George Soros: story of one trader Like in every sphere of life, there are outstanding personalities at Forex, whose
names went down in history. At the currency market, George Soros is one of the most successful traders in history. His career began from the establishment of the Quantum Fund in 1969 on Curacao (Netherlands Antilles in West India). During the time of its existence, the Quantum Fund conducted a great number of profitable speculative operations at Forex currency market. For example, on the spot market in 1996 only, the Fund received the profit equal to that of the annual income of McDonald’s Corporation. Though, the most money-making deal of George Soros is considered to be the operation on the currency speculations at the British pound sterling in 1992, due to which within a period of one month a net profit of USD 2 billion was gained. Thanks to such success and the facts, by which it was caused by, George Soros got the reputation of "the man who broke the Bank of England." For such triumphant currency speculation, George Soros owes to the situation in the world in the 90s. In 1979 on the initiative of Germany and France the European Monetary System (EMS) was established. The EMS was targeted to maintain the stability of the currency rates of the European countries- members of the System, and also to prepare for the currency integration. The initial members of EMS were Germany, France, Italy, the Netherlands, Belgium, Denmark, Ireland and Luxemburg. The mechanism of the currency rates maintenance (the European Exchange Rate Mechanism (ERM), which was the main purpose of the EMS, was grounded on the introduction of the European Currency Unit, ECU, which was a prototype of the today’s Euro (EUR). For every EMS member, the central rate versus ECU was set, and also the currency rate limits (a corridor), within which the change in currency exchange rate was allowed. The members of the EMS were obliged to maintain the rate of their national currency by any means under conditions of the agreement, or leave the System. The central rates of the countries- members of the EMS, under the terms of the treaty, could be changed, which had happened 9 times in a period from 1979 to 1987. In 1990, the Great Britain joined the EMS and the rate of the pound (GBP) was fixed at the level of 2,95 (DEM) with a permissible currency corridor ± 6%. By the middle of the 1992 thanks to the ERM, a considerable decrease of the inflation tempo in European countries- members of the EMS, was reached. Nevertheless, the artificial maintenance of the currency rates in the limits of the currency corridor arose doubts of the investors. The situation got worse after the reunion of West and East Germany in 1989. The weakness of West Germany’s economy brought to the incensement of the national outlay, which forced Bundesbank to issue more money. This policy brought to inflation, and Bundesbank reacted to this by uprising the interest rate. The high interest rates attracted foreign investors, this, in its turn, caused an excess demand on the Deutschemark, and resulted in the growth of its rates. The Great Britain, being bound by the EMS agreement, was to maintain its national currency rates within the fixed limits of the currency corridor versus the Deutschemark. The British economy at that time was destabilized; the unemployment rate of the country was high. The uprising of the interest rate after Germany in such conditions could only make the situation worse. But there were no other possibilities to strengthen the domestic currency rate in the near term. At that time, George Soros and many other investors considered, that the GB would not be able to maintain the domestic currency rate at the needed level, and it would have either to announce about its devaluation, or refrain from the ERM. George Soros took a decision to contract debts for the pounds (GBP), and to sell them for the Deutschemarks (DEM), and invest them in the German assets. As a result, almost GBP 10 billion was sold. George Soros was not alone thinking in this direction, and many investors followed his actions.
As a consequence of such speculations, the unstable economical situation in Britain became even worse. The Bank of England in the attempt to set the situation right and to increase the currency rate repurchased for its reserves around GBP 15 billion. But it did not bring the desired result. Then, on the 16th of September 1992, on the day, which would further be called “Black Wednesday”, the Bank of England declared about the interest rate increase from 10% to 12% in the attempt to neutralize the boom, but the expectations of the English politicians did not prove. The investors, who sold pounds, were sure that they would gain an enormous profit after the further downfall of its rate. A few hours later the Bank of England claimed to increase the interest rate to 15%, but the traders kept selling pounds in large quantities. This continued till 19:00 of that very day, later on the Chief Secretary to the Treasury Norman Lamont pronounced, that the Great Britain was seceding the European Exchange Rate Mechanism (ERM) and the interest rate would be lowered to 10%. From that day on, the pound rate fall had started, which fell by 15% versus the Deutschemark and by 25% versus the US dollar within 5 weeks. This brought a gigantic profit to the Quantum Fund – within only one month George Soros gained around 2 billion US dollars, buying for the German assets the significantly cheaper pounds. The downfalling of the pound currency rate versus the US dollar after the above described events is shown on the image. As it can be noticed, that only in September 1992 the pound fell by almost 3000 ticks! Thus, George Soros, "the man who broke the Bank of England" showed, to what extent the Central Banks can be vulnerable to currency speculations of the large investors in the conditions of the artificially maintained currency rates. The use of the borrowed funds allowed George Soros to gather wealth within just a few weeks, which set a beginning to his charity work. As we have seen it, in order to prevent the negative influence of the currency speculations on the economy of the country, Central Banks create reserves in the form of foreign assets. But as the practice has shown, such reserves can prove to be ineffective, if they are opposed to the large capitals of the investors, who have the same goal. Today, the currency market Forex is far more liquid than at the beginning of the 90ies. Therefore, no investor, even having a billion capital, will hardly be able to influence on the currency rate for a long time. “Black Wednesday” of September, 1992 is left far behind, but the historic facts should not be ignored, because the history has a tendency to recur.