I think you've got this backwards.

Big hedge fund like Melvin Capital goes out of business. The shares they borrowed and sold are now gone, but the broker still needs them back. The broker can't call them from Melvin, so the broker that lent them is now on the hook. They cannot ignore this or let it ride because their books now show that their customers own shares that the broker does not have.

The broker has to buy back the shares NOW because they do not own the shares and have no agreement on how or when to get them back. This is fabricating shares if they don't get them back ASAP.

That broker has to replace millions of shares, so they start putting in buy orders to cover, losing money. Except this isn't just one broker, it's every broker that Melvin borrowed from.

Price spikes. Oh, price is spiking on that big order from brokers A, B, and C. Now Citron went from losing billions a week to having their entire portfolio at negative value. Their brokers now call them on it because their entire firm is now worth negative money.

Now brokers D E and F are in the same boat buying shares because their shorts aren't coming back.

Price keeps spiking. Brokers entire portfolios are now worth negative value. The brokers have immediately lost all of their money, all of their operating capital, everything.

and when the brokers go, so do the banks, the clearing houses, and everything.

We were about a day away from Apple and Google not being able to make payroll.

Precisely my thoughts as well

Do you think we're going to have to repay that "free money" eventually through inflation

Honestly, I'm not convinced inflation is a thing in the classical sense anymore. Nobody has a number of how many dollars are in the economy. It's not like Germany where people were carrying around wheel barrows and could see that dollars are easy to get. It's all numbers in a computer. Does the classical mechanics of supply and demand on money even exist outside of international exchange anymore? It's definitely not directly correlated with the money supply.

i think im more confused than ever now. still dont see how people would have been able to cash out at a sustained 1k price tag, especially if bankruptcy is in the mix for the big guys involved. i see the picture painted that it wrecks big time greedy fucks, just not how people get paid out or how the price would be sustained, or how people coordinate without getting on the hook for price manipulation.

They would be able to cash out at 1k+ because the buy orders are forced. The brokers MUST BUY. When the guy who owes you shares stops existing you have to still replace those shares. So you get a bunch of buy orders all at once for twice as many shares than exist. It's not coordination, it's that every broker that lent Melvin shares has to cover when Melvin goes out of business because that is the triggering event for all of them. Every retail investor could sell at once and it would only be 100m shares, but the brokers are being forced to buy 250m shares.

ok then, if u will, ELI5 in the context of I hold 1 GME share i bought for 300$ on Robinhood and the stock price is now 1k$.

tbh i felt like i had a decent understanding of the situation but am grasping i did not and am glad i stick to meme stocks and my TSM roth and crypto.

From my perspective, inflation is currently in asset prices ie stocks crypto and housing

Obviously no one has a crystal ball like mentioned but I'm just worried something triggers the shift from assets to goods

Thor buys 1 share of GME at $20. The broker that holds my shares (Robinhood) loans my share out to Melvin. Melvin pays Robinhood 1% of the share price every week until they give it back. Melvin sells the share for $20 to John, who is also a Robinhood customer.

Melvin borrows John's share from Robinhood at $18 and sells it. So now there are 2 shares shorted, but it was the same share.

This process repeats enough times, with Robinhood's customers buying shares from Melvin and Robinhood loaning them out to Melvin, that Melvin owes Robinhood twice as many shares as exist in the market. The process of selling more shares than actually exist (by borrowing them from Robinhood) has driven the stock down to $4.

(In reality Melvin is multiple firms and Robinhood is multiple brokers)

Several weeks go by and GME is at $30 because retail investors are buying and Robinhood has raised its fee to 5% per week. Melvin has to give Robinhood 5% per share, and the price is double what its borrowed its shares at, so they are losing 10% of their short profits every week, and if they wanted to buy it back they would be paying twice as much.

Next week GME is at $300. You buy a share at $300 and hold.

Melvin is now paying 5% of $300 per share. One week eats all of their profit. Next week eats into the rest of their portfolio.

3 weeks go by with GME above $100, and Melvin has virtually exhausted all of their reserves. They can't pay Robinhood the interest on the loaned shares, but they also can't buy them back for 10x the price they sold them at. They're sunk. Melvin files for bankruptcy.

Robinhood gets a letter saying Melvin no longer exists. Melvin owed Robinhood 300 million shares of GME.

Everybody who has shares of GME being held by Robinhood owns shares, but Robinhood doesn't have them. Uh oh.

Robinhood now has to buy 200 million shares of GME. Only 100 million shares of GME exist. They start putting in buy orders at $200, but nobody sells.

They put in a buy order at $500 and get some hits, but the price moves up.

They put in a buy at $1000 and get some more, the price moves up.

They still need to cover 150 million shares NOW.

Robinhood's books are showing that they owe 150 million shares at $1000 each. <-- This is where everybody sells, and Robinhood has to continually buy it at whatever price the market sells it for.

The banks who have loaned them money, who gets to see Robinhood's books at any time to assess risk, call them on the fact that they owe their clients more in GME shares than they are worth as a company.

Robinhood can no longer get a loan because they are worthless as a company.

Robinhood owed the bank 100 billion dollars it was using as operating funds.

The bank shows a loss of 100 billion dollars because Robinhood is definitely not going to pay that back.

That bank owed another bank 80 billion dollars. That bank sees an immediate loss of 80 billion.

Continue down the chain with everybody taking losses.

The financial system basically collapses because all of the brokers defaulted on their loans all at once


We were almost at the bolded step, which would have destroyed the system. The little guy gets paid or the system crashes around them.

But instead they changed the rules.

looking good so far

New to this forum, but I’m in on PLTR and having a great morning so far

This post was edited by SharpNips on Feb 19 2021 09:54am