Why Robinhood’s PR Nightmare Keeps Getting Worse
Every congressional hearing has at least one witness who has been cast in the role of the villain. And at last week’s House Financial Services Committee meeting into the GameStop saga (which I wrote about here), there was no question about who the villain was: Vlad Tenev, the CEO of the online trading platform Robinhood.
Tenev had barely started his opening statement before committee chair Maxine Waters started banging her gavel and telling him to focus his comments on what happened on January 28, when Robinhood and other platforms barred customers from buying shares of GameStop and other so-called meme stocks. The rest of the hearing went no better: Though there were other witnesses, including Citadel Securities’ C.E.O. Ken Griffin (who would normally be a more natural target of politicians’ anger venting), lawmakers had clearly set their sights on Tenev. They grilled him about a wide range of issues loosely connected, at best, to the GameStop story: Robinhood’s culture, its role in “gamifying” investing, its relationship with Citadel (a hedge fund which pays Robinhood hundreds of millions in order to execute its customers’ trades). And they grilled him about January 28, about why Robinhood put the trading ban in place and whether Tenev had been honest in his explanations at the time.
This undoubtedly came as no surprise to Tenev, who became Public Enemy №1 almost from the moment Robinhood put the trading ban in place. Alexandria Ocasio-Cortez and Rashida Tlaib on the left and Ted Cruz on the right inveighed against the move. Memestock investors lambasted Tenev across the internet. And Dave Portnoy, the CEO of Barstool Sports and now a guru for younger individual investors, made it his personal mission to demolish Tenev’s reputation. He called what Robinhood did “criminal behavior, plain and simple,” suggesting that the firm had engaged in “intentional market manipulation” in order to stop the upward momentum of GameStop’s stock and allow hedge funds who had been short the stock to limit their losses and exit their short positions. He said Tenev’s decision to halt trading would be “the end of Robinhood,” but suggested Tenev “willingly blew up his company” because that’s what his hedge-fund masters wanted him to do.
Robinhood’s initial public statements explaining to its customers why it had done what it had done were vague and filled with corporate mumbo-jumbo.
Now, as it happens, none of this is true. Robinhood halted buying of GameStop and other meme stocks because it literally couldn’t afford to let them keep trading. Understanding why requires getting deep in the weeds of how stock trades are cleared and settled (which takes a few days), but the key idea is that any firm that is clearing stock trades has to put cash collateral with a centralized clearinghouse to cover the risk that they, or their customers, will go under before the trades clear. How much collateral you have to post depends on a variety of factors, including volatility and whether your customers’ buying is concentrated in a few stocks. Normally, meeting those requirements is easy to do. But early in the morning of January 28, the centralized clearinghouse raised the collateral requirements by an astronomical amount, because of the incredible volatility and volume of the meme stocks. According to Tenev, in fact, Robinhood was told it had to post $3.7 billion in cash as collateral.
That was money Robinhood did not have, so if it had posted the collateral, it would have fallen below its net-capital requirements and risked going under (which obviously would have been far worse for its customers than not being able to buy meme stocks). Imposing the ban on meme stock buying got the clearinghouse to lower its collateral demands, and over the next few days Robinhood raised more capital.
Now, why the centralized clearinghouse raised its collateral requirements by so much is an interesting question that hasn’t been fully been answered. But that it did so, and that Robinhood was left with no choice but to impose a buying ban, isn’t disputed at this point. And this is not something we learned after the fact — it was clear the day the trading ban was imposed. Why, then, did Tenev become the target of so much hatred?
The simple answer is that he didn’t actually explain any of this at the time. Instead, the interviews he did fueled people’s anger instead of defusing it, and instead of dispelling concerns that there was some grand conspiracy to rob ordinary investors, actually increased those concerns. Tenev’s grand failure, in other words, was a failure of crisis management.
What did Tenev do wrong? Instead of being honest about the situation, and saying that Robinhood had made a rational decision to stop trading in these stocks in the face of the new collateral requirements, he hedged and waffled. Robinhood’s initial public statements explaining to its customers why it had done what it had done were vague and filled with corporate mumbo-jumbo. Tenev himself, meanwhile, was abysmally bad in the interviews he did with CNBC and CNN. He used ambiguous phrases like “to protect our customers and the firm,” without explaining what that meant. He hinted at the collateral-requirement issue but never came out and said that was the problem. When Andrew Sorkin of CNBC smartly asked him if Robinhood was facing liquidity problems, he said there was no liquidity problem, instead of saying, “The reason we stopped trading in these stocks was to ensure we didn’t have a liquidity problem.” And when interviewers like Chris Cuomo thundered at him and suggested that the requirements he was alluding to didn’t exist, Tenev didn’t push back and explain exactly what he was talking about.
Tenev’s self-presentation was also unconvincing. He spoke in a meandering, circuitous way. At moments, it sounded like he was reading from cue cards, at other moments like he was trying to dodge the question. He looked (perhaps understandably) uncomfortable. Instead of making people trust what he was saying, he made it seem all the more likely that something fishy was going on.
In trying to protect the reputation of the firm (and of himself), Tenev ended up sabotaging them.
One reason we know that this poor performance mattered is that while Tenev was fumbling his way through interview after interview, Anthony Denier, the CEO of Webull — an online trading platform that, just like Robinhood, banned the buying of GameStop shares — was doing interviews of his own. But where Tenev was opaque and evasive, Denier was open and clear. He explained not just why Webull had done what it had done, but also explained, in plain English, how trade settlement and collateral requirements worked. He didn’t use vague language like Tenev did. He said the central clearinghouse had raised collateral requirements more than thirtyfold, to 100% of the value of the shares. And he said simply, “We cannot afford the cost.”
Denier’s response was almost a textbook example of how you’re supposed to manage a crisis, at least when you have the facts on your side (as Webull, and Robinhood, did): Don’t hide. Respond quickly. Explain clearly and without obfuscatory language why you did what you did (or why the problem occurred), and take responsibility for the things that are your fault, but not for those that aren’t. (That’s what Johnson & Johnson did after seven people died from ingesting cyanide-laced Extra Strength Tylenol, in what became the most famous example of successful crisis management in corporate history.) Most companies, instead, do what Robinhood did: stall, release information grudgingly, and say little out of fear of saying the wrong thing.
To be fair to Tenev, it’s easy to understand why he took the approach he did. Financial institutions never say they’re facing liquidity issues unless they absolutely can’t help it, because they don’t want to spook customers or investors. Plus, Robinhood was in the middle of raising more capital as all this was happening, so Tenev presumably wanted to put as good a face on matters as possible. But in trying to protect the reputation of the firm (and of himself), Tenev ended up sabotaging them. Of course, had he been more forthright, it would not have silenced the conspiracy theorists completely. But it would have given their charges much less traction. Corporate scandals usually happen when a company is trying to hide an unsavory truth. In Robinhood’s case, its image would actually have been improved by the truth. Tenev just made the very bad decision not to tell it.