Chapter 1
Mr. Kitty Goes to Washington
Keith Gill
"I am not a cat."
So began the congressional testimony of an until recently middle-class, thirty-four-year-old financial wellness expert from the suburbs of Boston. His quip, a reference to a video of a virtual legal pleading that had gone viral a week earlier, injected a bit of levity into the serious proceedings, being conducted remotely on the afternoon of February 18, 2021, because of the still-raging COVID-19 pandemic. Unlike the hapless, tabby-faced lawyer, Keith Patrick Gill had more than enough tech savvy to disable a Zoom filter.
He had recently come into a bit of money in the stock market-over $50 million at one point-and, indirectly at least, he had modern social media and trading apps that had radically lowered the bar for novice investors to thank for it. Even at his peak, that made him easily the poorest of the five men called to testify that day.
Gill, who went by the name Roaring Kitty on a series of YouTube videos and by the screen name DeepFuckingValue on Reddit's WallStreetBets forum, also was the sole man testifying at the virtual hearing who had become rich by risking only his personal capital. It was all earned through a concentrated bet on the stock of a single company that some of the brightest minds in finance were convinced was headed in the opposite direction: GameStop. It takes two to make a market, as they say.
When Gill first made a fortune on paper and then hung on to most of his stake anyway, he became an overnight hero for an online social movement. Millions of people logged on to WallStreetBets each afternoon just to see if he had sold, and members vowed each time:
If he's still in, I'm still in!
The revolutionaries couldn't all get rich or even make a profit in the process-though clearly many hadn't thought that part of the plan through-but they could transform themselves from hunted to hunter on Wall Street by collectively weaponizing their modest brokerage accounts. For some, sticking it to the man was just the gravy on top of the profit. For others, it had suddenly become their main goal, and they pledged to hang on even if it cost them money. They were surprised by just how successful they were as millions of people joined them over the course of one crazy week. But, just as the fat cats were in full panic mode, they got bailed out again when the rules of the game were changed. It was "heads we win, tails you lose," just like during the financial crisis. That was the popular narrative at least, and it was the reason Gill had to put on a suit and tie that morning.
Vladimir Tenev
The other men called as witnesses were wearing nicer suits and were giving their testimony from swanky offices, not the basement of a rented house with a poster of a kitten hanging on the wall. They had accumulated far greater fortunes than Gill, in large part by tapping into the era's gusher of venture capital or by profiting from the longer-standing practice of "helping" Americans invest and grow their savings.
The one who would get the most questions that day from the House Committee on Financial Services, Vladimir Tenev, was the same age as Gill. Slim and pale with shoulder-length brown hair, he bore an uncommon resemblance to Adam Driver, with more than a touch of David Cassidy. Tenev had immigrated to the US from Bulgaria as a child shortly after the fall of its communist regime. As a boy, he was preoccupied with having money so that his family wouldn't get sent back and studied hard, majoring in math at Stanford. Tenev had become a billionaire three years earlier by harnessing both Silicon Valley's and Wall Street's money machines to start a company named for Robin Hood, the mythical figure who stole from the rich to give to the poor. But now he was the prime suspect in rigging the game for Wall Street's fat cats by restricting trading just as the squeeze had them on the ropes.
Tenev started out his testimony by reading lines taken straight from his company's marketing materials about how "the financial system should be built to work for everyone," not just people with a lot of money.
Committee chair Maxine Waters was in no mood to hear it, cutting Tenev off as he began and telling him to "use your limited time to talk directly to what happened January 28th and your involvement in it." That was the day three weeks earlier that had outraged everyone from leading politicians on both sides of the spectrum to late-night talk show hosts, making WallStreetBets a cause cŽlbre.
Although the committee's members had accepted millions of dollars in political donations from the finance industry, sympathies clearly were with the little guy that day. There was just one problem: nobody had broken any rules. Moreover, as we shall explore later in these pages, there was no conspiracy between hedge funds and retail brokers to short-circuit a revolution.
But one pundit's quip that the hearing was a solution in search of a problem overlooked the big picture. It was a missed opportunity to lay bare for the public how a huge and hugely profitable business made its money from the savings of novice investors. For decades Americans have been forced to navigate a confusing maze of slick marketing messages from companies seeking to help them invest their money, often leading to poor and expensive choices. Compound interest isn't something that people grasp intuitively, but people like the late index-fund pioneer Jack Bogle had by then convinced tens of millions of savers that they were giving up a huge chunk of their potential nest eggs due to what seemed like inconsequential costs.
Now, though, many stock-trading services like Robinhood were "free." So were real-time updates delivered straight to your smartphone and investing recommendations on social media that seemed to have worked out well lately. Index funds, on the other hand, were about as exciting as watching grass grow. A lot of the analysis and news feeds that cost professionals a fortune and had long given them an edge had now become available to the little guys, allowing them to compete with and even outsmart elite investors. That was the story, at least. But, if finance was being "democratized," why was Wall Street making more profit than ever?
Had the hearings been called at some other point in time-say, in the aftermath of the dot-com bubble's bursting-people tuning in might have been more interested in how much of the stock market's return was accruing to them and how some of the men testifying that day had become so rich. But February 2021 was a moment in time when most Americans with investment accounts weren't in the mood to check the fine print on their statements. Stocks were booming, and the people affected by the trading restrictions believed that they could do much better than just capturing the market's long-run return. They were Wall Street's ideal customers.
Americans are almost entirely on their own when it comes to financing retirement and their children's education. Those that take the crucial step of setting aside enough money for those goals often get their pockets picked along the way without realizing it. The meme-stock squeeze presented an excellent opportunity to ask some hard questions about how much of our savings wind up enriching Wall Street and what could be done to change the industry's incentives.
