“George Soros is a moron”, screamed the headlines of the newspaper I was reading over breakfast sitting in Kuala Lumpur somewhere in mid-1997. This is the first time I had heard his name. The statement was made by the then Prime Minister of Malaysia, Dr. Mohamad Mahathir.
That got my curiosity. A Prime Minister’s words and reactions must be controlled and measured. Who was this person who could make a Prime Minister blurt out something like this? I started to do a little research on this phenomenon called George Soros.
A Hungarian-born American business magnate, investor, and philanthropist George Soros is a currency trader and the chairman of Soros Fund Management.
He gained notoriety in 1992, when he fought a battle with the Bank of England, and won it.
Let me start from the beginning.
Before the formation of the European Union, the European Economic Community had made many attempts at bringing about some kind of monetary stability in Europe.
Towards this end was the introduction in March 1979 of the European Exchange Rate Mechanism (ERM) as part of the European Monetary System (EMS), which was based on the concept of fixed currency exchange rate margins, but with exchange rates variable within those margins. This was also known as a semi-pegged system.
The United Kingdom chose not to join the ERM in 1979 due to concerns that it would benefit the German economy more. But finally, in October 1990, in one of Margaret Thatcher’s final acts as prime minister, Britain joined the exchange rate mechanism under which it was committed to keeping the value of a Pound Sterling at 2.95 Deutschmarks, plus or minus 6 percent.
By 1992, amid inflation and weak growth in the UK, George Soros was confident that the underlying value of the pound was below that and that the British government was no longer going to be able to hold its currency at the level. He was betting that the currency would inevitably fall to levels that more closely matched its fundamentals, and that the government couldn’t afford to keep its value artificially high by entering the market to buy sterling.
On Wednesday, September 16, 1992, George Soros instructed his Chief Portfolio Manager, Stan Druckenmiller to start selling Sterling.
To counter the selling pressure, and to prop up their currency, the traders at the Bank of England began buying pounds at a furious pace.
By 8.40 that morning, they had bought a billion pounds. But the prices on the screen refused to budge.
What they did not know was that George Soros had given a remarkable order to Stan Druckenmiller “Sell Sterling as much as you can. And don’t stop.”
They decided to sell Sterling “short” – that is, to sell ‘borrowed pounds’, which they would have to buy back later after the pound dropped, as they hoped it would. This move could, of course, have been suicidal in case the pound had gone up instead.
But such was Soros’ confidence that the British government will not be able to do so, that on Tuesday night he told Druckenmiller to “Go for the jugular.”
Soon others started selling Sterling too.
To reverse the effects of the sell-off, Prime Minister John Major’s government hiked interest rates twice in quick succession, once by two percentage points and again by three percentage points on Thursday.
But Soros and the global investors did not relent, and continued selling.
At 7.40 p.m. on Thursday September 17, the British Government decided to suspend membership of ERM.
The pound plummeted.
George Soros and Stan Druckenmiller had broken the Bank of England, made a profit of a billion dollars for themselves and their investors and became legends in the world of finance.