12/25/2014

The winners, like George Soros, are grinning; the losers, like John Major and Norman Lamont, are sadly admitting defeat

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The winners, like George Soros, are grinning; the losers, like John Major and Norman Lamont,
are sadly admitting defeat
Black Wednesday
Wednesday, September 10,1992, 4:00 PM
The afternoon of Black Wednesday grows darker and darker. The British are caving in, dropping out of the European Exchange Rate
Mechanism.
The winners, like George Soros, are grinning; the losers, like John Major and Norman Lamont, are sadly admitting defeat.
Bank of England officials engage in a conference call with members of the other central banks in Europe, passing on the news that
sterling is being suspended from the ERM.
The pound has fallen 2.7 percent against the mark and is trading at 2.703 marks in late New York trading, well below its former
ERM floor level.

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Wednesday, 5:00 PM
Intraday
John Major summons his cabinet and wins its approval to take Britain out of the ERM. Italy makes clear that it will follow suit. Now Trading.
the British and Italian currencies will trade freely, and their central banks will no longer have to defend them by buying them up in the Profitable
open market.
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Television camera crews and photographers crowd together outside the British Treasury for the expected public announcement.

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Wednesday, 7:00 PM
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The announcement finally comes. Norman Lamont appears before the cameras to admit defeat. His face looks worn, haggard,
Stocks
dismayed. The Economist will call him hapless.
Placing his hands behind his back, as if he is a prisoner whose hands have been tied, Lamont forces a smile; the smile, however, lasts Money,
Finance,
only a brief second. With his right hand he pushes back some hair falling over his forehead. And then he speaks.
Power,
Today, he begins, has been an extremely difficult and turbulent day. Massive financial flows have continued to disrupt the functioning Inflation
of ERM.. . . In the meantime the government has concluded that Britains best interests are served by suspending our membership of
the Exchange Rate Mechanism.
Wednesday, 7:30 PM
Britain is permitting the pound to float. The pound closes on Black Wednesday at 2.71 marks, down only 3 percent. (By the end of
September, however, the pound will drop to 2.5 German marks.)
Thursday, September 17,1992
Britains interest rate is back to 10 percent.
Italy follows Britain and withdraws its currency from the ERM. The pound tumbles immediately to 2.70 marks, then stabilizes at 2.65
marks, 5 percent below its previous floor level. It will eventually settle 16 percent below where it stood on Black Wednesday.
Britain is not alone in devaluing its currency. Spains currency is devalued by 28 percent; Italys by 22 percent.
With the news that Britain has withdrawn from the ERM, the pound is being quoted below 2.70 marks in New York trading, more
than seven pfennigs below its lower ERM limit of 2.7780.
(A sad footnote to the pound crisis came the following summer when the bands were widened to a rather meaningless 15 percent. As
of September 1994, the ERM was still in operation, with Germany, France, and six other countries participating.)
George Soros looked like a genius.
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12/25/2014

The winners, like George Soros, are grinning; the losers, like John Major and Norman Lamont, are sadly admitting defeat

