George Soros. A Hungarian Jew born 1930 in Budapest. A controversial character too, to say the least. Who has attracted lots of hate in recent years due to his huge funding of mostly unpopular political campaigns and the constant meddling in other nations affairs. He is known by many, as a sort of billionaire villain. Almost as he was straight out of a James Bond movie. But what is less known, is that he came to his wealth by managing a hedge fund called Quantum. And he was as controversial in the world of finance as he is in the world of politics. Often, he intentionally sparked crises, so that could profit from it. Oh, but the event I’m about to tell you is on another level, the problems he caused for some profit are huge. So, let’s get into it.
World War II had just ended and Europe was in shambles. European countries wanted to avoid another war at all cost. So, they came up with a solution, they created an economic bond between them. Behind it was the idea that sovereign countries trading with each other are a lot less likely to go to war. This bond took various forms throughout the years and constantly evolving and expanding, ultimately becoming the EU we all know today.
In the 80s before the creation of a common currency countries operated on with an exchange system called the exchange rate mechanism, ERM. It worked by setting a standard range of inflation and interest rates for all European countries to be in, so that no currency would become too strong in proportion to the other.
Most big European countries like Germany, Italy and France joined. But Great Britain under the lead of Margaret Thatcher refused the offer. As she claimed the economies were too different between them and circumstances could vary, this required different rates of inflation and interest rates for every specific economy.
Soon later the United Kingdom entered an economic recession and Thatcher’s Euro skepticism lost public support. Another politician named John Major led the charge for the country to join the ERM and in 1990 succeeded, forcing Thatcher to resign one month later. Then becoming Prime Minister.
Major was then forced to face the recession. Protocol would have it that the UK slashed interest rates to stimulate spending. But this would devalue the pound, meaning that they would have to leave the ERM. That option was off the table, it would political suicide.
So, in alternative the UK central bank bought trillions of pounds with their foreign currency reserve, to keep it from collapsing. Artificially inflating the pound, barely worked, and every forex trader knew that a collapse would happen, the question was when.
George Soros, the manager of a hedge fund called Quantum, wanted to take full advantage of this opportunity.
He started building up his short position waiting for the spark that would make it all collapse. He borrowed pounds and sold them for German marks, with the plan that when the pound would decline, he could repurchase it at a lower rate. It worked and he had built up a position worth 1.5 billion.
He was just waiting for the moment to act.
It came soon enough, when on 15 September 1992 the ECB director Helmut Schlesingberg in what seemed an ordinary interview said 1 or 2 currencies may come under pressure” referring to the near future.
This was the spark. Soros attacked. Throughout that night he started borrowing and selling pounds, bringing his position up to 10 billion. More forex traders and funds then saw what was coming and did the same. By the morning came it was too late tens of billions of pounds had already been sold.
What followed next was panic. The UK central bank desperately repurchased 3 billion pounds and increased interest rates from 10 to 12% and only a couple hours later increased them again to 15%. It was all in vain the British Pound kept tanking.
Left with no other alternative at 7:30 pm the UK government conceded defeat and announced that it will leave the ERM.
Soros had won. The UK pound had lost 15% to the German Mark and 25% to the US dollar.
The fund then grew from 15 billion to 22 billion, with estimated 1 billion profit going directly to Soros. Making it the biggest short in history.
The crises nicknamed “Black Wednesday”, cost the UK taxpayer at least £3.3 billion, approximately £15 per person. It is possible that the real number is a lot bigger and has been purposely covered up.
Turns out Thatcher was right, don’t mess with the money supply, Government regulation can often create a loophole giving an opportunity for people like Soros to come in and use it for their own gain.
There’re moral ways to make lots of money, create a product or offer a service aimed at the betterment of humanity, and then there’s well… one could say immoral ways, like what Soros did. Impoverishing the honest, working family for his own personal gain. Of course, it takes real skill to pull what he did off. It is impressive how an individual managed to collapse the currency of one of the richest countries in the world, not an everyday foot.
Governments incompetence is also to blame but nonetheless this an act greed from a man sometimes defined as evil, named George Soros. Maybe public opinion is not that wrong after, he is sort of like a James Bond villain.