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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
Soros 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 sell-off on Tuesday, September 15, 1992. 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. When the markets opened in London the next morning, the Bank of England began their attempt to prop up their 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 to little effect. 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, 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, that their pound purchasing was failing to produce results. Major ordered Lamont to wait for further data later in the trading day, hoping the trend would pass. At 10:30 AM Major agreed to raise interest rates a full two percentage points to 12 percent.
Even after the interest rate hike, Soros, Druckenmiller and Quantum (as well many other speculators) 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. Major decided to try one last interest rate hike, three percentage points this time, to 15 percent. The second interest rate increase was announced the following morning, but again the pound did not respond. That evening the United Kingdom officially exited the Exchange Rate Mechanism.
