Breaking the bank!
'...it is not hard to see why 'breaking the bank' is what he [George Soros] will always be remembered for.'
Dominic Lunt | 6 March 2016

It has been believed for decades that on Black Wednesday, 16th September 1992, George Soros 'broke the pound'. However, this was not actually the case.

 

After heavy speculating in early 1992, the United Kingdom was forced to back its own currency by buying up pounds on the open market. At this time, the pound was fixed at a rate of £1 to 2.49DM (German Marks). It was believed at this time that the pound was largely overvalued. Due to currency intervention, the United Kingdom government was able to keep it at this potentially hazardous, fixed exchange rate, in part thanks to the European Exchange Rate Mechanism (ERM).

 

At this time, George Soros was a well-recognised and respected economist, having fled his home country of Hungary in 1947 for London and then graduating from the London School of Economics in 1952. He quickly obtained a position at an investment bank in London, before moving to America. Some years later, in 1973, Soros founded Soros Hedge Fund Management, his own company, that created the Quantum Fund. This was one of the most successful hedge funds to ever be set up, posting returns in excess of 30% each year and, in two cases, annual returns of over 100%. After around 15 years, when the fund was worth well in excess of $10 billion, Soros gave up day-to-day running of Quantum and became a philanthropist.

 

However, it was in 1992 that he once again took an active role in the world’s financial market, to lead a movement which would become his legacy. As the United Kingdom Government became forced to buy back its own currency, Soros was selling, heavily ‘shorting’ his personal reserves of the pound. For economists, 'shorting' is typically to sell off stocks, shares or commodities with the intention of buying them back at a profit. Although sounding simple, this financial principle relies on a keen mind with knowledge of the market in order to recognise when a stock or currency will fall in value. George Soros’ example of this is perhaps the best there is, and almost certainly the most well-known.

 

On 16th September 1992, George Soros began the process of shorting with his considerable fortune, today the equivalent of about £12 billion. Due to the fixed exchange rate at the time, he did this at a price of 2.95 German Marks. However, the British Government gave up in their attempts to fight the pressure on the pound and withdrew from the ERM, allowing the exchange rate to move to a floating rate and increase drastically. As a result, Soros was able to buy back his pounds and more thanks to their reduction in price. Almost overnight, thanks to his huge risk and gamble, George Soros made an astonishing profit equivalent to $1 billion, argued today to be closer to $2 billion.

 

Since then, he has become incredibly active in politics and in his support of human rights and has been given an honorary degree from Oxford University. However, it is not hard to see why 'breaking the bank' is what he will always be remembered for.

 

 

Image issued under the Creative Commons license

James Routledge 2016