The 7 Craziest Financial Stories of 2021: Investing in Nothing

2021 was a very strange year, but it was triple strange for anyone with the slightest interest in finance and investing. In this review, I have compiled 7 craziest financial stories and phenomena that earned the most "no way!" and "lol, what?!" tags last year.

Chinese stocks: Leg Dry Market Buy Reliably

In recent years, it has been evident to all investors that the Chinese market has the best growth prospects. After all, China is the world's second-largest economy after the United States.

At the same time, Chinese companies occupy a measly few percent of global stock market capitalization (compared to the same U.S. firms, which account for more than half of market capitalization).

And it was especially obvious to everyone how undervalued Chinese tech companies like Alibaba or Tencent are, whose products seem to be used daily by the entire 1.5 billion Chinese people.

And then, in 2021, the Chinese authorities suddenly set out to strictly regulate the education sector, de facto prohibiting companies from making a profit. Who needs companies without profits? So other investors in the market decided the same, and shares of trendy "educational unicorns" like TAL fell briskly by twenty times.

And the rest of the tech stocks from China fell ~50% during the year for the company. Who knows what innovations the Communist Party of China will come up with on the way to a bright future of communism?

For many investors, it turned out at the same time that they do not really own these very Alibaba. The fact is that Chinese law prohibits access for foreign investors to strategically important industries.

Therefore, it is not the notional Alibaba company (or its equivalent) listed on the American exchange but the so-called VIE - Variable Interest Entity. This offshore shell company has an agreement with the real Alibaba in the style of

"VIE doesn't seem to own Alibaba, but Alibaba promises to share all the profits earned with VIE, fair and square!"

How likely is it that in the future, the Chinese Communists will say,

"let's consider that Alibaba doesn't owe any more offshore VIEs anything; we think it would be fairer"?

I have no idea. I'll leave that to the readers.

Moral: If something in investment seems evident to everyone, then only one thing is obvious: it is not evident at all!

The deadly Peloton: TV can't lie!

Peloton creates exercise bicycles. When the pandemic hit, all athletes lurked at home and began to suffer frantically without visits to their favorite fitness clubs. So the topic of home exercise training became popular, and Peloton stock increased in value six-fold in 2020.

Trouble came when it wasn't expected. In December 2021, the stock plummeted 17% in just a couple of days because of the release of the first episode of the cult series "Sex and the City." What's the connection here? The plot is simple: one of the main characters dies of a heart attack while training on the Peloton. Well, since they show on TV how people die from Pelotons, it only makes sense to get on the devil's machine if you're suicidal.

The company tried to find a neat way out of the situation by promptly filming a cheerful commercial with an actor from the show, where the message "YES LIVE, HE IS LIVE!" appeared at the end. But then, as luck would have it, the actor himself got accused of harassment, so the commercial had to be canceled almost immediately.

Moral: No matter what they say about "there is no such thing as bad PR," sometimes there is. If they show something about your favorite shares on TV, it's better for your wallet if no one dies (and no one harrases anyone, either!).

Greensill Capital: If you don't have enough money, you can make it up as if someone owes you money

Reliable Swiss bank Credit Suisse liked to offer its clients sound investments in their investment funds. Which, in turn, invested in the even more reliable Greensill fund.

Greensill's business model was simple: lend money to unreliable companies on good collateral. Specifically, they financed the supply chain: when a company had already sold their merchandise but contractually, they would only get cash from buyers in a few months, and since they always needed money fast, they could borrow from Greensill for that period secured with receivables from end clients.

And everyone is happy: the aspiring companies get the financing they need for their current expenses, Credit Suisse clients are delighted to earn an excellent return without much risk, and Greensill gets its commissions on organizing the whole process.

The idyll came to a natural end in March 2021, when Greensill went bankrupt. It turned out that a substantial portion of the super-secure loans issued was not secured by real sales but by imaginary sales. I'm not kidding! Companies would come to Greensill and say,

"We really need the dough, but we've already borrowed money from you against all the existing debt from current customers. How about you give us some money against future imaginary sales that we'll probably totally sell someday?"

