

How Soros Broke the Pound - cwan
http://www.theatlantic.com/business/print/2010/06/go-for-the-jugular/57696/

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rameshnid
I recommend a book titled "naked economics" for all. It is a great book and a
must read for a technologist to see "macro vectors" alongside the "technical
vectors" that help for a sounder prediction of the future.

[http://www.amazon.com/Naked-Economics-Undressing-Dismal-
Scie...](http://www.amazon.com/Naked-Economics-Undressing-Dismal-
Science/dp/0393049825)

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Jun8
The thing is, I read articles like this with interest, but feel like a two-
year old. I don't get it. My theory is that intelligence, math ability, etc.
has nothing to do with it, your brain has to be wired in a certain way to
understand the the varying grotesqueries of financial markets, to paraphrase
the Architect.

~~~
jakarta
The two biggest things you can learn from Soros, IMO:

George Soros is a genius. But he is not a genius for searching and finding the
trades. He is not sitting around and doing calculations or running analyses
with fancy algorithms.

Instead, he is amazing at risk management. He knows precisely when to 'go for
the jugular' and bet really big.

It's a really instinctual type thing, he can gauge the psychology of the
market really well and understand when bubbles are about to pop.

The other great thing about Soros is that he has a remarkably open mind. There
is a story about how Soros went and played tennis with someone, at the time,
he had a big trade betting on one direction of the market. The person he
played tennis with was vehemently against that position and expressed his
concern.

The next day the market turned opposite to Soros' trade and his tennis partner
called, to see if he was doing okay, thinking that Soros must have lost a lot
of money that day. But, he was greeted with a happy George Soros who reported
that after the tennis match he totally changed the direction of his trade.

It is pretty rare to find people, especially in financial markets, who can
quickly change directions and basically admit that they were originally wrong.
Trading is a business that is dominated by people with huge egos, but you will
notice that most of the best traders are ones that will switch direction
without hesitation.

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parenthesis
As an aside, the now UK Prime Minister, David Cameron, was a Special Adviser
to the then UK Chancellor when this happened.

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kierank
In the famous Black Wednesday announcement after the pound left the ERM you
can see David Cameron behind Norman Lamont.

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gfunk911
Can somebody explain this to me? I don't get how leaving the exchange rate
mechanism made Soros a winner.

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jordanb
Soros sold shorts against the British pound, essentially, betting that it
would fall in value.

The Bank of England tried to keep the value of the pound high enough to stay
within the 'allowed band' of the ERM by buying up the excess pounds (and the
bullish side of Soros' short contracts) on the open market, using their
foreign currency reserves. If the bank had allowed the pound to fall instead
of trying to prop it up though, Soros wouldn't have had a buyer. Moreover, if
Soros had lost his nerve or his solvency selling shorts before the BoE ran out
of reserves, the pound would have stayed high and he would have lost his shirt
fulfilling the contracts.

Once Soros sold his contracts, he stood to lose if the value of the pound
stayed high. The Bank of England could keep it high even after their attempts
to buy up pounds had failed, by drastically raising interest rates and keeping
them high. That would have thrown the British economy into a recession so
Soros was betting that the BoE wouldn't go through with it.

In the end, the BoE didn't have the nerve to jack interest rates, so they let
the value of the pound fall out of the ERM-allowed band, and Soros was able to
fulfill his contracts with cheap pounds and pocket the difference.

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cstross
They _did_ try to jack the interest rates (full disclosure: I'm British and I
had a bank account at the time :) -- the base rate rocketed by roughly 1% one
day, then 2% the next. Then they chickened out and pulled the eject handle on
the ERM, and cut the base rate back to where it had been before Soros'
assault.

That was the moment when it became obvious that the next government would be a
Labour one. (And the reason Labour instantly hived the BoE off as an
autonomous entity.)

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rjett
Alternate title: "Why Britain Stayed Away from the Euro"

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1010011010
Other alternate title: "why central banking is dangerous".

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1010011010
downvoted? really? Wouldn't a reply have been better?

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bitdiddle
I remember these events well and it's interesting to note that Soros and other
currency traders also did the same thing in Malaysia during the same time
period. This was a lesson not lost on observers like Zhu Rhongi.

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gwern
Indeed. I was reading <http://en.wikipedia.org/wiki/Unrestricted_Warfare> and
was a little surprised to come across Soros's pound raid as a prominent
example of what the Chinese authors meant by the concept.

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puzzle-out
Soros has been betting against the Euro since March, shorting it for US
dollars. Again, the central bankers are fighting a losing battle. Sooner or
later there will be a similar attack on sterling and eventually the greenback.
The transferance of private debt to sovereign states has created a level of
currency volatility which is the closest thing to paradise for aggressive
currancy trading.

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nradov
How exactly would a speculator "attack" the greenback? The exchange rate may
decline relative to other currencies (or precious metals). But the money
supply is huge relative to every other currency and our central bank is not
trying to actively defend any particular exchange rate. There's not going to
be sharp, sudden break like what happened to the pound.

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known
Lesson learned: Short selling should be regulated.

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adrianscott
I don't understand how your conclusion relates to the data. Can you explain?

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known
<http://en.wikipedia.org/wiki/Uptick_rule>

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adrianscott
Why was there any relation to short selling regulation as a lesson learned
from the trade in question? Wasn't it more about the policies of the U.K.
leading up to the trading opportunity, rather than any abuse of 'short-
selling'. (Plus given it was currency markets, rather than stock markets...)

