Congress is grillingReddit ,Robinhood , and hedge funds overGameStop 's unlikely rally.- Lawmakers have criticized the stock market's gains during the COVID-19 pandemic.
- Some might use the opportunity to call for greater regulation over tech, Wall Street.
Congress is set to grill Reddit, Robinhood, and hedge funds over their roles in GameStop's unlikely rally last month.
Congresspeople from both sides of the aisle called for scrutiny after individual investors bought GameStop shares in droves to burn funds that bet against the stock.
But the hearing on GameStop's rally, which slowed weeks ago, will likely allow Congresspeople an excuse to push for stronger consumer protections, call out the stock market's power, and continue its battle against big tech.
Here's 3 factors that could have triggered Congress' investigation into GameStop's rally.
1. Some lawmakers might be using the saga to call for stronger consumer protections in the post-Trump era
Lawmakers and American consumers called for greater government regulation of Wall Street following the 2008 financial crisis.
Obama signed Dodd-Frank Act in 2010 to increase financial stability and prevent against future collapses. Dodd-Frank created the Consumer Financial Protection Bureau, originally proposed by then Harvard law professor Elizabeth Warren, which regulates financial services like banks and non-bank lenders.
Dodd-Frank succeeded in increasing the amount of money banks had in reserve to make up for losses, and the CFPB provided $11.7 billion in forgiven debt balances and other relief for consumers by July 2016.
But the Trump era destroyed hope of further strengthening financial regulation. Weeks after his inauguration, Trump ordered the secretary of labor to review Dodd-Frank, calling it a "disaster." He sought to gut the CFPB of authority, critics argued, throughout his presidency.
With Trump out, politicians might be seizing on any moment to call for greater financial regulation.
Sen. Warren was among the most outspoken politicians during the GameStop rally, appeared on CNN and told the SEC to "grow a backbone."
"We've got a real problem on Wall Street, and it's time to fix it," Warren added.
In announcing the Congressional hearing, Rep. Maxine Waters said hedge funds had a "long history" of using predatory practices at the expense of US workers. Rep. Brad Sherman, who chairs the Capital Markets Subcommittee, told CNBC he expects the hearing to "get larger" than just the GameStop situation.
2. The stock market resentment might stem from the market's wild success as the COVID-19 pandemic wrecked small businesses and killed jobs.
The GameStop saga gives lawmakers a chance to point out how little the stock market reflected economic reality during the pandemic.
As millions of Americans lost jobs and small businesses shuttered, the stock market reached record highs during the COVID-19 pandemic. The S&P 500 gained more than 16% in 2020 as the employment-to-population ratio dropped to its lowest since 1948.
Billionaires became $845 billion wealthier during the first six months of the pandemic after the stock market rebounded after the initial March drop.
Progressive Sen. Bernie Sanders called the stock market's gains during the pandemic "corrupt," and said Wall Street executives should not profit off pain and suffering.
Members of the House Committee on Financial Services, like Reps. Alexandria Ocasio-Cortez and Rashida Tlaib, said the stock market does not reflect the reality of the pandemic.
"The economy is not the stock market," Ocasio-Cortez said in response to Trump economic adviser Stephen Moore's statement that the economy was "doing fine" in late November when millions remained out of work as COVID-19 cases climbed during the holiday season.
3. Congress loves grilling tech.
Reddit and Robinhood's participation in Thursday's hearing follows a flood of big tech hearings in recent years.
Mark Zuckerberg, Jeff Bezos, Tim Cook, and Sundar Pichai testified in a historic six-hour antitrust hearing last summer before Congress released a scathing report calling to break up big tech.
Though nor Reddit and Robinhood have close to the market dominance Facebook and Amazon have, the two demonstrate tech's influence outside of the online realm. Robinhood CEO Vlad Tenev said his hearing testimony his app has changed investing using technology, and Congress should consider updating SEC trading rules to allow for better use. Reddit CEO Steve Huffman touted his platform's ability to connect r/WallStreetBets members from around the world to cheer GameStop's rally.
Additionally, distrust in tech firms is one of the only bipartisan topics Congress can agree on. Republican Sen. Ted Cruz, as well as Committee on Financial Services members Reps. Lance Gooden and Josh Gottheimer, joined progressive lawmakers in criticizing Robinhood's decision to restrict GameStop trading.
".@RobinhoodApp needs to explain why they're restricting trading & canceling stock orders," Gottheimer, a Democratic representative from New Jersey, said in a tweet. "That is NOT a free market."