
The Trade of the Century: When George Soros Broke the British Pound - nols
http://priceonomics.com/the-trade-of-the-century-when-george-soros-broke/
======
AndrewBissell
Politicians always like to blame speculators when their attempts to fight the
market inevitably end in failure, and this instance is no different. Soros
didn't "break the GBP," it was already broken and the British government's
guarantee to prop it up was never sustainable in the first place.

Someone was going to a lot of make money when the British government's scheme
unraveled. Soros just happened to make a lot more than anyone else. Reminds me
of a good Rhett Butler quote: "Opportunists have always been held in
disrepute. Especially by those who had the same opportunities and didn't take
them."

~~~
fred_durst
You do realize that most people do not take the same opportunities because
they consider them ethically and morally disgusting? That maybe we're not just
a bunch of fools floundering around bumping into just enough money to survive?

I'm always amazed how opportunists think they are the only ones who thought of
their schemes.

~~~
GigabyteCoin
What was morally or ethically disgusting about Soros profiting greatly at the
expense of the British Government?

Do you think it's morally or ethically wrong that you paid $3 for a hamburger
that McDonald's only paid $2 to produce?

Opportunities and tradeoffs exist all around us. It's simply how our world
works.

~~~
norswap
The thing about McDonals, a company making profits in a consensual trade is a
total non-sequitur.

What I assume is disgusting is that the British Government's money actually
belong to British taxpayers, who contributed it in the first place. Those
taxpayers have reasonable expectations that this money will be used to
indirectly benefit them or for the good of the British people at large, and
not end up squandered.

Now other people correctly pointed out that the pound would have devaluated
with or without Soros, so I don't think his actions where all that unethical.
But as it happened so suddenly instead of the usual drawn-out game of rumors,
some politicians clearly felt the burn.

~~~
cortesoft
It WAS a consensual trade between the British government and Soros, in
effect.... the gov could have at any time earlier in the process stopped
buying obviously over priced pounds, but they didn't.... yes, the gov was
spending tax payers money in doing those deals, but the tax payers had
selected John Major, and he was quite clear on his position in terms of
monetary policy.

~~~
norswap
Yes it was, but that's nitpicking. I think you get my point: buying burgers
and trying to manipulate the market are two rather different separate things.

~~~
AnimalMuppet
But who was trying to manipulate the market? Soros? Well, yes, he was. The
British government? They also were.

Why do you find one morally repugnant and not the other?

------
seizethecheese
It's interesting that the loss to the Bank of England is attributed almost
entirely to Soros. If you accept that the fixed rate was unsustainable then
even without Soros the Bank of England would have been forced to defend an
untenable position, and eventually would have lost enough to give up. It's
reasonable to assume that the acceptable losses for the Bank of England would
have been similar whether they were sustained in one day or over the period of
weeks or months.

Soros' brilliance was to see the inevitable and take almost the entire
opportunity for himself.

~~~
marvin
The big question is whether the Bank of England would have sold so much GBP if
this was allowed to happen gradually rather than overnight. The real problem
is still political incompetence, but there's no guarantee that the losses of
the British taxpayers would have been equally large if Soros's fund had not
made such a spectacular short which sparked a political pissing match.

~~~
seizethecheese
Definitely. It's plausible that without Soros the losses would have been much
smaller. On the other hand, it is possible that a slower burn would have
enabled political inaction and therefore more losses!

------
temuze
Can someone explain to me what the effects of China's artificial devaluation
of the yuan vs the dollar are? I understand that they are doing this to make
themselves more competitive as an export economy, but can they really keep it
up? I mean, to maintain this valuation, they have to constantly sell yuan and
buy dollars, but they can't do that forever, right?

So when the yuan finally increases in value, will the dollar's value crash?

~~~
klodolph
Maybe the dollar's value will crash relative to the Yuan. If you make a bet
like George Soros that the Yuan is going to rise in value, what would that bet
look like?

One of the problems with the bet is that you are betting in the opposite
direction from Soros. China can just print more Yuan, and suddenly Yuan
decrease in value. Add to this the ridiculous levels of pointless internal
investments, seemingly done to inflate China's GDP. And finally, there are
severe problems with Chinese equity markets that make it scary to bet on Yuan
against USD.

I think at some point in the future, China will stop having an export economy,
because advances in manufacturing technology and automation will obviate the
need for cheap labor. And at some other point, China will start investing
sensibly in internal matters. I have no idea how to translate this into USD or
CNY, but if I were in China, I would want the transition to happen gradually.
A gradual transition avoids destroying the manufacturing sector overnight.

