timeline, Ken Griffin's Citadel chose to infuse Gabe Plotkin's Melvin Capital, the initial primary hedge fund villain when this story exploded across the internet, with $2 billion of additional funds to ride out a perceived squeeze on their short position. I don't know the depth of their relationship, but Griffin's a hedge fund guy and, my guess is, he rationalized that this would be a relatively small bump followed by a continued drop of GameStop stock. An infusion into Plotkin's position would provide him an opportunity to gain even more.
In initial reports and with so much information flying, people confused this investment with something nefarious. It was not. Was it an odd choice and a bad bet considering 12-year-olds and grandmothers could understand the position's absurdity about GameStop? Yes, it was.
But the talking heads and public relations people took to the airwaves, frothing with rage on television, radio, and social media. The internet started to perk up and take notice, and more people bought into GameStop. More anger from pundits. With a long history against short sellers betting against his company and the current richest man in the world, Elon Musk chimed in with words of encouragement for the plucky rebels. The more the expensive suits hemmed and hawed and guffawed on television that they couldn't believe what was happening and that people would dare do such a thing to them, more people piled on. The losses were compounding.
As things progressed, for a moment, it was all fun, games, and memes. For a moment, it appeared that the little guy had finally beat the "masters of the universe" at their own game. A plucky group of rebels had found the thermal exhaust port.
For a moment, this was it. This was history. This was the moment the Game...stopped.
For a moment.
Can you blame the little guy for thinking it was funny watching them squirm? Gabe Plotkin at Melvin Capital and Steve Cohen at Point72 and Ken Griffin at Citadel knew the inherent risks. That's what all the Wall Street players have been preaching to Main Street since the '80s. They knew the game. They'd profited from the game and acquired obscene wealth playing the game. Gabe Plotkin was one of the wunderkinder at Steve Cohen's SAC Capital during the era where Cohen's SAC Capital got busted for insider trading and ultimately dissolved in 2016.
Play stupid games, win stupid prizes, as they say. It was funny and it was fun. They knew the game.
Then, a bizarre thing happened...
Trading stopped.
It appeared to be an ugly move. An unfair move. Probably an illegal move.
But more, it was a move that a spoiled brat getting beat would make, taking the ball and going home. A move that forced people to wonder if the risk of not doing so was more dangerous to the Holy Market Empire than any potential consequences that could come later.
What's worse? The explanation for why was nothing short of an insult. As if the regular guy wouldn't understand, and what happened was for his own good. As if they actually believed themselves to be High Priests protecting the Holy of Holies.
I don't know who ultimately made the call to stop trading, but it was viewed as allowing the super hedge funds and institutional investors to reposition themselves against the plucky band of rebels. Ken Griffin may be about to learn a hard lesson. You are the company you keep.
For whoever made the decision, it may be one of the biggest backfires we've seen since the British Parliament thought it a good idea to enact the Intolerable Acts of 1774.
That's when the real anger came out and the emotions took over. And nothing good comes from when the emotions take over. Go ahead and ask Robespierre if you don't believe me.
A deep desire for revenge took hold and swelled in a group of people with nowhere to go and nothing to do, stuck in yet another economic disaster caused by sheer incompetence and through no fault of their own, after having been witness to decades of obscenely wealthy bankers and market manipulators and oligarchs get richer and richer and richer, after having been witness to countless jobs be sent overseas and told to "learn to code" if they didn't like it, after having been witness to those in charge of both their finances and policy-making face next to zero repercussions or consequences for their behavior, even witnessing them get bailed out time and time again with trillions upon trillions of their tax dollars, while their families and neighbors were stripped of their assets and purchasing power and, at least perceptibly, witness to their lives and livelihoods treated as little more than a piggybank...
They bought more and held the line.
"Diamond hands, motherfucker," became a rallying cry.
"We like the stock," became sardonic taunt.
Sure, once upon a time, the world needed wiz kids like Gabe Plotkin and Ken Griffin to make as much money as possible in a Wall Street environment, but now, when the kids all got together and combined all they knew, they formed an actual wizard. And they were going to win at all costs.
It was now a battle of good vs. evil, freedom vs. control, David vs. Goliath, and it'd be hard to argue that their anger was not righteous.
The establishment media and its apparatchiks, almost entirely owned and manipulated and controlled by the oligarchs and venture capital and big business, immediately tried to malign and cast aspersion and manipulatively portray the collective of redditors over at r/WallStreetBets, the group that initially spread this information to the globe, under all sorts of names.
