How George Soros Broke the Bank of England
It seems like a good plot for a Hollywood movie. At some point in time, you get a strong sense that a movie will get made.
At 84 years old, Soros is now active in philanthropy, as well as a social and political activist. But he was, and is, first and foremost a legendary investor and trader. His fund- the Quantum fund- has generated $40 billion since inception, and Soros himself is worth close to $30 billion himself.
But the legend of Soros began with how he audaciously “Broke the Bank of England”.
The Broken Bank
Soros had been building up a huge position of British pounds for months leading up to late 1992. At the time, Soros realized that a monumental shift was in the making.
The European Exchange Rate Mechanism (ERM) had been setup in 1979 as a way to keep currency rates steady and to reduce currency rate volatility. The idea was that at some point in time, a single currency could be used across Europe. Of course, this did occur 20 later with the introduction of the Euro.
In 1990, the British Pound entered the ERM. However, Britain had entered a major recession and inflation was soaring. It put an incredible amount of pressure on the British pound. Despite all this, Soros brilliantly kept buying Pounds.
Soros knew what he was doing. He knew that at some point in time, the Pound would not be able to withstand the pressure. However, he also knew that the rate the Pound was brought into the ERM was artificially high, and that it was just a matter of time before something drastic would happen.
Of course, that is exactly what happened. On September 16, 1992, Soros’ fund short an incredible $10 billion worth in pounds. While the pound remained within the ERM, pressure kept mounting for something to change. (interestingly, September 16, 1992 is known as Black Wednesday in Britain).
In a short amount of time, Soros’s prediction came true: the UK withdrew from the ERM. This caused the pound to naturally devalue against other currencies, and Soros earned a cool $1 billion through the process.
Soros knew what he was doing all along, and it paid off handsomely. Later on, the moniker “the man who broke the Bank of England” was placed upon him.
Although it’s probably not the best way to be recognized, you have to admit that there is a certain coolness factor when you are known as one who legally “broke the bank of England”!