How George Soros Broke the Bank of England and Made $1,5B in the Process
By: Toni Koraza
Tags: Finance, Forex, Politics, Bitcoin, Investing

How George Soros Broke the Bank of England and Made $1,5B in the Process

Image by Pete Linforth from Pixabay

When a pipe bomb arrived at George Soros's suburban home in NYC, and the Authoritarian Hungarian Government shut his college in 2018, the world again remembered the name of one of the most prized currency traders in history.

Democratic donor on the left, and a globalist boogyman on the right, George Soros is an interesting persona we don’t really know much about.

We do, however, know what he has done during his career as an investor and why he’s so famous today, even beyond the right-wing propaganda of globalist conspiracies. Soros’s infamy takes place soon after a single event.

September 16th, 1992 is known as Black Wednesday in the UK, but among Forex traders, it’s the day George Soros Broke the Bank of England.

The power of institutional money can humble even the most powerful nations.

Smart Money is the term for institutional bets that abruptly amass in single security (stock, bond, fx pair). Financial institutions, including hedge funds, commercial banks, and brokerages, have the power to set the market and disrupt trends.

When it comes to investing, the volume is a solid indicator that something is happening, and volume almost always means smart money is getting into a position before a big event takes place.

In early 1992, Smart Money started accumulating against the British pound, and what happened next paved the way for Britain’s departure from the European Union, and furthered a moral crisis in the UK.

Prelude to fiasco

Six European countries (Belgium, France, Germany, Italy, Luxembourg, and the Netherlands) got together to end the bloodshed on European ground that raged for millennia.

The union was supposed to be as economical, but it grew past trade deals.

The UK, a flailing colonial power at the time, first saw the EU as a half-baked idea and decided to pass on the call to join forces in creating a free and prosperous Europe.

Soon, after, when the European dream caught traction, the UK decided to make an entry. But the global power received a harsh no, twice. Charles de Gaulle, France's president, vetoed the UK’s attempts to join the EU in 1963, and again in 1967.

“But the question, to know whether Great Britain can now place herself like the Continent and with it inside a tariff which is genuinely common, to renounce all Commonwealth preferences, to cease any pretence that her agriculture be privileged, and, more than that, to treat her engagements with other countries of the free trade area as null and void — that question is the whole question.” — de Gaulle’s statement from 1963.

In short, the French president believed the UK would seek privileged status in the Union before it disrupts the common markets and instigates division among the member states.

However, The UK joined the EU in 1973, on its 3rd attempt, and secured a special agreement that would favor UK’s waters, fish, and agriculture. The agreement held for less than 40 years. The UK has left the EU on the 1st of January in 2021, causing division among the other member states.

Charles de Gaulle understood Britain better than its leaders and citizens at the time, according to many historians.

The opening act to currency wars

Geroge Soros, a Jewish Billionaire who gave away 32 billion dollars to worthy causes during his career, emerged as the face of everything bad on the far right.

His story begins before the crisis of 2008, the Trump Administration, and his defiance against the authoritarian regimes and anti-semitism.

In 1976, European nations were trying to make sense of different national currencies within the Union. The financial institutions created the European Rate Mechanism (ERM). The ERM tied exchange rates to each other, forcing central banks to artificially maintain the value among European currencies to avoid strong fluctuations in the value of money among member states.

The UK refused to join at first. Alan Waters who was Margeret Tacher’s economic’s advisor called the idea “half-baked,” and Britan refused any role in ERM. However, the performance of the German mark seduced the UK’s top officials a decade later and the Westminister representatives crafted a clever plan to take advantage of ERM’s loopholes.

The Forex crusade of 1992

George Soros believed the UK was stacking the deck against the other European countries. The British pound was artificially overvalued against the German Mark, as history shows.

Soros spearheaded the crusade against the BoE exchanging the Pound for Deutsche Mark (German’s currency before Euro). Investors following the volume amassing against the British pound weren’t surprised by what followed.

Before September 1992, other financial managers, including Paul Tudor Jones and Bruce Kovner, developed similar concerns and started betting against the Bank of England and the British government.

“They bet that the politicians and central banks could not much longer maintain artificially high exchange rates in the interests of European unity,” wrote authors Thomas Jaffe and Dyan Machan.

Soon, all hell broke. The Bank of England refused to accept the market sentiment, inflation, and the overwhelming push to lower the price of the pound. The central bank pumped more money into the system by exchanging the Deutsche mark for pounds, in a desperate attempt to maintain the ballooned price of the pound.

Sir John Major, the Prime Minister, and the leader of the Conservative party at the time, rose interest rates to 10% and authorized billions in support funds to buy more pound sterling from other markets.

On the morning of September 15, the currency trades have got the news and started massively selling the British pound. The financial laws required the central bank to accept each transaction against the pounds. BoE found a way to avoid any contract issued outside the working hours and coined a plan for the next day.

In the early morning of September 16th, at 8:30 am, the bank executed two orders of 300 million pounds, but the currency investors kept pushing against the pound sterling.

At 10:30 am, the government announced a base interest rate hike from 10% to 12% to bait speculators to buy more pounds. When the interest rate goes up, the price of money is supposed to raise consequently because money is now more expensive to buy from the central bank.

Speculators kept pushing with full resolve, distrusting UK’s government. Sir John Major announced another hike in the early afternoon, this time up to 15%, which showed a sign of true desperation. For context, interest rates are the most potent tools for central banks to keeps the value of money in check. Interest rates don’t change often, let alone in two massive spikes during the same day. For reference, the United States has been enjoying an interest rate between 0% and 2.25% for the past 13 years, slightly tuning interest rates 3–4 times a year.

At 7:00 pm that day, Norman Lamont, the Chancellor of the Exchequer, announced Britain's withdrawal from the ERM and accepted defeat.

September 16 is known as Black Wednesday, a day of the total and utter fiasco of Britain's monetary policy. Among investors, September 16th is known as the day when George Soros broke the Bank of England. The events damaged conservative reputation in the UK, and the world, and were condemned as a massive waste of money.

Soros’s short position against the British Pound made 1 billion in a single day and increased the assets under management in his hedge fund (Quantum Fund) from $3.3B to $7B in 1992, which continued to grow beyond $11B in 1993. Paul Tudor Jones netted $250 million officially, and Kovner’s Caxton Corp reported $300 million profit from that event.

Quantum Fund took the throne as the largest hedge fund at the end of the last millennia but lost the position soon after, following the dot-com crash.

The many morals and takeaways from the story.

→ You can’t compete against the market even if you’re a colonial power. Black Wednesday uncovers the power of democratized finance.

→ Many blame ERM, while others blame the UK’s colonial past and a sense of grand superiority. Both sides are to blame.

→ Black Wednesday was actually beneficial for the UK during the Eurozone crisis in 2009. Bank of England could steer the pound more effectively and wasn’t obliged to help other sinking economies in the Eurozone.

→ The events paved the way for Britains departure from the European Union.

→ ERM is by no means a fully-baked system, but it keeps on improving year-over-year, together with the rest of the European Union.

Who was George Soros on that day?

Was he a brave investor who took a position against a colonial empire, or an opportunist that traded in global misery? Depending on where you stand on the political spectrum, this story may have a different ring to it.

George Soros is a man that broke the Bank of England, changed the course of modern history, and still continues to deliver on his work even though he’s 88 years old.

Is he a good man? Who knows.

Is he a brilliant economic mind? Yes, he is, and Black Wednesday is the proof.