Social media storms are the result, not the cause of market anxiety
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Social media storms are the result, not the cause of market anxiety


Desperate for a scapegoat, banks under immense duress are increasingly pointing the finger at certain websites. But the truth is they have been the architects of their own downfall

In October, Credit Suisse shares took a pounding following a frenzy of negativity on Twitter. Thousands of tweets about the bank’s performance, which appeared to predict its imminent demise, brought a sharp decline in the stock price and led to tens of billions of dollars of withdrawals.

Chairman Axel Lehmann at the time blamed a “social media storm” for the run. The predictions eventually proved accurate — even if they were out by a few months. But for the bank to have blamed its demise on tweets from the likes of Grit Capital, Litquidity or Wall Street Silver was to dangerously miss the point.

The demise of Credit Suisse was not born in the wild west of Twitter, it was caused by the many mistakes and scandals at the bank that drove investors and depositors to yank their money before they lost it.

The concept of social media risk in the banking sector has been overplayed. Instead of worrying about it, Credit Suisse's Lehmann would have been better off focusing on the actual risks facing the bank. Take Lehman Brothers, for example: if Twitter had existed in 2008, the furore surrounding its collapse would have been deafening — but the bank would still have had the same financial problems that drove it to collapse.

Elsewhere, in the case of Silicon Valley Bank and Signature Bank, arguments abounded that the use of social media, messaging apps and the general advancement of technology sent the media and online world into hysteria and sped up the run on the banks’ assets.

While it is likely that the process happened a little faster than it would have because of Twitter, blaming the fall of the banks on the site is to ignore the role of the management of the banks and regulations, or lack of them, in causing the situation that the Twitterati were commenting on in the first place.

The fact that the news of SVB’s lack of capital spread quickly on Twitter was not the problem; the problem was that the bank took an unhedged punt on certain bonds, this bet went in its face, and there was insufficient regulatory oversight to prevent it from happening.

The bank’s decision to go long duration in US government-backed MBS in a period of fast interest rate rises was foolish. The fact that the general public caught on to this and spread the word quickly was a symptom, not a cause.

One example that is arguably the exception that proves the rule is the GameStop saga of a couple of years ago. The use of Reddit to mobilise large numbers of retail investors to manipulate the retailer’s stock price for rapid gains was unprecedented and caused a stir in the financial markets.

Users of the platform, known as ‘Redditors’, exploited those with short positions in GameStop and initiated what was referred to at the time as “the mother of all short squeezes”.

But GameStop wasn’t chosen as a target at random, it was targeted because of the financial decisions it had taken in the months leading up to the event and by Redditors figuring out by how much the market was short the stock, making it vulnerable.

Of course, social media can have tragic consequences. The CFO of Bed Bath & Beyond jumped from the window of his Manhattan residence in September following alleged pump and dump schemes on the company’s stocks. The company’s deep woes were heightened by a social media smear campaign but, ultimately caused by poor decision making and market conditions.

Social media is not a new malevolent presence in the financial markets, it is merely the latest scapegoat. Speaking of short sellers, authorities famously went into a frenzy of blaming them for the for the sovereign debt crisis of 2010-12, as the bonds of the likes of Greece, Spain, Italy, Ireland and Portugal plummeted in value.

It took far too long for governments and policy makers to get on with the business of fixing the economic mess that caused the debt weakness in the first place as instead they wasted energy and time proposing bans on short selling — something akin to trying to stop fires by removing fire alarms in the belief that if there is no siren wailing, there cannot be any inferno.

The reality is that financial collapses tend to be the result of poor risk management. Social media has become a key part of how the news and sentiment spreads, but to suggest it is the root cause is nothing short of trying to find an excuse to pardon one’s own mistakes.

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