~~~
cinquemb
I don't know if this is related directly, but seeing as Soros is in on the
largest gold mining company in the world and other gold companies related
etf's[0], doesn't that speak somewhat to the type of bet he's making in this
landscape?

[0]: [http://www.reuters.com/article/2014/05/15/hedgefunds-
filings...](http://www.reuters.com/article/2014/05/15/hedgefunds-filings-gold-
idUSL1N0O127W20140515)

~~~
brazzy
Note that this follows a massive reduction of Soros' gold investments last
year: [http://www.bloomberg.com/news/2013-05-19/gold-bear-bets-
reac...](http://www.bloomberg.com/news/2013-05-19/gold-bear-bets-reach-record-
as-soros-cuts-holdings-commodities.html)

Looks like he's simply playing the markets.

------
ryandrake
Bank of England thought they could achieve the Impossible Trinity [1] and
failed:

1\.
[http://en.wikipedia.org/wiki/Impossible_trinity](http://en.wikipedia.org/wiki/Impossible_trinity)

------
bsaul
I wonder how much money soros fans lost when they tried to do the same in the
previous years, trying to speculate on the end of the euro.

I love the paragraph saying "there was no way the sterling would go up". Those
are really the kind of reasonning you can do 20 years later. You never know
that there really "is no chance".

~~~
ZenPro
I personally lost a little over 9 months salary. The missus was not pleased
:-)

To be honest, the entire gambit rested on the results of the Greek election
[1]. If Tsiparis (Syriza) had of won then everyone who shorted would have made
a killing as they pledged to cease any repayments.

Exit polls had them _possibly_ winning at 7pm with the possibility lessened by
05.% at 8pm. As it happened, the result was 26.9% to Syrizas and the winners
(ND/DISY) with 29.7%; the markets already started climbing that evening and
within a few days the majority of short positions were untenable incurring
substantial losses.

Most media outlets agreed that a Tsiparis win would have resulted in a Greece
exit from the Eurozone with the currency plummeting. Foreign Affairs stated
that _...the election determined whether Greece would exit the eurozone and
decide the fate of the entire postwar European project._ [2]

The entire issue came down to just 170,475 votes (>2% of the voting
population).

[1]
[http://en.wikipedia.org/wiki/Greek_legislative_election,_Jun...](http://en.wikipedia.org/wiki/Greek_legislative_election,_June_2012)

[2][http://www.foreignaffairs.com/articles/137710/stathis-n-
kaly...](http://www.foreignaffairs.com/articles/137710/stathis-n-
kalyvas/greece-votes-itself-in-the-foot)

~~~
jacquesm
> The missus was not pleased :-)

She should have been just as 'not pleased' had your bet paid off. Going on the
assumption that one should not bet such sums without full consent of one's
partner...

~~~
ZenPro
Nothing you have stated there is untrue.

------
pjc50
In some ways, this was a comparatively cheap way for the UK to discover that
fixed exchange rates between economies must force the pressure into current
account deficits instead; such as has happened to
Portugal/Ireland/Greece/Spain. Falling out of ERM kept the UK out of the Euro,
which was beneficial in the long run.

~~~
M2Ys4U
>Falling out of ERM kept the UK out of the Euro, which was beneficial in the
long run.

Perhaps. That's certainly conventional wisdom, but we have no way of knowing
what the political or economical landscape would have been if the UK stayed in
the ERM and was now in the Eurozone. 20+ years is a long time.

~~~
TazeTSchnitzel
Were it not for Brown, we might have joined the Euro.

