Financial markets are loaded with seemingly ambiguous rules, practices and outcomes that most Americans do not understand or care about, yet the capital markets have the potential to rule everything about their current and future lives and prospects of prospering.
Is Gamestop the Canary in the Coal Mine?
The Gamestop short squeeze is a case in point. While many have engaged in the delicious game of schadenfreude when they realized the titans of Wall Street were being beaten at their own game, few have stopped to think about what the ramifications of the Gamestop saga may really be for companies and commercial real estate developers seeking capital financing.
Decisions Have Consequences
The pressure brought to bear by the hedge funds to rescue their position amounts to the admission the capital markets represent the casino house that many have feared it has always been. If enough retail investors become convinced of this proposition, then the potential for a market exodus and public markets crash cannot be discounted as a near-term outcome.
Everyone is Liable
Yet another outcome is the notice to employers, pension plans and fund managers the Gamestop crisis has provided. You have been given knowledge the market may be fundamentally flawed, and if your shareholders suffer a loss, you could find yourself stroking checks and explaining why you stayed in a fixed game when you knew the risks.
Capital Formation May Suffer
For those businesses seeking to utilize the public capital markets platforms to raise equity capital, the road is a bit more clouded now.
The implication of Gamestop may be that the risks of conducting an IPO are no longer worth it, nor are the risks of knowing on any given day a giant hedge fund could short you right out of business because they can.
The specter of hedge fund activities may drive more businesses to alternative platforms and processes (such as crowdfunding and other Regulation A registration-exempt offerings) to raise significant capital, and would definitely come at the expense of the capital markets, as they have feared since the securities regulations changes went into effect (see the comments on the new final rules posted on sec.gov).
Indeed, it is a brave new world, and for public capital market investors, you have to assume the worst and hope for the best. May the odds be ever in your favor.