And the fund managers are like:

"So, we can take our commission on this deal, right? Yes?! Great, here's your billions!"

Then it was hilarious when during the Greensill bankruptcy, the auditors started calling the companies whose imaginary sales were listed as collateral for the loans issued. The dialogues that occurred were rough as follows:

"Hello, we have a hundred million dollar bill in hand for selling a gigaton of steel from Horns and Hooves LLC to your companies. We want to collect this debt.”
“Who the hell are you, people?! We do not know such a company; we have never bought anything from it and are not even going to.”

So Credit Suisse lost billions of dollars of their investment in Greensill. But that's okay! After all, it wasn't really the bank's own money, just the money of its wealthy clients.

Moral: Just because something looks reliable and consistently makes money doesn't mean it's really reliable. Even if you invested in it on the advice of a Swiss bank.

Archegos Capital: greed kills

Bill Hwang had a lot of money because he successfully ran Tiger Asia Management's hedge fund. Then he closed that fund and moved all his hard-earned $10 billion to his family office, Archegos Capital, to become richer solely on his own.

Bill's strategy of getting rich was quite ingenious: he chose several not very liquid shares in fashionable technological industries. He started buying them in a frantic effort for all the money he had. When the pot ran out, he borrowed from his brokers (respected banks - Credit Suisse, Goldman Sachs, Morgan Stanley) with a 5:1 leverage.

The idea worked as follows: the more Hwang bought these shares, the faster they became expensive (demand was growing, after all!). The more expensive the shares became, the more credit was available to secure them.

And the more credit - the more new stocks you could buy! Voila, the circle closed, and the perpetual enrichment engine had been invented. Pretty soon, $10 billion turned into $30, and Hwang was glad.

The success ended when the companies whose shares went up sharply decided to get some profit from what was going on too and began to put new shares on the market. Supply goes up => share price will start to fall if demand doesn't go up too. And our Bill Hwang could no longer support the demand in such quantities because he had no money - he was already overextended with credit.

When the stock prices eventually turned around and went down, it became clear that the shares pledged as collateral for Hwang's loans were no longer enough to cover them - the banks that had issued the loans were sharply stressed. The Swiss at Credit Suisse called their American counterparts at Goldman Sachs and Morgan Stanley and called an emergency meeting:

"Dear friends, you and I are screwed!" - Credit Suisse began: "But if we all start selling our mortgages at the same time now, we'll be totally screwed because the prices will collapse obscenely, and we will never get our loans back. So as a gentleman, let's agree not to sell everything simultaneously, and then we'll think of something else."
"Oh yes, our Swiss friend, this is a great idea. We should definitely do this!" - The Goldman Sachs/Morgan Stanley Americans replied, while under the table, they were frantically texting instructions to their traders to "ASAP. SELL. ALL."

As a result, Archegos Capital went bankrupt at zero (although we don't know how much money the cunning Hwang had managed to withdraw before that, and closed somewhere in the Caymans), Goldman Sachs and Morgan Stanley came out of the delicate situation without much loss, the Japanese bank Nomura suffered small losses, but Credit Suisse lost $5 billion on all this (yes, 2021 was definitely not the best year for the Swiss).

Moral: If you get serious guys around the table to play adult games, and you don't know which one of them is the sucker, you're probably going to end up being the sucker. Even if you are a gentleman from the largest Swiss bank.

Trump's social network: the main thing is to be a good person, and we'll give you money!

In 2020, U.S. President Donald Trump was first declassified from the presidency and then banned from Twitter. He held a grudge and promised to launch his social network, TRUTH Social, with blackjack and free speech.

Nothing was heard about this mythical social network for a long time. Still, in October 2021, the previously unknown private company Trump Media & Technology Group rolled out a "demo" of the social network (a simple template based on the open-source engine Mastodon - you can create in about a day) and a presentation for investors. It crookedly described that the team of top developers with names like Billy B. and Josh A. (seriously, that's what it said) were about to outperform Facebook and Twitter.