------
phkahler
So what is the play today? The US is backed into a corner. Interest rates are
near zero (Fed fund rate) and they're buying $75Billion in bonds a month to
keep interest rates low. That was $85B and was supposed to taper, but as soon
as they dropped a little bit mortgage rates rose and home sales dropped again
- the housing market is at another peak with the low interest rates with
nowhere to go but down. They keep hoping to get some inflation going by
pushing on that rope and it's just not happening. All the money is going into
stocks. If we do get significant inflation they'll have to raise rates and
destroy the housing market (worse than last time). So we're on the brink. It's
hard to short stocks when they're rising so fast - one who could time this
thing could make Soros' gain look like lunch money. What is the play?

~~~
kasey_junk
One thing to remember is that the Soros bet was available because the currency
was pegged. Everyone (in the west) has learned that to be a bad thing, in part
because of this particular bet.

The US has not pegged their currency. They've made other currency policy
decisions under the hope that the US currency can handle the debasement (and
so far they have proven true).

Remember that when you short a currency, you also are taking a position about
all the other currencies in the world. So rather than say you don't like US
dollars you need to say, I prefer X to US dollars and think they aren't
currently trading at the right ratio (and if you are shorting you have to
account for a very expensive transaction cost).

So rather than asking what the play against the US dollar is, ask which
currency you prefer. The international markets do this everyday and so far
they haven't found a very compelling alternative.

------
PhasmaFelis
Why is it that taking advantage of loopholes and incompetent bureaucracy to
take things from innocent people is monstrous if you do it on a small scale,
but heroic on a national scale?

~~~
AndrewBissell
Why is it no one ever puts the blame on the incompetent bureaucracies that are
actually responsible for losing their countries' money?

~~~
PhasmaFelis
Don't you think there's plenty of blame for everybody? If I leave my keys in
the ignition with the window down and my car gets stolen, it's my own fault
for being careless, but that doesn't mean the thief is innocent.

~~~
kansface
There was neither a thief nor a theft. The equivalent would be if you declared
you would attempt to fix the price of all Camrys. You buy a huge number of
them to prop up the price. Some third party thinks this is stupid, borrows
some Camrys and sells them for dollars. Eventually you run out of money and
the price falls. There is no theft- it was simply a bad position for you to
take in the first place.

Baring any ethics, should governments be immune from loses in open markets?
Who would participate?

~~~
zacinbusiness
An elite few wealthy politicians decided how millions of people's money would
act in the global economy. They made a bad call, obviously. But Soros and
company weren't forced to "go for the jugular." They could have effectively
"taught the British government a lesson" by making a few hundred million
dollars and leaving the currency in tact, rather than completely decimating
it. It's just greed. And the fact that so few people can see that is alarming.

~~~
AnimalMuppet
But see, a few hundred million would not have taught them any lesson. They
would have accepted that as the price of maintaining the pound in the range
that the ERM said it needed to be in, _and continued to do so_. It was only
when the losses became unacceptable that the politicians stopped acting
foolishly.

------
duncan_bayne
"As it turns out, Margaret Thatcher was right: the UK had no business trying
to artificially prop up its currency in an era when a handful of hedge funds
could assemble more capital in a few hours than the Bank of England had at its
disposal."

Unfortunately, power-lust and ideology usually trump reason when politicians
are involved.

------
alexmayyasi
I'm interested to hear people's reactions to the article and the Soros trade.

I'd also like to know what the HN crowd thinks about opinions like this recent
New Yorker article that asks how hedge funds "get away" with charging such
high fees without producing superior returns:

[http://www.newyorker.com/online/blogs/johncassidy/2014/05/ho...](http://www.newyorker.com/online/blogs/johncassidy/2014/05/how-
hedge-funds-get-away-with-it.html)

~~~
cdk
I believe the 20% cut that the manager make is after they clear a benchmark
like the S&P 500 to ensure they get paid when they produce a superior return
compared to what an index fund could deliver.

~~~
patio11
This is not a very meaningful hurdle, though.

For example, let me pitch you on the Patio11 Hedgehog Fund. It uses
complicated financial alchemy to produce market-beating returns, and you only
pay if we beat the market. The fund has never lost money. Care to invest $10
million? You pay 2% per year and 20% of returns above the S&P 500.

Hypothetically suppose the S&P is up 10% next year. I deliver 20% returns.
Alchemy, what can I say. You make $1.6 million, I make $0.4 million (from
you), and since I did this in parallel with 100 other people life is pretty
grand for me.

Now just between HN and me, my strategy is simple: I buy the S&P 500 as an
index _but I use 2X leverage_.

