George Soros

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George Soros

• The Man Who Broke the Bank of England
• Presented By
• Vaibhav Ajmera
• Patricia Lopez
• Sabrina Madhani
• Shabeena Meghani
• Nisha Patel

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Introduction

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

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• Setting the Scene

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Exchange Rate Mechanism

• Founded in 1979 among 8 European countries
• Move towards one currency
• Adjustable peg system to the German mark
• Largest member of the ERM
• BundesbankGermanys central bank
• Ensured stability and flexibility
• Fluctuation band around central exchange rates

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Germany-A Brief History

• 1989Fall of the Berlin Wall, Reunification
• Focus on internal political economic problems
• 1991Government Spending Skyrockets
• Causes of Spending
• Consequences
• Central Bank prints MORE MONEY
• Inflation
• Stimulates increase in interest rates

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England-a Brief History

• Joined ERM in 1990
• Benefit from one currency peg
• Recession in progress
• High unemployment, high interest rates
• Response to Germanys increasing interest rate
• Two options increase interest rates or devalue
• Instead, try to defend pound by building reserves

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International Investors Split

• Most bet on bank of England
• Vs.
• Select few predicted inevitable devaluation

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George Soros Strategy

• Bet 10 billion
• Short pounds and long in DMs
• Borrowed pounds from British banks
• Sold pounds and bought DMs
• Flooded Forex market with pounds

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Englands Defense

• Goal avoid excess supply of pounds to prevent
  devaluation
• Strategy use accumulated reserves to buy pounds
  off the market
• -Spent approx. 15 billion pounds

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Simple Economics

• Soros supply side
• Bank of England demand side
• Tug of war
• Supply curve shifted to right
• Forces pound devaluation
• Soros WINS!!

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

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Aftermath

• Post devaluation
• -Soros sells DMs
• -Buys back pounds for cheaper
• Profit of 1 billion overnight!!
• Foresight of stock market phenomenon

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England in Shambles?

• Bruised ego
• Bad press for Soros
• Economic recovery
• Steady inflation
• Interest rates found natural level
• Improvement in BOP

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Can History Repeat Itself?

• Most currencies get attacked soon after its
  clear theyre vulnerable
• Self-fulfilled crisis (one time event)
• Then vs. Now
• Interconnection of economies

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Lessons Learned

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

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