They were quickly called everything from white supremacists to insurrectionists to Russian/Chinese hackers to anti-semites to terrorists to just plain old assholes. You know, the usual fair they've used for the last half-decade against anyone who dares to disagree.
I'm sure if we looked hard enough, we'd undoubtedly find a few that may meet that description but, even if our modern society has taken and run with the idea that anyone who disagrees with our perspectives deserves to eternal castigation under any despicable descriptor we can muster, it remains true that there are far, far more in that collective and in the larger collective of others that piled on to participate in the GameStop gambit that are not that. As I mentioned above, there are far, far more, including some who've lived their entire lives, under a system that not only doesn't seem to give a single good God damn about them but, lately, seems to be doing its damnedest to barely even attempt to put up the facade and/or wear the costume that they ever used to.
The reality of the situation was less nefarious. Something like Robinhood App was low on liquidity, and it was them who may have gone bankrupt if they didn't stop trading. Still, as the news came in that Citadel Securities was the primary backer behind Robinhood App, it didn't look good.
It looked like Ken Griffin couldn't let the little guy win. Not once.
That's not said right. It looked like he couldn't let the little guy win like an older brother may do for his younger brother's drive to the hoop for an easy layup or go easy on him wrestling.
The little guy did win. The little brother won, fair and square.
Until someone tried to change the rules midgame.
And it was an ugly, ugly look.
But remember, it's all a game. Someone wanted you to believe something. Mostly, that you were smarter than the guys who've screwed you over all these years.
Ken Griffin and people like Ken Griffin are going to be fine. They'll circle the wagons, and Citadel and the rest will head down to Miami and flip the switch on their fancy new exchanges down there any day now. More than that, they're a group of ultra-smart, insanely wealthy individuals, with access to more power and influence in their iPhone contact list than anyone can imagine other than maybe the hostess at the United Nations dining room.
But even if the reality wasn't as nefarious as it seemed in real time, the reality remains that this time it was real. Their billions were not at significant risk, but their core was. This was no fictional thermal exhaust port run to their accounts, it was at the trust in the system itself. They can pretend this will leave them unaffected all they want but there are challening times ahead.
It reminded me of the RIAA's behavior with Napster in '99-2001. Caught with their pants down in a changing technological landscape of how music and files were shared, facing an uncertain future for their industry, the RIAA went scorched earth trying to shut down and sue everybody. We'll have to wait and see if the hedge funds and market powers try to sue 12-year-olds and widowed grandmothers who had fun participating in this new and extraordinary technological change made possible by the Napsters of today's international finance industry, apps like RobinHood and TD Ameritrade's Think or Swim or WeBull or IBKR.
That's what really underlies this moment.
The internet has flipped the table and ripped through every industry these last three decades causing changes we all haven't come to terms with just yet, as the RIAA had to way back when. The little guy has done their best to adapt to this landscape, but these new changes has primarily benefit the lifestyles of the international financiers and made the lives of the jet-set easier and easier, and continued to make them richer and richer.
Until now.
Not too long ago, applications like Uber and Lyft were sweeping across the country and devastating the Taxi Cab industry. I remembered people laughing at cab drivers and joking that they were simply a victim of competition and their business model beaten. And yes, there was an element of truth to the argument.
But the cab driver also had some genuine frustrations.
Local municipal governments had overregulated the cab industry into futility, driving cab licenses in places like New York City upwards of $1.3 million. Some cab drivers had done everything right and spent their life savings buying these required medallions or buying a piece of them to start their businesses or be a partner. Then, practically overnight, Uber and Lyft appeared in the market, and those cab drivers were out of work and left with nothing more than an application to sign up as an Uber or Lyft driver.
Today, the question posed toward cab drivers are the same questions asked of hedge funds. Who needs 'em? Swap Uber with RobinHood and Lyft with Think or Swim and the problem is fundamentally the same.
Sure, these hedge fund guys and traders went to the elite schools and got the Series 7's and built their portfolios and client base. Sure they have to answer to the Securities and Exchange Commission and the Internal Revenue Service, etc., but "Hey, sorry, that's the free market. Should have offered a better product."
