George Soros' "attack" on the British pound in 1992---please explain to a complete idiot

Factual Questions
1

Heres what I can gather: in 1992 European financier and conspiracy theorist piñata George Soros “shorted” the British pound, causing it to collapse, and made a killing, according to people like Glenn Beck.

I interpret as something like this: he felt the Pound was going to go from lets say (these are arbitrary numbers) 2 pounds to the US dollar in exchange rate to 1.50 pounds to the dollar.

So he borrows lets say 1 billion British pounds at $2 billion USD with a promise to repay the lender in lets say, 60 days, at whatever the going rate is then.

He dumps the pounds on the market at 1.90 pounds each, losing 100 million pounds of his investment immediately, but he wants a little insurance his bet will pay off. A selling panic on the market ensues and the pound versus the dollar plummets.

60 says later, thanks to the artificial panic created by Soros AND economic events he predicted, the pound is now worth 1.50 pounds each as he predicted.

Payday is here; Soros still made 900 million pounds in his initial sale, and only has to pay 750 million pounds back to the bank, pocketing 150 million pounds from his scheme.

I know the actual numbers are higher, but is this how a currency short works? I also know this play involved investments in German Marks and French Francs, as well as few other manuevers in equities and stock markets.

Also one other thing that I cant figure out: by lowering the value of the pound, did Soros fuck himself in this example in terms of his buying power of the US Dollar? Or would there have been a workaround for that? (Again, I know the US dollar was not part of this scheme, as far as I know but Im trying to frame it in a way I can understand)

Keep in mind I have read every article there is about this, am fascinated by it, but makes my head explode.

SPEEEEAK----VERRRRRY ----SLOWLLY----ME—UNDERSTAND—BETTER!!!:smiley:

2

“short” also refers to merely reducing exposure to price drops.

Your question is about market manipulation. I’d call it flooding (as you ruled out insider trading - the connection being someone who seems to be flooding may be accused of insider trading . )
The idea is that a large amount of sales of the one stock may cause the price to drop.
Then other people/entities want to reduce exposure… so they sell too, and are hesistant to want to buy … the flooder gets back into buying while everyone is still trying to sell…

The idea that in a ‘short’ the seller must then buy the shares back is wrong, its explained that way, in writing, for simplicity.
However, Soros knew he was going to make money, as he knew the UK gov would try to continually buy pounds to try to unflood the market. If the UK gov succeeded, he’d have caused the price to RISE, so he could continue selling and make profits.
If the UK gov fails, as they did, then the price is dropped and he can BUY at a cheap price
Whats the US dollar got to do with Soros ? did he have to trade in anything else in that short time ? maybe the damage is long term…

3

I worked at Swiss Bank Corp (now UBS) at the time. I knew colleagues on the currency desk that shorted about 10x the amount Georgy boy did, but being a bank, they didn’t want the attention. Soros was not a very big player in shorting the pound. He was a very vocal one.

What happened was a classic central bank throwing their weight behind one outcome (the pound was “fundamentally” strong and should not weaken) vs macro economics saying otherwise ***and ***the big players all ganging up to short the market.

Central banks are big, can cause serious damage to a hedge fund or bank that crosses them. That said, a European Central bank was not nearly the size of all the big hedge funds and investment banks that bet against it. IIRC, for a few days, the UK central bank lost $1 billion/day defending the pound as more and more banks/hedge funds piled on that the Bank of England would capitulate. It only took a few days before the BoE gave up and the pound collapsed.

Does that make sense or should I explain more?

4

The simple answer is that anyone can short sell a currency. You first borrow, say, a million pounds. Then you make a contract to pay back the loan on a fixed date. You then exchange them immediately for dollars, say. So when the value of the pound drops in relation to the dollar, your costs of buying back that exact number of pounds is obviously lower, and what’s left over is gravy. Multiply this by 1000 and you can see how people can make lots of cash. It’s like gambling.

5

The pound at the time was in a regime of fixed exchange rates between European currencies, pegged at about 2.7 pounds to the mark. Soros (and everybody else) bet that that exchange rate was higher than the relative strengths of the economies would actually support, and bet that Britain would have to pull out of the exchange rate mechanism. That happened, and Soros made a profit on his bet.

It would be like if some guy was going around saying, “I’ll give you US$1.50 for every Canadian dollar you give me, because Canada is awesome, so it seems right to me that the Canadian dollar should be worth that much, no matter what the actually currency markets say!”. And everyone is just finding loonies, giving them to that guy in exchange for greenbacks. So long as that guy can keep it up, the C$ in a sense “really is” worth US$1.50, because you can make the trade with that guy, but everyone knows that that guy can’t keep it up forever – he’s only got so much US$ to trade with and will eventually run out.

6

The way commodities work is if the market knows that a commodity will be worth a certain price in the future the market will set the current price at that exact price now with a discount for time value. For instance if there is a blight that is going to make the supply of potatoes drastically smaller in November, that will move the price of potatoes now and not in November regardless of how many potatoes are currently available.
Currency is just like any other commodity in that its value goes up or down depending on supply and demand. Commodity traders try to make money at this by buying the commodity when it is priced low and selling when it is priced high. It is theoretically possible to move a market by by or selling enough of a commodity to move the price. It is possible to sell so much of a commodity that the price drops and then your trade shorting the commodity will be profitable. In practicality this is a good way to lose a great deal of money quickly. Since other traders know that the price will go back up as soon as you stop selling this means any drop in price will allow them to buy the commodity cheaply. So unless you have more money than all the other commodity traders combined you will probably lose money doing this. It is more practical to start selling and the other commodity traders will think you know something they don’t and refrain from buying while they research what is going on, and you might be able to make a profit during this time period
What Soros did was not an attempt to manipulate the market, he was making a bet that the pound was overvalued. Because he was the most famous currency trader his opinion and bet carried alot of weight, but the pound went down because the market agreed with him and not because of his actions. The Bank of England was trying to manipulate the market to keep the price of the pound artificially high but since the rest of the market had more money than they did, they were unable to do so and as soon as they stopped the price went to its natural level.

7

The Wikipedia article on Black Wednesday might help clear things up.

Note that it says that Soros’ Quantum Fund was dumping Pounds into the market faster than the Bank of England could take them out. (Which it was obligated to do to maintain the Pound.) But the Pound was already very near the tipping point since a lot of people, as noted, sensed what was about to happen.