Others had made large profits on the devaluation of the pound, but those profits went unreported. Bruce Kovner of Caxton
Corporation and Paul Tudor Jones of Jones Investments were big winners. Kovners funds made an estimated $300 million; Joness
funds made $250 million. Leading American banks with large foreign exchange operations, particularly Citicorp, J.P. Morgan, and
Chemical Banking, had profits as well. Together, in the third quarter, the banks netted over $800 million more than their normal
quarterly earnings from trading currencies.
Soross bet became public when Londons Daily Mail, reporting on a Forbes piece that was soon to appear, ran a front-page story on
October 24 with a huge, black, bold headline:
I Made a Billion as the Pound Crashed.
Accompanying the Mails story was a photograph of Soros, smiling and holding a drink in his hand. The lead was: An international
financier made nearly 1 billion pounds from last months currency crisis, it was reported last night.
Anatole Kaletsky, the economics editor of the Times of London, was walking home with his daughter on the Saturday morning that
the Mail story appeared. They paused for a few moments to buy some chocolate in a candy store, when Kaletskys eye fell on the
headline. Jolted by this news, Kaletsky bought the newspaper and read the article right there in the store. An hour later, by now back
at home, Kaletskys phone rang. George Soros was on the line.
Whats going on? the Times man asked, hearing some commotion in the background.
Im here in London, Soros replied, his voice agitated. I dont know if you saw the Mail.
Yes. Kaletsky began putting the puzzle together. My house is besieged by photographers and reporters. I want to go out and play
tennis. Im not sure what to do. What should I do? Whats your advice?
Before he was going to give advice, Kaletsky had to know one thing: Is the story true?
Soros was quick to reply. Yes, broadly, it is true. Kaletsky suggested that he not talk to any of the reporters at his
doorstep. If you want it on the record what you did and what you didnt do, why dont you write an article, or Ill come over and I can
talk to you.
OK, Ill think about it.
A half hour later, Soros phoned Kaletsky back to say that he thought it would be a good idea for the Times man to pay him a visit
that afternoon. Kaletsky did, and Soros gave his first full-blown interview on how he had engineered his coup against the pound. To
Kaletsky, the Soros interview in the Times on October 26 was the turning point in the creation of George Soros as a public figure.
From that interview came his celebrity in this country. Until then nobody had ever heard about George Soros.
Kaletsky led off his article by in effect introducing Soros to his readers: George Soros is an intensely intellectual man who spends
much of his time in eastern Europe as a political and educational philanthropist. He is also the worlds biggest currency speculator. In
the two weeks leading to Black Wednesday Mr. Soros engaged the British government in the highest-stakes game of poker in
history.
Soros, wrote Kaletsky, acknowledged that he had made a billion dollars from the pounds collapse with an embarrassed wince that
could not entirely hide some mischievous self-satisfaction.
Explaining his moves before Black Wednesday, Soros told Kaletsky: We did short a lot of sterling and we did make a lot of money,
because our funds are so large. We must have been the biggest single factor in the market in the days before the ERM fell apart. Our
total position by Black Wednesday had to be worth almost $10 billion. We planned to sell more than that. In fact, when Norman
Lamont said just before the devaluation that he would borrow nearly $15 billion to defend sterling, we were amused because that was
about how much we wanted to sell.
But things moved faster than we expected and we didnt manage to build up the full position. So a billion is about right as an estimate
of the profit, though dollars, not pounds.
Soros checked with his office and discovered that the running profits on his sterling positions were closer to $950 million, but his gains
continued to mount as he kept his money in currencies other than sterling. Of that $950 million, Soross personal share was onethird.
Long positions on British, French, and German interest rate futures and short selling of the Italian lira had boosted his profits to an
estimated $2 billion.
Kaletsky asked him why he was prepared to stake his entire wealth on the failure of a policy to which the British government had
been so irrevocably committed.
Soros said he had been confident that the German Bundesbank wanted devaluations in Italy and Britain, but not in France. I felt safe
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The winners, like George Soros, are grinning; the losers, like John Major and Norman Lamont, are sadly admitting defeat

betting with the Bundesbank. The Bundesbank clearly wanted the lira and pound devalued, but it was prepared to defend the franc.
In the end, the score was Bundesbank, 3-nil; speculators, 2-1. I did even better than some others by sticking to the Bundesbanks
side.
Asked if Prime Minister Major might have been better off raising British interest rates earlier than Black Wednesday, Soros replied:
Absolute nonsense, poppycock. If interest rates had been raised, it would have encouraged us to speed up our sales, because the
process was speeding up. In fact, we had not expected the devaluation to happen until the weekend. But when interest rates were put
up on Black Wednesday we realized we could not afford to wait any longer. We had to accelerate our selling to build up our position.
Time was running out.
For a brief time in the interview, Soros stopped thinking like a speculator. He took on the role of financial analyst, suggesting that
speculation could be harmful, particularly in the currency markets. But measures to stop it, such as exchange controls, usually do even
more harm. Fixed exchange-rate systems are also flawed, because they eventually fall apart. In fact, any exchange-rate system is
flawed and the longer it exists the greater the flaws become. The only escape is to have no exchange-rate system at all, but a single
currency in Europe, as in the U.S. It would put speculators like me out of business, but I would be delighted to make the sacrifice.

Previous Issues
200604-18

The Bank of England remains confident it can hold off speculators like George Soros

200604-17

The billions that George Soros would eventually risk in the fall of 1992 in his bet against the British pound

200604-16

Druckenmillers success with the Strategic Fund came to George Soross attention. Druckenmiller sought him out after
having been intrigued by The Alchemy of Finance

200604-15

According to Soross theory of reflexivity, the market would climb even higher

200604-14

Soros, the silence surrounding the investor came less from Soros than from Wall Street

200604-13

Attacks on Soros began soon after the foundation was launched

200604-12

Soros and his foundation faced continuing mistrust on the part of the government

2007 Olesia

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