Where were the hedge fund guys in defense of those cab drivers? Did any of them give a damn about the cab driver who lost everything? No. Does anyone think, if there were a publicly-traded cab company available at the time and they could have made a bet, those hedge fund guys and short sellers would not have been right there betting on those cab drivers to fail, just like they were with GameStop?
You betcha.
This time it's finally happening to them.
Or so it seemed, for a moment...
I could sit here all day and analyze all the plays and provide a historical perspective, but that will take too long and is less important than the more significant questions it's forcing.
Will this GameStop fiasco cause complete and total societal collapse? No, of course not. Despite what both the extreme anarchists and wannabe autocrats would have you believe, society does not work like that. Community will continue with or without them just fine.
That said, the GameStop fiasco does force a more significant conversation that hasn't been had and keeps getting kicked down the road. A conversation that has been begging to be had and should have been had for a long, long time.
No, I'm not talking about any subjective racial/gender equity or global redistribution of wealth or the "Great Reset" or universal basic income or "Build-Back-Better" or the Green New Deal or open borders immigration or defunding the police or whatever other nonsense that are little more than glorified ad slogans dreamed up by a fictional Don Draper and that will do nothing actually to address any of the fundamental issues. I'm not even talking about income inequality, although income inequality is a symptom.
It's a conversation that is far more simple and fundamental.
I'm talking about equality of opportunity. Said another way, "rules for thee and not for me."
Not since Dorothy's little dog Toto pulled back the curtain to reveal the Wizard has a news story opened more eyes to something maybe they didn't want to admit before but now something that can't be unseen. Exposed, vulnerable, and in a shockingly transparent state, we've rarely seen a more poignant moment that so utterly shatters perception of how our international financial system and Wall Street operate.
And it needs to change.
There are tough lessons to be learned. Lessons that the little guys have had to learn time and time again. There should and likely will be significant reform, but there needs to be a realignment or reassessment of principles that can only come from the Wall Street side if anything is to come from this.
Even if that's true there are other things that can be true at the same time, it's true that this was bad for trust. And, because no one can properly explain what's happening or because hedge fund guys are the way they are, wannabe "masters of the universe" living above everyone else and holding their details close so no one gains an advantage and all that, the vitriol will turn toward them and everything they do. It will turn hard.
The global industrialists and oligarchs and international financiers and all who travel in those circles better wake up, and they better wake up quick. Or losing a significant portion of their portfolio is going to be the least of their worries.
Hopefully, this time, they and their big government apparatchiks do not try to play the card they've played again and again because they are not too big to fail. They do not get to use that excuse anymore. A reason to do it again. Nobody feels sorry. There will be no more bailouts. They do not deserve absolution of the legal responsibility of paying up to the little guy because the little guy doesn't know any better. Hopefully, this time, they and their big government apparatchiks do not continue to refuse to understand and finally reckon with the reality of why so many of the regular guys, the little guys, the average guys, the guys who get up and go to work every day to earn an honest living providing whatever product or service they sell, the family guy who just wants to raise his family how he wishes and best he's able, are so righteously pissed off. That the little guy is not upset so much at the obscene wealth and power wielded, they're upset at the hypocrisy and that the rules continue to be for thee and not for me.
Hypocrisy to a stunning degree. That's how it appears to the little guy.
Again, the hedge fund guys are going to be fine. The financial system is not the same as it was pre-2008. What happened was likely a safety regulation put in place after Bear Stearns and Lehman Brothers collapsed.
All the public can ultimately do is continue to refine the rules of opportunity to be fair for all. It's the only thing we can control.
And, unfortunately, there will be those who bend the new rules in the future, too. They'll then refine the rules again until they're so overregulated again that disruption is the only way out.
Will the jet-set finally be able to see the cause for them becoming the butt of the joke and so many having a little fun at their expense and little sympathy in their fall? I doubt it. They never have and probably never will.
It's a vicious cycle.
On the brighter side, we only encounter trouble, real trouble, when we don't have this constant refinement and reflection. Only then do our straits become dire.
Back around the turn of the millennium, the RIAA thought it was over. The sky was falling. But then, even newer technology eventually worked the issues out. Streaming began and grew in popularity. The recording industry adapted to the changing environment. Some would argue, they're in a better place than they've ever been.
So keep your chins up, hedge fund guys and international financiers! Things are looking up!
And what the hell, if not, you can always learn to code.
Author's NOTE: I do not play the stock market and have no position or interest in GameStop or any of the companies mentioned.
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