Washington Lets Stock Mania Unfold in Reminder of Market’s Risks
(Bloomberg) -- Frenzied trading by retail investors has swept up a struggling video-game retailer, a movie theater operator and now the price of silver -- capturing Wall Street’s imagination and drawing promises of close scrutiny from Washington.
But while regulators, lawmakers and the Biden administration say they’re closely monitoring the market turmoil, there’s little sign the government is poised to intervene.
For all of the billions of dollars made and lost, the Wall Street whiplash has yet to pose a fundamental risk to the economy or financial system, according to a half-dozen former senior Treasury Department officials, leaving regulators with little immediate role to play. Likewise, agencies are wary of overprotecting investors from unwise financial bets.
“If one group of speculators wants to have a battle of wills with another group of speculators over an individual stock, God bless them,” Federal Reserve Bank of Minneapolis President Neel Kashkari said Monday in a virtual town-hall event.
The market turbulence whipsawing prices for GameStop Corp. and AMC Entertainment Holdings Inc. comes at a particularly awkward time in Washington, where President Joe Biden’s administration is still taking wing. Many of his cabinet choices and picks for other crucial jobs await Senate confirmation -- including Gary Gensler, his nominee as Securities and Exchange Commission chairman.
Biden has yet to nominate a chairman of the Commodity Futures Trading Commission -- the agency that Gensler led after the 2008 financial crisis and that may take an interest after retail traders drove up the price of silver on Monday.
The Biden administration and Congress have also made clear they believe other matters are far more pressing. The president is in the midst of an aggressive push for another virus relief package. The Senate is preparing for former President Donald Trump’s impeachment trial next week between confirmation votes for Biden’s nominees and stimulus negotiations.
There are signs that some of the frenzy hitting GameStop and other stocks is abating -- at least for now. GameStop sank as much as 67% in New York trading Tuesday, after plunging 31% Monday.
Acting SEC Chair Allison Herren Lee said Monday the agency was keeping a close eye on stocks but had seen no evidence that the broader market is under threat even as she warned individual investors could pay the price.
“When we see stock prices depart so wildly from fundamental valuations, we know there is a chance that people are going to get hurt,” Lee told National Public Radio. “We want people to know that there are risks involved here.”
Uncertainty surrounding the frenetic trading of GameStop and other stocks has made consensus difficult on a policy response. In Congress, the sophisticated financial machinations behind the trades are poorly understood, prompting House Financial Services Committee Chairwoman Maxine Waters to schedule a Feb. 18 hearing on the turmoil titled: “Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide.”
‘Harmful to the Market’
Some House and Senate lawmakers are warning that the government may come to regret a failure to act against market behavior -- including high-frequency trading and short-selling of more than 100% of a company’s available stock, as was the case with GameStop.
“That speculation can be harmful to the integrity not only of just this small segment of the market but can possibly be harmful to the market itself,” said Representative Al Green, a Texas Democrat who sits on the House Financial Services Committee.
Senator Sherrod Brown, the incoming chairman of the Senate banking committee, pledged Tuesday to hold hearings on the matter and called on the SEC to address a system he called “broken.”
“Wall Street has been using the stock market for years as its own personal casino, then when they’re in trouble they look to taxpayers, they look to the federal government to bail them out,” Brown, an Ohio Democrat, said in a video posted on Twitter. “That needs to stop.”
Retail investors who are long in GameStop and other companies face the prospect of considerable losses as the stock prices fall. But the SEC has not traditionally seen its role to include intervening to prevent such losses. Plus, an intervention might not work as intended: many investors have decided to buy GameStop stock despite long-term risks of its business model.
Robinhood Markets Inc. is facing scrutiny from Democrats and Republicans over whether the startup can handle heavy betting on GameStop and other stocks. The more risks its customers take, the more collateral the company must post with the little-known Depository Trust & Clearing Corp, which processes trades.
On Tuesday, Democratic Senator Elizabeth Warren asked Robinhood Chief Executive Officer Vladimir Tenev to explain the company’s decision to restrict trading in GameStop and other stocks. In a letter to Tenev, Warren sought assurances that Robinhood is meeting regulatory requirements and contractual obligations to retail customers, while requesting a reply by Feb. 9.
Federal agencies are unlikely to intervene if Robinhood found itself on the brink of failure, however, since it’s viewed as being too small to inflict major damage on the overall financial system.
SEC Moving Deliberately
The SEC would be best positioned to step in, should it identify a problem, said the former Treasury officials, who spoke on condition of anonymity. Yet the SEC must move carefully and deliberately to alter regulations around market activity, lest it provoke -- and risk losing -- a lawsuit from traders who regard themselves as disadvantaged by the decision.
While there have been calls to change rules and laws governing brokerages like Robinhood as well as short-selling, they could take months or years to be approved -- well beyond any short-term damage from the situation.
Among the SEC’s responses, short of intervening, would be investigating into whether the wild trading swings involved manipulation or other wrongdoing.
On Monday, in a slight change of message, White House Press Secretary Jen Psaki invited congressional examination of “important” -- but unspecified -- issues raised by the trades. “We think congressional attention to these issues is appropriate and would welcome working with Congress,” she told reporters.
Green said forthcoming congressional hearings should look into matters ranging from hedge funds’ systemic advantages over individual investors to whether new regulations are needed on high-frequency trading to prevent equity markets from being “rigged.”
Representative Ro Khanna, a Democrat who represents Silicon Valley, called for greater regulation of hedge funds, including imposing greater capital requirements on funds that engage in short-selling as well as reinstatement of the Great Depression-era “uptick rule” that restricted the practice. Khanna said Monday on MSNBC that Robinhood should also have stronger capital requirements.
Blizzard of Cash
“They can’t be promising in their terms of service that they trade and not have reserve requirements,” Khanna said.
When systemic problems arise in markets, Washington typically responds with a blizzard of cash in order to prevent the whole financial system from coming undone. When commercial lending and other significant sectors froze in March, at the onset of the pandemic, the Fed and Treasury responded by enacting emergency lending programs to stabilize markets and give confidence to traders.
The Fed and Treasury similarly responded in 2008. As credit markets deteriorated, they announced a series of emergency lending programs to backstop money-market mutual funds and took over Fannie Mae and Freddie Mac due to concerns the companies would collapse and the mortgage market would be obliterated.
Even Congress and the White House have shown they can act fast if there is a genuine emergency. After Lehman Brothers collapsed, there were grave concerns about runs on banks, so lawmakers passed the Troubled Asset Relief Program, which provided a $700 billion bailout.
And after the pandemic blossomed in the U.S. in March, collapsing the economy as states halted most public activity, Congress raced to pass the largest stimulus in history: the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act. President Donald Trump signed the measure into law before the end of the month.
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