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George Soros, the Hungarian-born American investor is often credited with 'breaking the Bank of England' for his contribution leading up to and on Black Wednesday. Soros' speculative activity directly contributed to the United Kingdom and the pound to exit the Exchange Rate Mechanism. Soros and his Quantum Fund made a profit of approximately $1 Billion USD on the short-sale of pounds sterling solidifying his reputation as one of the worlds most prominent investors. Today, many believe Soros may have actually helped the UK by forcing them out of a bad system and preventing the possible future adoption of the Euro.
Before Black Wednesday
Comments made on the eve of Black Wednesday by Helmut Schlesinger, the president of the German Bundesbank represented a signal to Soros that the pound was vulnerable. Schlesinger had indicated in several interviews that he felt there would have to be a reallignment amongst the currencies of the Exchange Rate Mechanism. Of course Soros hadn’t had some miraculous realization that day, rather, he had been building a huge position in pounds sterling for months leading up to Black Wednesday. Soros recognized the unfavorable position at which the United Kingdom joined the Exchange Rate Mechanism. For Soros, the rate at which the United Kingdom was brought into the Exchange Rate Mechanism was too high, their inflation was also much too high (triple the German rate), and British interest rates were hurting their asset prices.
Black Wednesday and Aftermath
Soros and Stan Druckenmiller, the chief portfolio manager at Quantum Fund, began their massive selloff on that Tuesday. Ordinarily Soros wouldn’t be making calls and doing groundwork himself but they were making a far larger bet than usual. Ironically, the Exchange Rate Mechanism stated that the Bank of England was required to accept any offers to sell pounds. However, the Bank of England only accepted orders during the trading day. This would not be enough to satisfy Druckenmiller and Soros who now had to work to find as many buyers as they could. When the markets opened in London the next morning, the Bank of England began their attempt to prop up their failing currency as per the decision made by Norman Lamont and Robin Leigh-Pemberton, the then Chancellor of the Exchequer and President of the Bank of England respectively. They began buying orders to the amount of 300 million pounds twice before 8:30 AM and were surprised to see these purchases do nothing. The Bank of England’s intervention was not effective because Soros’ Quantum Fund was dumping pounds far faster. The Bank of England continued to buy and Quantum continued to sell until Lamont told Prime Minister John Major that their pound purchasing was failing to produce results. However, John Major was the man responsible for making the controversial decision to bring the United Kingdom into the Exchange Rate Mechanism while he was serving as Chancellor of the Exchequer. Therefore, hesitant to acknowledge the system he advocated was failing, Major ordered Lamont to wait for further data later in the trading day, hoping the trend would pass. Lamont continued to plead with Major to raise interest rates until 10:30 AM. Up until that point the bank had been trying to exude confidence despite massive currency speculation attacking them. However, when Major agreed to act and raise interest rates a full two percentage points, the direness of the situation was clear.
Even after the interest rate hike, Soros, Druckenmiller and Quantum (as well many other speculators) had the Bank of England outmatched. And while the Bank of England struggled with indecision and political maneuvering, Soros just continued to sell. When it became clear that the two-percentage point interest rate increase didn’t work Major held a meeting with high-ranking government ministers including Lamont to discuss further action. While some would have advocated an outright exit from the Exchange Rate Mechanism, Major decided they would try one last interest rate hike, three percentage points this time. The second interest rate increase was announced the following morning and again the pound did not respond. From Soros’ perspective the interest rate maneuvering was a clear sign of desperation and only lead him to sell harder. That evening, after it was abundantly clear that the pound couldn’t be saved in it’s current condition, the United Kingdom officially exited the Exchange Rate Mechanism.
While September 16, 1992 has become known as Black Wednesday for the United Kingdom, many today would claim otherwise. Furthermore, George Soros is frequently credited for breaking the Bank of England by short-selling pounds and making himself $1 billion in the process, however perhaps he inadvertently saved the British economy. The events of ‘Black Wednesday’ ensured more than anything else that the United Kingdom exit the Exchange Rate Mechanism. Had the United Kingdom not done that, they would likely have joined the monetary union and adopted the Euro. Not adopting the Euro has spared the UK from significant turmoil in recent years and comparatively the pound has performed quite well. Not only has their economy fared well but under its current conditions the United Kingdom has far greater flexibility. Not having a list of requirements imposed by a greater monetary body, many would say, has benefited the British immensely.
