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The idea of betting against the pound was not Soros’

On October 24, 1992, George Soros, the internationally reputed currency speculator, stock market investor and philanthropist, was in London.

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“My father will sit down and give you theories to explain why he does this or that. But I remember seeing it as a kid and thinking, Jesus Christ, at least half of this is bullshit, I mean, you know the reason he changes his position in the market or whatever is because his back starts killing him. It has nothing to do with reason. He literally goes into a spasm, and it’s his early warning sign.”— Robert Soros on his more famous father George Soros.

On October 24, 1992, George Soros, the internationally reputed currency speculator, stock market investor and philanthropist, was in London. An avid tennis player, Soros was leaving his house to play tennis with some of his friends.

As soon as he opened his front door, he was besieged by a slew of reporters and photographers. As Michael T Kaufman writes in Soros - The Life and Times of a Messianic Billionaire, “As he opened the front door, he was met by a throbbing scrum of Fleet Street reporters and photographers, all shouting at him. ‘Did you really make a billion on the pound? Can we have an interview? Just a few questions.’”

Soros not realising what had happened called up Anatole Kaletsky, who was the economics editor of the Times of London. Kaletsky then told Soros that a newspaper called the Daily Mail had carried a story on him with a headline proclaiming ‘I Made a Billion as the Pound Crashed.’

“The alleged killing had taken place more than a month earlier on September 16, a day that by then had become known as Black Wednesday, when the British government succumbed to a 20% devaluation of the pound,” writes Kaufman. “By the October morning when Soros found himself trapped by clamouring journalists, everyone in Britain knew that Prime Minister John Major and Chancellor of the Exchequer Norman Lamont had been dealt a humiliating defeat. Since August they had repeatedly maintained that the government would stand up to speculators who were betting that the pound was overvalued. They had spent billions of the government’s foreign reserves to buy back pounds and thus shore up the value of the sterling in the face of the speculative wave. Those foreign reserves, it turned out, had been squandered in the futile defence of a currency in the time of recession.”

Soros was then not well known outside the financial community. He knew that he had a public relations problem and given this he decided to clarify the entire situation to Kaletsky of Times by giving him an interview.

“Soros and his fund had done to challenge Major and his stated resolve to maintain the exchange rate for sterling within the limits of the Exchange Rate Mechanism (ERM), the so-called snake that since 1979 had linked the value of European currencies to each other, with all them pegged to the German mark. Within the snake, each member country was committed to maintaining its currencies within predetermined limits. In the case of Britain, the pound was to trade at a level of about 2.95 marks,” writes Kaufman.

What is not well known even today is the fact that the idea of betting against the British pound was not Soros’ idea. It essentially came from Stanley Druckenmiller who was the chief trader and strategist of George Soros’ Quantum Fund. As Kaufman writes, “In 1992 Druckenmiller calculated that, despite public assurances to the contrary, the Bank of England would not be able to avoid devaluating the pound. He called Soros to discuss his thinking. ‘I told him why I thought the pound could collapse and the reasons I had and I told him the amount I was going to do. I did not get a scolding, but I got something close to a scolding, which was, well, if you believe all that, why are you betting only two or three billion.’ With Soros’ encouragement, Druckenmiller more than tripled his original stake.”

Soros essentially had a position of $10 billion on the British pound. The trade essentially involved short selling the British pound and later buying it back once it was devalued. And that is what happened. He eventually ended up making $1 billion on the entire trade.

What has always helped Soros is the fact once he believes in something he pulls the trigger and goes ahead full steam with it.

As Kaufman writes, “There are thousands of people who are good at analysis and hundreds who are good at predicting trends, but when you get down to using that information, pulling the trigger, putting it on the line to make what you are supposed to make, you are down less than a handful…You know, the ugly way to describe it would be ‘balls.’ To be willing at the right moment in time put it all on the line. That is not something, in my opinion, that can be learned. It is totally intuitive, and it is an art, not in any way a science.”
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