In short, Trump's company obviously has no social network, no development team, and no adequate product development business plan. But there is a desire to make quick money! Oddly enough, this turned out to be enough: TMTG almost immediately announced that 23% of its shares would be listed for $293 million through the SPAC mechanism. It is a clever way to make the company public quickly without going through the long and complicated disclosure process required in a traditional IPO.

On the wave of this news, the market valuation of TMTG shares immediately increased fivefold. After all, it is evident that Trump always gets what he wants, which means that the social network will take off!

But Trump himself got hurt: he had agreed to sell a 23% stake in TMTG for $10 a share, but the market was willing to pay $40-50 for the same share. It turns out that Trump was selling five times cheaper - he could have raised not $293 million but almost $1.5 billion!

So Trump quickly got on the horn and agreed to sell an additional stake in TMTG for $1 billion. If ordinary private investors gave money to buy the company through SPAC, then the top hedge funds should invest in TMTG. Why would smart hedge funds buy a shell company at an obviously inflated price?

It's simple: under the terms of the SPAC deal, Trump can't directly put more stock on the market than already agreed upon or at a higher price. But he can sell new stocks to hedge funds at any price!

Usually, the "capital freeze" rule applies to such large investors when they cannot immediately sell the purchased shares into the market but have to hold them for at least six months to a year. Here, however, under the terms of the agreement, hedge funds not only get a substantial discount from the current market price of TMTG stock, but they can also sell to mom-and-pop retail investors the day after the deal is done.

So, Trump and the hedge fund managers have agreed on a deal to get from the general public another $1 billion and split it between them, quickly pulling off a risk-free agreement to dump an additional package of worthless stocks on the market for mom-and-pop retail investors.

Moral: If you're a super-popular dude with cringe-worthy hair, you can make up any tale you want, and your loyal fans will immediately drop a suitcase of money (or even two) on it.

Hometown Deli: golden sandwiches

In May 2021, everyone talked about the New Jersey little sandwich shop called Your Hometown Deli. It was publicly traded (lol) with a total capitalization of as much as $100 million (other estimates even $2 billion).

What's the point of valuing a company with revenues of about $20k a year in the millions and billions of dollars? Not if you're going to use it to sell sandwiches. But if you need an inconspicuous legal entity with listed shares to re-register some obscure foreign assets in its name, then it has a point!

This was the purpose of the whole scheme with the sandwich shop. At least, it turned out that Peter Coker Sr. controls this financial and food conglomerate - some dubious old man from Hong Kong with a criminal record for financial crimes and for showing his penis to small children. Not the best resume for an investor in a billion-dollar company.

Moral: All sorts of absurd nonsense can happen with stocks of low-liquid companies - that's why they're low-liquid. But that doesn't mean you can make any money on this nonsense.

GameStop: why isn't meme stock price going under

In January 2021, there was a story about how the guys on Reddit, led by Roaring Kitty, had all bought GameStop stock. They pushed its price several dozen folds and nearly bankrupted a couple of big hedge funds betting heavily on a backward bias.

The consensus then was rough that the temporary madness of the crowd is fun, but stock prices are determined primarily by fundamentals, so all those loss-making GameStops of yours will inevitably collapse back in a month or two at the most.

All the more surprising is that the phenomenon of "meme stocks" has proven remarkably resilient, and firms like GameStop or AMC are still trading at very high prices a year later.

Roaring Kitty, meanwhile, had a hearing before the U.S. Congress (starting his speech with the words "I'm not really a cat!" which became a meme) and was sued by angry investors who thought he had insidiously manipulated the stock price (to which he invariably replied "I just like the stock").

In the first months of the hype, GameStop pretended to be in shock and was not going to take any action about the tenfold jump in the stock price. But then common sense (read: greed) prevailed.

They have carried out an additional issue of shares, first for $550 million and then again for $1.1 billion - which is approximately 5 times more than the entire capitalization of the company in mid-2020.

Moral: This whole meme stock situation best reflects the spirit of adventurism that reigned in the financial markets during 2021. It doesn't matter how much profit your asset generates - it matters how much people talk about it (and make memes of it)!

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