A few of the statements made and questions asked by members of the committee got to that point. For example, Illinois representative Sean Casten had an uncomfortable observation as he addressed Tenev.
"There is an innate tension in your business model, between democratizing finance, which is a noble calling, and being a conduit to feed fish to sharks."
Another member asked Tenev if he should have seen the trading frenzy coming. Tenev called the meme-stock short squeeze a "black swan" event that had a one in 3.5 million chance of occurring. Maybe the former mathematics PhD student's numbers were accurate, but a black swan, a term popularized by bestselling author and risk analyst Nassim Nicholas Taleb, is something one simply didn't anticipate, not just a rarity. Tenev wasn't a passive observer of the increasingly wild and risky behavior by novices over the past year. His firm and its imitators enabled them by making trading with borrowed money and derivatives free, easy, and even fun-a bit too much fun. Robinhood's whole business model prospered when its customers traded a lot, and it did even better because of their recklessness. Plenty of Robinhood's core demographic, young men, already are reckless without any encouragement. They also take their cues from one another-mainly on social media these days. Robinhood's interface and price point put that tendency on steroids. The reason Tenev was testifying that day was that his company had done too good of a job and had to hit the circuit breakers.
Everything we know about the success or failure of individual investors tells us that this was a recipe for poor returns and high risk. So how did Robinhood's customers do? Tenev replied that they had collectively earned $35 billion over and above the money they had deposited. But how much had they deposited and what was their return? Would it be at least as good as just parking the money in an index fund? Tenev tellingly dodged the question, instead noting that his customers had more money than if they had just spent it instead.
Gabriel Plotkin
One of the sharks in Casten's metaphor was a witness at the hearing. After years in which he chomped more minnows than almost anyone else, though, the revolutionaries nearly beached Gabriel Plotkin, founder and chief investment officer of Melvin Capital Management, erasing billions of dollars from the value of his hedge fund.
Despite being the squeeze's biggest victim, Plotkin wasn't expecting a sympathetic audience that day, and he didn't get it. Part of the reason is that, despite the passage of time, the global financial crisis had made hedge fund managers like him out to be cartoon villains. And the fact that he made part of his money by betting certain stocks would fall made him even worse in the public's eyes.
Like Gill, Plotkin had found himself caught up in a securities fraud investigation at the age of thirty-four. He also hadn't done anything wrong, but it was a scare that came close to cutting short a promising career. At the time Plotkin was a star portfolio manager at SAC, the aggressive hedge fund whose initials stand for the name of its founder, Steven A. Cohen, Wall Street's most feared trader. He had been copied on emails circulated to others at the firm about insider tips on stocks. There is no evidence that Plotkin acted on or even read them. SAC was eventually forced to pay a $1.8 billion criminal and civil penalty, and several employees faced insider trading charges.
His boss's adversity turned into an opportunity for Plotkin, who struck out on his own in 2014, naming his new hedge fund after his late grandfather, a hardworking convenience store owner. With some cash from Cohen and others, he was managing $500 million at the end of his first year in business and immediately began racking up big gains. As Plotkin informed the committee in his written testimony, among his first positions after starting the firm was going short the shares of GameStop-borrowing its shares and selling them in a bet that their price would fall and that he could buy them back more cheaply.
Why GameStop? Plotkin's focus was finding successful companies he thought would rise in value, as most investors might. But instead of just avoiding those that didn't make the cut, he and many other hedge fund managers picked likely losers in the same business, betting against them. If all retailers had a terrible year in the stock market, then his performance might not be so bad because weak companies he had sold short would do even worse, making Plotkin a profit and smoothing out the rough patch. It worked like a charm until it didn't: by the eve of the meme-stock squeeze, Plotkin was managing about $13 billion in his fund. He had personally taken home $846 million in compensation the previous year.
Plotkin was in many ways different from his mentor Cohen, who collected impressionist paintings and modern art and had reportedly paid $12 million for a shark in formaldehyde by Damien Hirst titled The Physical Impossibility of Death in the Mind of Someone Living. Melvin Capital's first office had a single decoration-a framed quote by football legend Vince Lombardi that probably cost about $12: winning is habit. In other ways, though, he was similar. Athletic and darkly handsome with a full head of hair, Plotkin might not have looked much like the bald, chubby Cohen, but both had minds made for Wall Street. A sports buff, Plotkin could instantly recall all manner of statistics and had turned that ability toward finance, being able to regurgitate dates and stock prices with ease. Lately both Plotkin and Cohen had invested in the ultimate trophy asset for a master of the universe-a professional sports team. Cohen had become the majority owner of the New York Mets in 2020. Plotkin, along with Daniel Sundheim, a competitor who also lost a fortune in the meme-stock squeeze, had bought a chunk of the Charlotte Hornets basketball team in 2019 from hoops legend Michael Jordan.
The reason hedge fund managers can earn hundreds or even thousands of times as much as the poor schlubs, relatively speaking, who manage mutual funds for mom and pop, is that they are supposed to have an edge. While their average performance hadn't necessarily borne that out in the years since the global financial crisis, they are certainly allowed to do things that someone who works for Fidelity or Vanguard can't with your 401(k). That freedom means that their performance can be different from the market overall-the "hedge" in hedge fund. That is in and of itself a selling point in marketing pitches to the trustees of pensions and endowments who hand over hundreds of billions of dollars to managers like Melvin Capital.
But this certainly wasn't what they thought they were getting when hiring Plotkin. Over the span of several exuberant days for the WallStreetBets crowd, Melvin Capital would bleed a dangerous amount of money as GameStop's share price, and eventually the prices of other heavily shorted companies, surged. Melvin received a quick infusion of $2.75 billion from Cohen and Citadel LLC, the giant financial firm run by Ken Griffin, with Plotkin later insisting it wasn't a "bailout."
