George Soros The Man Who Broke the Bank

George Soros “The Man Who Broke the Bank of England” Presented By: Vaibhav Ajmera Patricia Lopez Sabrina Madhani Shabeena Meghani Nisha Patel

Introduction n September 16, 1992 • British pound forced out of ERM by currency speculators and British ego severely bruised n The man who made it happen • George Soros, the world’s biggest currency speculator n All in a day’s work • Took home 1 billion US dollars in profit

Setting the Scene

Exchange Rate Mechanism n Founded in 1979 among 8 European countries n n Adjustable peg system to the German mark n n n Move towards one currency Largest member of the ERM Bundesbank—Germany’s central bank Ensured stability and flexibility n Fluctuation band around central exchange rates

Germany-A Brief History n 1989—Fall of the Berlin Wall, Reunification • Focus on internal political & economic problems n 1991—Government Spending Skyrockets • Causes of Spending n Consequences: • • • Central Bank prints MORE MONEY Inflation Stimulates increase in interest rates

England-a Brief History n Joined ERM in 1990 • Benefit from one currency peg n “Recession in progress” • High unemployment, high interest rates n Response to Germany’s increasing interest rate • Two options: increase interest rates or devalue • Instead, try to defend pound by building reserves

International Investors Split n Most bet on bank of England Vs. n Select few predicted inevitable devaluation

George Soros: Strategy n Bet $10 billion n Short pounds and long in DMs 1. Borrowed pounds from British banks 2. Sold pounds and bought DMs n Flooded Forex market with pounds

England’s Defense n n Goal: avoid excess supply of pounds to prevent devaluation Strategy: use accumulated reserves to buy pounds off the market -Spent approx. 15 billion pounds

Simple Economics n n n Soros: supply side Bank of England: demand side Tug of war Supply curve shifted to right Forces pound devaluation Soros WINS!!

Black Wednesday September 16, 1992 Britain is forced out of ERM

Aftermath… n Post devaluation: -Soros sells DMs -Buys back pounds for cheaper n Profit of $ 1 billion overnight!! n Foresight of stock market phenomenon

England in Shambles? n Bruised ego • Bad press for Soros n Economic recovery • • • Steady inflation Interest rates found “natural level” Improvement in BOP

Can History Repeat Itself? n Most currencies get attacked soon after it’s clear they’re vulnerable n Self-fulfilled crisis (one time event) n Then vs. Now • Interconnection of economies

Lessons Learned… n Comes down to the fundamental concepts of economics Governments MUST remain true to the markets n How? n • Implement policies that conform with strict economic orthodoxy • Britain tried to have their cake and eat it too