How GameStop, Bernie Madoff, and Dave Portnoy Have Mets Fans Panicked
Less than a decade after the Bernie Madoff scam roped in the Wilpons and supposedly handcuffed the New York Mets payroll as a result, the team’s fans are panicking that new financial market weirdness in the form of bizarre trading in video-game retailer GameStop is going to harm new owner Steve Cohen’s ability to make the Mets amazin’ again.
How this could possibly happen is, like a Mets fan’s psyche, complicated.
In December 2008, Madoff was arrested and later found guilty of operating a Ponzi scheme over decades. Among its investors: the Mets. Some $500 million of team money was in Madoff’s fake funds, forcing the team to borrow hundreds of millions of dollars to cover the lost and seized assets. On top of that, the team’s controlling owners, the Wilpon and Katz families, had personal money in the fund. Investigators later determined the families actually realized profits overall (because Madoff produced fake returns to older investors using money from newer investors). The family had to pay back perhaps $71 million. Mets fans lamented that the financial stress from the scheme handcuffed the payroll for years.
Fast forward to late 2020. In a quarterly SEC filing, a hedge fund named Melvin Capital listed a position in GameStop, a brick-and-mortar video-game retailer many people see going the way of Blockbuster. Melvin reported the equivalent of 5.4 million shares controlled through a put—an option that conveys the right to make someone else buy shares at a set price. Essentially, it’s a short—a bet that the price in the underlying stock of the put will decline. Options are preferred for such bets because they are cheap to buy. The market value of Melvin’s GameStop position in November was $55 million.
Around that time, a group of anonymous posters – presumably daytraders – on Reddit, a fever swamp of investing chatter, began pointedly naming Melvin Capital and urging fellow traders to push up prices on the hedge fund’s apparent short positions, including GameStop, whose shares were then trading around $12.50. Historically, the idea of individual “retail” traders affecting a hedge fund would have been laughable. But then came Dave Portnoy.
Portnoy, the founder of Barstool Sports, began daytrading during the pandemic. And Portnoy, who only traded one stock beforehand, wasn’t alone. Millions of sports fans missing the thrill of gambling and others itching to play with federal stimulus payments while stuck at home joined him. Inspired by the daily streams of Portnoy’s trading exploits, the retail army started piling into the stock market, including using options themselves, cheap ways of betting on prices moves that actually end up affecting prices. Portnoy didn’t target Melvin or GameStop, but his retail army and their swagger has made retail traders an unexpected force in the stock market. In the old days, retail investors were as a rule always the ones being outsmarted by hedge funds. Now the tables are turned.
“Guess what? In football the forward pass didn’t exist in the beginning. Then it’s invented. This is new: new traders, new strategies, new everything. No different than gambling,” Portnoy said on Twitter about GameStop trading.
The piling into GameStop has sent shares skyrocketing in days. GameStop shares jumped more than 50% on January 13. They jumped another 55% on January 22, then another 68% Tuesday and then 133% today. Since the start of the year GameStop shares have run from $18 to $345. It’s not just retail traders joining the frenzy. Also joining the gamification of stock trading in GameStop is Chamath Palihapitiya. The co-owner of the Golden State Warriors found time between running his six SPACs to buy calls (the right to buy a stock at a lower price) on GameStop, and then went on CNBC to donate his profits to Portnoy’s Barstool charitable fund.
Melvin Capital? It has lost perhaps 30% in January alone, as a series of short bets including GameStop turned bad, according to a report by the Financial Times.
In comes Steve Cohen. Melvin Capital founder Gabe Plotkin used to work for Cohen and already had $1 billion of Cohen’s money in his fund. To help Melvin weather its awful month, Cohen and another hedge fund billionaire invested another $2.75 billion into Melvin this month.
That in turn is why Mets fans are now freaking out. One Reddit poster claimed yesterday Cohen’s fresh capital must be gone, burned in Melvin’s desperate need to cover the short bet on GameStop. Suddenly, visions of a super wealthy new owner who could finally spend money on the team were replaced with another Wall Street catastrophe. Mets fans worried while GameStop pumpers teased Cohen.
“Rough crowd on Twitter tonight. Hey stock jockeys keep bringing it,” Cohen tweeted last night.
In reality, Mets fans probably don’t need to worry: Cohen is baseball’s richest owner at $14.6 billion in wealth, and he didn’t serve as inspiration for the brilliant, ruthless Bobby Axelrod of Billions by losing money so easily. He even survived seeming permanent regulatory banishment from managing other people’s money.
A spokesman for Cohen Wednesday said the billionaire wasn’t immediately available to comment.
More practically, hedge fund disclosures are few and far between, and reflect one day’s portfolio position. But for the company telling the Financial Times today it has closed out its short position in GameStop, no one actually would know if the fund was short the stock recently.
Melvin has no obligation to report a short position publicly beyond whether shares are controlled by options on the date of the SEC filing. If the short position was just the reported put (and not actually selling shares short), Melvin can let it expire without being used – after all it’s an option, not an obligation – losing a “mere” $55 million. Melvin also may have drastically hedged its position even before its disclosure in November to reduce its overall GameStop risk.
Even if Steve Cohen literally loses all of his investment into his protégé’s hedge fund, he still has more than $10 billion elsewhere—including more than $1 billion in art hanging on his walls. That’s hard for any retail army to get at – just yet.
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