Finance culture is full of allegories, like that one Star Trek episode. It's a useful kind of compression: if someone tells you about how they have a big short position in a melting ice cube company, the first sentence you say to them is likely to include the word "GameStop." The way these stories spread is, typically, from more experienced people to more junior people. If you're a few years into your career, talking to someone who's a few months in, there are things you remember vividly that they'll only know about if they started reading the Wall Street Journal in middle school, and these stories are probably new to them. Or, put another way: these stories are probably baked into the worldview of whoever's on the other side of the trade.¹ There's a famous one that was later outdone by different events, but which still has some useful lessons today.

Imagine trust in American institutions is at an all-time low. Average people are worried that the good jobs have all disappeared, and that if they make any money, inflation will just eat it. This creates a kind of financial nihilism, getting people excited about things like newly-legal forms of gambling, or participating in short squeezes.

It's the summer of 1978, and the short squeeze and the newly-legal gambling are part of the same phenomenon: when Atlantic City legalized gambling, the first company to build a casino there was Resorts International.

Resorts International ticked a lot of the right boxes for a compelling short position: a recent industry pivot (they were previously known as the Mary Carter Paint Company, but were now under new management), a hot sector, questions about their financing, including mysterious loans, a penny-stock promoter whose business associates kept getting murdered, another executive who had pleaded guilty to paying bribes in the form of cash and prostitutes, and occasional dealings with Meyer Lansky. One possible explanation for all of that oddness came from Rolling Stone, which in a lengthy article about ties between American anti-communists and organized crime, identified the Mary Carter Paint Company as a CIA front that had helped launder money for the Bay of Pigs invasion, though Rolling Stone later retracted that.

There was, as people sometimes say, some hair on the deal.

On the other hand, investors had seen what had happened in Vegas: between Howard Hughes buying up real estate, the jet making Vegas more accessible, and the air conditioner making it more tolerable. What would happen, they might wonder, if there were a version of Vegas that was a three-hour drive from New York City?

What happened to the stock was that Resorts' class A shares were around $8.75 in 1977, and hit $35.25 in May 1978. They had a second class of less liquid stock (shorts might wonder what sort of paint-turned-casino company needs dual-class stock, anyway), which roughly quadrupled, leading the SEC to suspend trading in the B shares for ten days.

Around this time, the manager of a hedge fund turned family office, Robert Wilson, started shorting the stock. Wilson's an interesting character: he had a high tolerance for risk, loved shorting garbage, was happy to lose money on shorts for a while, and liked to stay very plugged in to what analysts were saying. He was a long-biased investor, but since he used leverage and liked growth stocks, he did a lot of shorting, too.² Being well-connected works both ways; institutional equity traders knew who Wilson was, and knew which trades he had on.

In the Spring of 1978, Wilson started on a six-month vacation around the world (and, apparently, did not follow the tradition of grossing down the spiciest trades a little before heading out of the office). The casino opened in late May, and was a huge hit. By June, shares were over $70, and by early September they'd hit $120, and there was a lively bull market in casino stocks generally. It got to the point that the American Stock Exchange raised margin requirements to 75% for the A shares and 100% for the B shares.³ As Wilson himself knew, that wouldn't necessarily eliminate levered speculation: early in his career, when he wanted more margin than his brokers had allowed, he'd borrowed from a Swiss bank to finance more trades. Wilson himself was being chased around the world by margin clerks; every time he'd check into a new hotel, he'd get a call from his broker, initially asking him if he wanted to cover and eventually telling him that if he didn't, they'd do it for him. In mid-September, Resorts hit $190, after management estimated that they'd earn $15/share that year despite having only opened the casino in May. At the time, the S&P traded at around 9x earnings, so this was still a premium valuation on a trailing basis, albeit a discount if you rolled those earnings expectations forward and ignored the prospect of competition, as many buyers did.

And, at around $190, Wilson finally told his broker to go ahead and cover it. (Or rather: he told them that at $130, but they didn't get his message, which he only discovered when they called him back to tell him it was trading at $190.) He'd started with a $50m net worth and a 3% short position in Resorts; he ended up losing $20m overall on the trade.

