June 25, 2016
Yesterday, as I watched the movement of the market during the Brexit vote, as the pound crashed 10% to a 31 year low, the lowest since 1985 and trillions of dollars left the markets overnight, a story came to mind about how George Soros once profited by manipulating the currency of the Bank of England. Untold misery for a nation and the far reaches of an economy resulted from what Soros did. Certainly the Bank of England was to blame as well. It often takes two to tango, after all.
Last night, I thought about how Janet Yellen was certainly on the phone with the Bank of Japan and how they were certainly discussing market interventions to stem the bleeding of the British currency, but the currency dropped further and further. Was it possible that no one would step in? Was a lesson being taught to the British people, and an example being made – withdraw from the march toward super states like the European Union at your own peril.
Perhaps we will one day learn that the secretive Federal Reserve Bank tried to step in but couldn’t stop the bleeding. On the other hand, perhaps we will one day learn that it engaged in open market operations shorting the pound, thereby helping to drive it down further. More than likely, it will never be known what exactly was happening at the Fed last night. So used to secrets being kept from the governed, we forget the fact that such a level of governmental secrecy is inconsistent with a free people. Certainly there was some shadowy well-heeled figure like George Soros at work in the marketplace last night, just like on September 16, 1992.
It would be strange in fact if an operation funded by George Soros were not actively shorting the British pound last night. He’d done it before. He knew how to do it. As a man in support of a global government rather than the diversity of nation-states, there would even be poetic justice for him in the bleeding of an economy. After all, if he didn’t profit from the bleeding of the British economy, someone else would have just stood in his place and done the same right ?
That’s not exactly how things work. A well funded active trading operation that knows what it’s doing can manipulate a market and cause it to go into panic mode, by attacking predictable places where a market will naturally slow or stop and doing it in predictable ways. Someone likely profited last night by doing that to the British Pound. George Soros profited by doing that to the British pound in the early 1990s. What he did in fact caused Britain to have to pull back from some quite significant European Union commitments. He force an early Brexit in 1992 long before there was the 2016 Brexit vote.
Leading up to September 16, 1992, or Black Wednesday in the UK, George Soros made a bet that the British pound was overpriced against the German mark and that there was no way the mark was going to hold strong under an attack.
The European Exchange Rate Mechanism, a predecessor to a fully integrated European Union governing its member states, was something the Soros knew could not hold in its relatively undeveloped state where. The British government was trying to move closer to European integration at the time, and Soros did his best to stymie that. In trying to integrate, the Bank of England sought to maintain a fixed exchange rate. The exchange rate was artificially high, especially given the economic conditions of the UK at the time. The Bank of England had a stated policy to buy everything that sold on the lower end of that peg, in order to keep the price above a certain level.
Forbes later that year claimed that though the world had many billionaires, George Soros was the first person who made a billion dollars in a single month.
His strategy was a little more complex than just shorting the pound.
“In carrying out this operation, Soros and his aides sold short sterling to the tune of about $ 7 billion, bought the mark to the tune of $ 6 billion and, to a lesser extent, bought the French franc. As a parallel play they bought as much as $ 500 million worth of British stocks even while they were shorting sterling, figuring that equities often rise after a currency devalues. Soros also went long German and French bonds, while shorting those countries’ equities. Soros’ reasoning on the French and German markets was that upward valuation was bad for equities but was good for bonds because it would lead to lower interest rates.”
This article by Rohin Dhar of Priceonomics nicely illustrates the value of perception in keeping a currency strong, which is a relatively weak foundation for a currency. The flashpoint for the pound finally dropping and Soros profiting of his legendary bet is explained by Dhar in this way:
“The event that ultimately led to the undoing of the British pound’s fixed exchange rate was an interview with the President of the German Bundesbank, Helmut Schlesinger. Schlesinger gave the interview to the Wall Street Journal and a German newspaper. He had one condition: If they wanted to directly quote him, they had to let him review the quotes. If they only indirectly paraphrased him, no such permission was necessary.
“That night…the following report paraphrasing Schlesinger’s words went out over the newswires:
“The President of the Bundesbank, Professor Helmut Schlesinger, does not rule out the possibility that, even after the realignment and the cut in German interest rates, one or two currencies could come under pressure before the referendum in France. He conceded in an interview that the problems are of course not solved completely by the measures taken.
“By the morning, the report landed on George Soros’ desk. Soros and the entire financial market took this to believe that the pound sterling was one of those currencies that could ‘come under pressure’ and be devalued.”
The story was released in the wires September 15, 2016, the night before Black Wednesday as cited in detail by The Independent.
Soros then made a decision. He had a bet on already. Was he going to force the hand of the Bank of England that day or was he going to sit by and watch as the world followed its own course. He went for the jugular.
Throughout the day, in costly market interventions, the Bank of England failed to affect the market place, while making themselves appear inept by raising interest rates, not once but twice that day, a total of 50%, from 10% to 12% and later to 15%. By the end of the day the Bank of England announced it would stop supporting the price of the pound on the international markets and would leave the ERM.
Former British Prime Minister Margaret Thatcher was proven right that day that the UK should not be propping up the price of its currency. Her former Chancellor of the Exchequer, and Black Wednesday Prime Minister, John Major, who insisted on artificially propping up the currency was proven wrong. The British people paid a hefty price tag, their economy suffered a sudden correction instead of constant gradual changes, and George Soros made a billion dollars that month proving how very ineffective a central bank was at doing the job it set out to do.
Allan Stevo writes on Slovak culture at www.52inSk.com. He is from Chicago and spends most of his time travelling Europe and writing. You can find more of his writing at www.AllanStevo.com. If you enjoyed this post, please use the buttons below to like it on Facebook or to share it with your friends by email. You can sign up for emails on Slovak culture from 52 Weeks in Slovakia by clicking here.