What would have happened if the market went down 5% next year? Well, we would
have lost 10%. That certainly sucks, and you need to make your $1 million
back. Which is great, because I am now accepting new money on the Patio11
Chinchilla Fund. It uses complicated financial alchemy to produce market-
beating returns, and you only pay if we beat the market. The fund has never
lost money.

~~~
kasey_junk
Well to be fair, it's also not the real hurdle than any investor in Hedge
funds use. It's more of a marketing term than anything else (and often funds
don't target the S&P as their benchmark, but something else closer to their
trade category).

Almost all investors in hedge funds will want to see the portfolio of all
previous funds you've managed as well as how much of your own money you have
in the fund, how much leverage you are doing, alpha, beta, risk adjusted
metrics etc.

That said, the Hedge Fund industry is going through a consolidation. Lots of
small funds were essentially S&P indexes with leverage/hedges and execution
ability. The rise of ETFs, the decrease in execution costs, and the creation
of a true history of performance has made those funds pretty obviously useless
and they are (rightly, I believe) dying.

------
loso
A pretty good documentary from the BBC about Black Wednesday. Shows more from
the government side and the mistakes they made than Soros part but still gives
you a good understanding of what happened.
[http://m.youtube.com/watch?v=K_oET45GzMI](http://m.youtube.com/watch?v=K_oET45GzMI)

------
blueskin_
Yet again, Thatcher showed her intelligence and foresight by opposing the ERM.
There's a reason many people in Britain referred to it as the Eternal
Recession Mechanism.

It is a shame bordering on a national disgrace that so many people don't know
of actions like that, or indeed, her being one of the biggest proponents of
lean-burn technology that would yield several times the fuel efficiency of
modern cars but has since been all but abandoned[1]. She saw climate change as
a future issue before any other politician, but was unable to act given the
conditions of the time. Instead, she is best remembered for the collapse of
the coal industry, something that was inevitable in any case, but she simply
refused to subsidise it to keep it staggering along for another couple of
years.

Not only this, but she was responsible for Britain winning one of the few
post-WW2 wars fought by the West against anything close to an equally well
equipped foreign power.

[1][http://iaindale.blogspot.co.uk/2009/02/margaret-thatcher-
cli...](http://iaindale.blogspot.co.uk/2009/02/margaret-thatcher-climate-
change.html) [http://conceptual-reflections.w43w.com/1036/unleaded-
paintin...](http://conceptual-reflections.w43w.com/1036/unleaded-painting-a-
false-picture/)

~~~
kasey_junk
Without getting into the pluses/minuses of Thatcher's leadership, saying that
she "simply refused to subsidise" the coal industry papers over a lot of very
anti union activities.

You can argue for or against these activities, but the reason she is despised
so widely has nothing to do with subsidies and everything to do with
criminalizing non-violent Union protests.

------
honksillet
Here is the take away. "As it turns out, Margaret Thatcher was right..."

------
seanccox
It's interesting timing to post this, since the New Yorker explored the data
available on hedge funds' returns just yesterday, and found them lacking...

[http://www.newyorker.com/online/blogs/johncassidy/2014/05/ho...](http://www.newyorker.com/online/blogs/johncassidy/2014/05/how-
hedge-funds-get-away-with-it.html)

------
Vanayad
I am really curious what would have happened if the British Government bought
DM as well during this period (and maybe not disclose it?) Then they would
exit the ERM, and the pound would fall and they would exchange all their money
back to sterling and would be rich... :/ I know my logic has a mistake in
it... it can't be that simple :P

~~~
contulluipeste
The British Government had DMs, that's what they sold trying to keep their
currency at fixed rate. You say they should have kept Deutschmarks to sell
them later for what? For depreciated sterling pounds? It doesn't make sense,
the only thing that a government has plenty of is its own currency.
Governments are "rich" in their own printed stamps, the challenge is to keep
those stamps valuable. That's what the British Government was trying to do.

------
facepalm
One aspect in stories of this kind always seems to be somebody trying to
artificially inflating the value of some stock (or currency) by buying lots
and lots of it. In this case, the bank of England. (I've read the same thing
about Indonesia, and the Barings Bank incident).

That seems so silly - I mean here are these supposedly highly trained
financial experts, and all they can do is try the most primitive stock
manipulation imaginable?

What would have happened if the Bank of England wouldn't have tried to
artificially inflate the pound by buying lots of it? Would it have had the
same cost to the tax payer? Obviously there would have been a cost because of
the devalued pound (less buying power for foreign goods), so perhaps the
question is did it even make any difference? Either they lose because of the
diminished buying power, or they lose directly because of the buying spree of
the Bank of England?