This trade was a big deal, and for a while was part of the finance anecdote canon: in Diary of a Hedgehog, Barton Biggs tells a very thinly-disguised version of it (this book review has an answer key for all the other slightly anonymized stories in the book). And he wasn't the only famous trader involved. Here's a quick excerpt from The Predators' Ball:

Not long before Milken and his wife began their journey [from Drexel's East Coast HQ to their new LA office, a move that happened in the summer of 1978], he (in Drexel’s account) had shorted some bonds with warrants (to buy stock at a given exercise price) attached... As the Milkens started out, however, the company’s stock took off on one of the greatest runs of all time—and escalating with it, of course, were Milken’s shorted bonds and warrants. “Mike said, the warrants were going up and up, there was nothing he could do—he just kept stopping and making calls from phone booths all the way to California. It was a very long trip,” recounts one former Drexel employee. “It would have been a very hard hit if it had been the firm’s capital that took the loss. But by the time Mike got to California, he had managed to lay off the position on his clients. He told that story laughing—especially the part about how he’d been able to lay it off.”

Interesting! That office opened on July 3, 1978. Resorts had issued some bonds and warrants, though that source doesn't say that they were attached. Ed Thorp has a story about owning some Resorts International warrants, and, during that run-up, getting increasingly desperate calls from traders who wanted to buy them—and Thorp was a big Milken client.⁴

There have been bigger short squeezes since, like Volkswagen and GameStop. But this one was a classic slow-feedback summer crash: it happened for lots of idiosyncratic reasons, but one of them was that two of the biggest participants in the short side of the trade happened to be hard to reach right when things got exciting.

Short squeezes are a fun combination of personal drama and market plumbing. And it's been an interesting few years for short sellers, as they've gotten better at using the media but have simultaneously been threatened by unruly social media. So there's been a lot of material, including:

• We've looked at the recent rise of gambling and prediction markets ($).

• A review of The Trolls of Wall Street helps explain where the meme stock phenomenon came from ($).

• Meme stocks make it harder to run a balanced long/short strategy ($): you need more ideas, but these will be lower-conviction ideas—and people might panic-cover faster if five of them are each short 1% of the company with low conviction rather than one of them being short 5% of it and knowing the story inside and out.

• The rise of GameStop shares is still somewhat mysterious ($).

• Resorts International is a good illustration of the general rule that it's hard to make money shorting worthless stocks ($).

Join the discussion!

1  In general it's interesting to think about what's in someone's stock of recent historical events that they use as analogies. Some of these are close to permanent: the further from the launch of Sputnik that you refer to something as a "Sputnik moment," the higher the odds that the next one will be called a "Sputnik moment" and not a "DeepSeek moment." Similarly, we hopefully will not have some term that replaces "9/11" as shorthand for a big disaster. If you're talking to someone who's roughly your age and from the same country, you can draw on a common set of more recent references. But how far back do you go? There's a funny phenomenon among kids who read a lot, where the average date of their current events reference points is shifted back a decade or two, to the average date on which their parents bought whatever books are around the house. This makes them sound artificially smart to their parents' friends, but leaves younger adults confused. I knew, in grade school, that President Carter once fought off a rabbit in a canoe, because Dave Barry talked about it. But some of the younger teachers I had didn't get references to this kind of trivia; it was before their time! Though increasingly, young people might quickly get up the curve on these references by, perhaps, asking LLMs to enumerate and summarize all the notable / interesting happenings as told in the Wall Street Journal, over the past 30 years.

2  Sometimes, people write papers that analyze famous investors' factor exposure, and they sometimes find that a good track record was due to what looks, in retrospect, like good factor timing. Wilson feels modern in that the way we'd describe his behavior is factor-neutral investing: he'd be long and short companies that traded at 30x earnings, back when that was a growth multiple, and would try to be long the one that should have been 50x and short the one that barely deserved 15x.

3  As with GameStop decades later, intermediaries will sometimes do this because they are really providing short-term specialized credit.

4  There doesn't seem to be any confirmation of this online anywhere, so this is just based on circumstantial evidence. It's possible that when this story was related in the book a decade later, the average reader was supposed to assume it was Resorts International. And it's also possible that the source for the story didn't want to burn a potential banking relationship; Drexel was the investment banker representing most of the casino companies, with the exception of Resorts and Donald Trump, both of whom worked with Bear Stearns. Given the size and interests of this newsletter's readership, I think there's a decent chance someone will just forward this to him and ask; will update if that happens.