Fucking the Deck...

[captainsblog]

The big finance story coming out of nowhere the past few days is about amateur traders taking down hedge funds by messing with short sales of publicly traded stock.  This is an area that few understood until more than a few people suddenly did. It's difficult to explain the concepts, and not for lack of trying. The director of the Anchorman movies tried doing it in a quite serious film about the 2008 financial crisis called The Big Short by using supermodels to try to explain the concepts:
 

Watch on YouTube

Like so.

But that involved shorting of even more complex financial instruments than the simple 19th century inventions known as shares of stock.

Here, in a single screenshot, is the single best and simplest explanation of the current "crisis" as I have seen (author unknown):



Another analogy came to mind from a book I read some years back. Writer and sometime journalist Joe Queenan set out to understand Middle America, so he went on a tour. The book resulting from it was called Red Lobster, White Trash and the Blue Lagoon. He decided to endure a performance of Cats, he listened to a Michael Bolton record, he tried reading The Horse Whisperer, and even dug in to the Admiral's Feast at the titular restaurant chain. But the pertinent part for today was when he decided to visit the low-rent casinos of Atlantic City back in their heyday:

Entering Atlantic City by car is like entering Venice by dog cart--you simply must take the bus to get there. But when you get off the bus, after three hours of deadening chitchat with a battalion of cadaverous low rollers, you will immediately notice that Atlantic City does not resemble Venice. Atlantic City is a vast series of interlocking slums abutted by a narrow strip of clownish, high-rise buildings erected by people like Donald Trump. Venice is not. Even I, who have never been to Venice, know that.

     Figuring that I should go first class all the way, I checked into the Taj Mahal, where my luggage was scooped up by a man dressed like Ali Baba. We deposited my bags, then I returned to the main floor, where I spent the next twenty-four hours gambling. I had never gambled before in my life, and did not know any of the rules. This was unfortunate because shortly after I arrived at the blackjack table, the young woman sitting directly to my left diplomatically informed me that I was "fucking the deck."

    Fucking the deck, she explained, is the process whereby a neophyte or incompetent gambler disrupts the ordinary distribution of cards by making anomalous or stupid decisions. In my case, I stood on sixteen with the dealer showing a seven. According to orthodox blackjack procedure, you must always ask for another card when the dealer is showing a seven and you are holding sixteen, because you must always assume that the dealer has a concealed ten, ace, or face card.

    But I had a funny feeling that my sixteen was good enough to win. Which it was. One by one, all the other players at the table went bust, as did the dealer. But now I was persona non grata, because I should have said "hit," and gone bust with the ten, whereupon the person sitting next to me would have gone bust with a nine, but the three other players farther down the table would have beaten the dealer. In short, it's not enough to win, you have to win according to the system. Thus, there was no joy in Mudville when the dealer paid me, because I had altered the platonic sequence of cards that the Lord intended, effectively fucking the deck.

    I spent a good portion of the day fucking the deck at various tables, then around Happy Hour I ran into the young woman who had first pointed out my failings as a blackjack player. Over coffee, she explained the rules of blackjack. But she also explained the appeal of the game, pointing out that she didn't gamble because of the money, but because it was "Freudian."

    I like the table camaraderie," she noted. "You have to be careful not to disrupt the table camaraderie."

    "How can you make sure that you don't disrupt the table camaraderie?" I inquired.

    "Don't fuck the deck," she replied. "And if you do fuck the deck, try as hard as possible to unfuck it."

    "How do you unfuck the deck?" I asked, not mentioning that I'd been accused of doing precisely that at least three other times during the day.

    "It's a long story."

(Note the Trump reference in there. This came out in 1999. He knew.)

This, in essence, is what Wall Street is now pissed at Main Street for doing to them. They have taken perfectly legally obtained public information about their hedge fund trading habits and, using them to their advantage, they have fucked the deck. And this will not do. Masters of the Universe are the only ones allowed to play at this game.  Just as their conduct in shorting in the first place is legal, the interlopers' use of their conduct to profit themselves is, also- for now.  There's little that is ILLEGAL, outside of blatant insider trading- and even that is countenanced (witness the more than half dozen then-sitting US Senators who either dumped fragile stocks or loaded up on pharma ones with their inside knowledge of the real effect of COVID early last year), or, in the case of our local felonious Congresstrader, pardoned.

It is now a bizarre game of wack-a-mole, where the Reddit crowd identifies a new stock that has been previously overshorted, tries buying it to jack its price up (and screw the hedge fund vultures), and the stock exchanges (the biggest owned by the husband of one of those trade-happy US senators) halt trading in it.

I may move into securities law after this. It could be fun.

Comments

[uninvitedcat]

I saw that one-screen explanation of the GameStop situation on Twitter, and thought it absolutely excellent!

[warriorsavant]

Like most people, I'm absolutely adoring this whole Gamestop escapade. The reddit crowd will likely ultimately get hosed, because they bought up stock in an essentially worthless company (except the few who got in early and then sold it), but it is absolutely wonderful their having done it. They have, as you say, f***ed the deck, which is not their problem.

[angledge]

Thanks for the explanation of the GameStop sitch. I kinda knew what happened, but that B&W screenshot made it clearer to me.