Remember GameStop back in January? If you don’t, here’s a recap:
There is a subreddit called r/wallstreetbets, where retail investors (normal people like you and me) post their earnings, wins, losses and a lot of memes in relation to the share market. These Redditers were driving up the price of shares of a company called GameStop (and other companies like Blackberry too). By driving up the price of these shares, it would bankrupt super rich hedge funds. It was kind of a joke, but also taken quite seriously.
- Wall Street: An actual street in New York that is the financial epicentre – the home of the New York Stock Exchange
- Main Street: A term used to describe normal retail investors (people like you and me) who buy and sell shares
- Hedge fund: a company (that has a lot of money) who looks after rich people’s money. Hedge funds engage in risky share trades that are kind of like gambling where the wins can result in mass profit, but the losses can end up in bankruptcy.
The story begins
But one of the most interesting parts of that story came a little after all the hype. This story was perceived as a war between Wall Street and Main Street. And yes, to an extent, what those random retail investors on Reddit did made some on Wall Street panic there for a while. But the outcome of that story wasn’t necessarily a win for retail investors. Let’s take a look at why:
Let’s start with a company called AMC Theatres – a movie chain like Event Cinemas or Hoyts. They were on the brink of bankruptcy due to the pandemic. As Reddit retail investors were driving up the price of GameStop, they were also doing the same to other companies, including AMC Theatres. They were doing this, and we’re not joking when we say, for the meme, and wanting to annoy rich hedge funds.
AMC Theatres took on a loan from a hedge fund called Silver Lake (remember this name) in 2018 worth $US600 million. This was not a normal loan, Silver Lake could convert the debt it had from giving the loan into AMC shares — effectively turning their loan into ownership of a portion of AMC Theatres. Share ownership = owning a portion of a company. Turning debt into shares is a fairly common practice in finance and is used as a protection mechanism in case the loan cannot be repaid by the receiver.
Here’s where it gets interesting.
AMC shares went from $2.12 (thanks to the retail Reddit investors) to $19.90. Remember how we said AMC was on the brink of bankruptcy? The likelihood of them paying that loan from Silver Lake was looking rather slim, so when the price shot up, Silver Lake (the hedge fund) decided to capitalise on it. Silver Lake turned their debt into AMC shares, and instantly sold them. By selling, Silver Lake made US$713 million from the sale (thanks to that price jump from Reddit retail investors).
Silver Lake’s original loan to AMC Theatres in 2018 was US$600 million. But Silver Lake sold the AMC shares at US$713 million, meaning Silver Lake made a profit of US$113 million.
Guess where all that money came from? The retail Reddit investors. The reason Silver Lake was able to sell their shares and profit was through Reddit investors pumping their money into those shares, driving up the price. When someone (or a company) sells a share, someone has to be on the other side buying the share. The buyers were retail investors, essentially meaning retail investors bought the AMC debt, and made Silver Lake (the rich hedge fund) US$113 million richer.
As much as this story was first perceived as the normal guys winning, it wasn’t necessarily the case. The rich got richer off the backs of normal people. But the good news for AMC Theaters? They survived the pandemic thanks to Reddit.