~~~
lmm
The thing is that you only see the failures. Propping up a currency like that
works fine until it doesn't.

Not buying up pounds would have meant dropping out of the ERM immediately. In
the short term that would have saved money. In the long term, depends on your
view of how similar or different the UK and German economies are.

------
coreymgilmore
Free markets always win. The markets have a very good history of correcting
themselves and it just happens to be that corrections are always rough to most
people, and highly profitable to a few. Ex. the 2009 housing bubble in the US.
A few people made a ton of money of this. Same with gold coming off its all
time highs.

------
westiseast
If you see an online service whose online security is terrible, do you (a)
notify the company (b) hack them and privately inform them off the exploit or
(c) hack them, steal all the data, sell it on the open market and make a
million pounds, simultaneously disadvantaging millions of average customers?

~~~
AndrewBissell
LOL, I can just imagine the scene now:

INTERIOR, HER MAJESTY'S TREASURY OFFICE

 _PHONE RINGS_

SOROS: Hi, my name is George Soros, I'm a hedge fund manager and international
speculator. I noticed that you're trying to prop up the British pound, but
rather than try to profit from this, I figured I'd just call and give you guys
the heads up that it's not going to work.

TREASURY OFFICIAL: Oh my God, you're right! We'll issue a public statement
right away, admitting that we've been wrong and that we're putting an
immediate end to the policy. Thanks so much for the warning, kind sir!

~~~
fabulist
"In light of this development, we're starting a Fiscal Policy Bug Bounty
program...."

------
the_watcher
So this is basically the worst case scenario of activist monetary policy by
governments, right?

~~~
emiliobumachar
Wrong. Worst case scenario, they'd double down and keep fighting the market
until the country was completely bankrupt.

------
truantbuick
I don't know that much about finance, so can somebody explain to me why I
never hear anybody censuring Soros over this? I only hear congratulations for
bamboozling the incompetent British government.

He made billions at the expense of an entire country.

I'm not saying it was illegal, and maybe people like Soros are needed to help
deter governments from artificially manipulating their currency like the
British did. However, when it comes down to it, he benefited by executing a
bet meant to enrich himself, compound the problems of the pound, and diminish
the wealth of a nation. It seems like a plainly immoral thing to me.

~~~
ProAm
He played the game according to the rules. You can't fault a winner when he
wins on a even playing field.

~~~
truantbuick
Using these kind of game metaphors just shallowly rationalizes something of
far more importance, IMO. Legal or not, a country was worse off because of his
direct and deliberate actions.

~~~
kansface
"a country was worse off because of his direct and deliberate actions"

The country was worse off because its fiscal policy, determined via politics,
amounted to a completely untenable long term position. An epic disaster was
the only possible conclusion.

~~~
craigjb
Well I'm glad someone made the entire country pay for the Chancellor of the
Exchequer's decisions.

~~~
guard-of-terra
Didn't you, I don't know, elect them? Who is there to blame?

------
arbuge
That's a previous century.

This century's trade of the century so far might be John Paulson shorting
various mortgage securities during the financial crisis.

------
rurounijones
So it seems that everyone knew the pound was mis-valued, the only thing
stopping them from just revaluing was politics and the egos of politicians.

They were a bleeding man in water and Soros was a shark; I don't praise or
like him for what he did but he was not the main cause, he just acts as you
would have expected him to.

------
alexnewman
Hardly the trade of the 1900's. In fact Soros has had much better deals. Also,
on the notion that the pound was inherintly broken, one should probably
checkout adam curtis mayfair set.

------
kyleblarson
Funny that he now uses profits derived from the incompetence of one government
to purchase elections in another.

------
mikecb
| 2.78 DM to 3.13 GBP.

I think they mean between 2.78 and 3.13 DM per GBP.

------
jokoon
world finance is brutal

