Wayne Parry/AP Photo
At Golden Nugget in Atlantic City. The casino’s parent company announced a $6 billion SPAC.
After a trading frenzy that shook a few hedge funds and launched thousands of populist cries of “Hold the Line,” GameStop has sunk back toward reality, closing on Wednesday at $92 a share after reaching as high as $347 a week ago. (It should be noted that this is still over five times where GameStop closed as recently as Inauguration Day.) Other meme stocks have been falling, as the reality of hype trading sets in. All told, the most volatile 50 stocks have lost $167 billion in value from their peak. Of course, the same stocks gained $267 billion from the beginning of 2021 to the peak, so there’s further to fall.
Those truly dedicated to taking on the financial system have pivoted, however. They’ve discovered what the rest of the investing world has worked themselves into a lather about recently: SPACs.
In 2021, SPACs, or special purpose acquisition companies, have increased on the first day of their initial listing on the stock exchanges by an average of 6 percent, as opposed to 1.6 percent last year. According to a Dow Jones Market Data analysis, 117 straight SPACs listed have gone up in their opening week. Analysts attribute this to an onrush of day traders, and they’ve found a few quotes from twenty-somethings to buttress this.
But the truth is that SPAC mania is a much broader and more revealing phenomenon, one that demonstrates how the GameStop craziness is more reflective of the entire market’s penchant for reckless gambling than an anomaly. Before anyone ever heard of DeepF**kingValue, the most sophisticated investors in America were gorging themselves on wholly speculative SPACs, no matter how dubious. We’ve created a massively over-financialized economy where secondary market trading is a more reasonable ticket to wealth in America than finding a high-paying job. If we were really looking to shut down the Wall Street casino, and needed evidence to that end, we’d turn away from GameStop and r/wallstreetbets, and look at SPACs.
It’s like every GameStop meme is converging in the SPAC space.
I first wrote about SPACs last August; they are effectively an end-run around the initial public offering process. A rich financier sets up a shell company that it puts on the stock exchange. Investors can then buy shares in the SPAC, even though it has no business and no products. They are often called “blank-check companies.” Within two years, the SPAC must use the money it’s raised to purchase a private company. The merger makes that private company go public, without having to do an IPO.
If it sounds like an easy way for an iffy company to avoid all the public disclosures associated with an IPO and just get into the public markets quickly, well, that’s exactly what it is. SPACs used to be frowned upon, because what shady private company would have to shield themselves from disclosure to go public? And why would any investor sign up with a company that could tout its future profits, never show their work, and suffer diminished risk of future lawsuits about fraudulent hyping?
But some of the biggest names in finance decided to embrace SPACs, as a means to gobble up startups. And now it’s gotten completely out of control, with SPACs trading higher even before they buy a private company. In other words, people are enthusiastically buying and selling non-entities, with no assets, no products, and no sales.
Last year, SPACs raised $82 billion, more than their entire history to that point. And there were more SPAC announcements in the first three weeks of 2021 than in all of 2019. Chamath Palihapitiya, one of the limousine populists hyping up the GameStop trade, has several SPACs. Paul Ryan—yes that Paul Ryan—has a SPAC. So does Shaquille O’Neal. (Shaq SPAC: OK, that had to happen.)
A week ago Monday, five SPACs announced $15 billion in mergers. Mobile game developer Playstudios announced a SPAC merger this week for $1 billion. The parent company of Golden Nugget casinos announced a $6 billion SPAC. Literally a maker of rocket ships is going public via a $2.1 billion SPAC. It’s like every GameStop meme is converging in the SPAC space.
WeWork couldn’t become a public company the normal way because its finances were appallingly bad, but it’s taking the SPAC route, because nothing matters.
Nobody is being turned away from the SPAC banana stand. Former Boeing CEO Dennis Muilenburg, literally one of the most disgraced people in corporate America, started a SPAC and plans to raise $200 million for it. Muilenburg was ousted as CEO at the end of 2019 after presiding over two deadly 737 MAX crashes, despite warnings the company failed to convey to federal regulators. Muilenburg’s SPAC office is a few blocks from Boeing’s corporate HQ in Chicago; it’s like nothing ever happened. Almost more incredibly, WeWork, which had the most disastrous IPO in recent memory just a couple years ago, is in talks to merge with a SPAC in a deal that would value the company at $10 billion. WeWork couldn’t become a public company the normal way because its finances were appallingly bad, but it’s taking the SPAC route, because nothing matters.
So, the story so far: Every miscreant in the business world is piling into SPACs and investors can’t get enough of it. And everyone’s getting rich. Investment banks soared at the end of 2020, mostly on underwriting SPAC entries into the market. An entirely separate operation called PIPEs, or private investments in public equity, are surging alongside SPACs, to help fund the eventual mergers. There’s now an exchange-traded fund (ETF) that’s a basket of SPACs. And the Redditors have found the market as well. The best thing that you can say about SPACs, as Goldman Sachs CEO David Solomon did recently, is that when some of them crash it won’t trigger a total crisis.
Why are we talking about day traders with $600 stimmy checks when this rampant speculation, which is just as dangerous and will come to just as inevitable an endgame, is happening just next door? “It’s a tremendous amount of speculation,” Wealthspring Capital’s Matt Simpson told The Wall Street Journal, in a typical admonishment about how day traders are getting in over their heads with SPACs. But he’s a SPAC investor! “It worries me,” said another investor named Bill Foley. He owns a SPAC!
Maybe there’s no correlation between GameStop’s stock and the value of the underlying company, but there are countless examples of that dynamic throughout the market, including with SPACs that are literally non-companies. The main problem with the GameStop frenzy is the extension of leverage to retail investors through options trading. That’s what creates giant losses, and we can limit that.
But what the SPAC mania reveals is that there’s irrational exuberance all the way down in the markets, with little or no regard for valuations or corporate performance driving the trading volumes. Indeed, there’s massive speculation on both sides of the GameStop bet, just like there is throughout every position on Wall Street. The speculation, not the online trading app facilitating one tiny corner of it, is the problem.
In a New York Times op-ed Alexis Goldstein gets at part of the larger problem: We have spent so many decades financializing the economy and devoting greater and greater resources to capital than to labor that casino-style speculation has become one of the few alternatives to success. Better pay and a stronger safety net and the ability to take risks as an entrepreneur and an actual means to build wealth would make wild trading obsolete to the ordinary investor. Instead the money’s in financial engineering, so you have to put your effort and energy there.
The way out of this crisis is to shut down the casino, and radically shrink the unproductive trading that centers Wall Street in the economy. Excess capital is driving speculation, at the low end with spare stimulus checks and meme stocks and at the high end with SPACs. Financiers blaming young, bored people on Reddit for over-speculation are telling on themselves. The gambling is coming from inside the house. And it speaks to a fundamental imbalance in our economy that must be fixed.
