"The Revolution That Wasn't: Gamestop, Reddit, and the Fleecing of Small Investors" by Spencer Jakab; Portfolio (320 pages, $28)
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Remember last year, when bros in their bedrooms ganged up on the Robinhood app, pumped meme stocks like GameStop to absurd heights, got crazy rich and beat Wall Street at its own game?
If that's the way you remember it, you're wrong — although you can be forgiven, given how much of the media played the story like David v. Goliath, the little guy wielding a social media slingshot to stick it to the man.
Spencer Jakab sets the record straight in his new book, "The Revolution that Wasn't: GameStop, Reddit, and the Fleecing of Small Investors." Some little guys did get rich. Most lost their money and many saw their entire savings cleared out, meager as they might have been. But guess who profited most from the meme stock craze? That's right — Wall Street.
Everyone knows how bubble stock stories like this usually end, but Jakab moves this particular morality play into new territory. His thrumming narrative paints a post-COVID picture of American greed driven by social media and a variety of accomplices: addictive, pervasive technology; click-bait media; generational resentment; clueless and craven politicians; feckless regulators; billionaires who use Twitter to manipulate markets; and much more.
The basic story: Young men, most ages 18 to 35, were stuck at home due to COVID with little to do. New smartphone apps like Robinhood offered no-fee stock trading; playing the game was quick, easy and cheap. Ever-rising stock prices, fed by the Federal Reserve Board's hedge-fund bailout and mad money printing approach to monetary policy, meant the only sucker's game was not buying stocks.
Forums like Wall Street Bets on Reddit provided a tribal gathering ground for this new investor class. Moving quickly past the stock-tips online forums of old, the players began swarming, flash-mobbing onto specific stocks. That sent torpid old companies like GameStop, the bricks-and-mortar games retailer, on a rocket ride. From a low price of $2.17 a share in 2020, GameStop went vertical and hit a high of $483 in March 2021 before it plunged back to Earth. (It remains preternaturally lofty, though, at around $110 a share.)
The forums were (and still are) filled with scorn toward Wall Street. The mobs intentionally targeted hedge funds that sold stocks short — a strategy that makes money when a stock price goes down. Some of those funds suffered true pain.
But short sellers represent a tiny part of Wall Street, if they can be considered "Wall Street" at all. The big players did just fine. So did the Robinhood app, which worked tightly with Wall Street to extract money from customers by selling their orders to clearinghouses like Citadel Securities.
Robinhood also fronted money to its customers, naive or not, through fee-producing margin loans. Those loans can be leveraged into outsized profits, but when things go bad, the investor can be totally wiped out. Robinhood also made it easy for neophytes to trade complex derivatives, once the province of the financially savvy. The company claimed, with some justification, that it was democratizing financial investing.
But this democracy, by making trading easy and even addictive, is a gift to Wall Street, whose multibillion-dollar brokerage business makes money every time someone trades a stock. Easy apps like Robinhood boost trading volume. According to Jakab, the average Robinhooder trades stocks eight times every day.
In Jakab's assessment, Robinhood doesn't take from the rich and give to the poor. Its founders, he notes, are billionaires. Ironic, then, that the traders they rabble-raised grew up during the 2008 financial crisis, seeing parents lose their houses while financial fraudsters walked away scot-free. And now, as Jakab makes clear, they've lost their own nest eggs after taking Robinhood loans — balloon mortgages for a new decade.
Jakab is a former investment banker who currently writes the Wall Street Journal's "Heard on the Street" column; he knows what he's talking about. He's skilled at translating concepts like puts and calls and short sales and gamma squeezes into language most anyone can understand — a true gift. He doesn't especially vilify Wall Street, understanding that it's behaving as anyone should expect it to.
He does aim some scorn at Congress, which held hearings after the Robinhood app was so overwhelmed by trading volume it had to temporarily cut its customers off. Representatives from both parties posed as protectors of the little guy, either pretending not to understand the facts on the ground or, more frightening, genuinely missing the point.
Like so much reporting in recent years, Jakab's book is both depressing and necessary. Amid rapid change, Americans continue to lose faith in even a modicum of financial fair play and in political leaders' ability to cope. Sometimes they turn to new shiny objects in hope of beating the system. Jakab's book makes clear that the endorphin rush of novelty, hyper-fueled by social media, is probably a dead end; it certainly won't change the power structure.
That seems to be the case with cryptocurrency and other new forms of money too. Those enticed to enter the game need to ask themselves who benefits from crypto's volatility. It's not the suckers who win big. It's exchanges such as the company that sponsors what used to be called the Staples Center. Do those companies really believe NFTs will be worth more a couple years from now than they are today?
Anybody who buys and sells stocks, and anyone who "invests" in anything old or new, should read this book.
