The Day George Soros Broke the Bank of England to Make $1.1B (2021)

https://historyofyesterday.com/the-day-george-soros-broke-the-bank-of-england-to-make-1-1b-4834df0605d1?gi=1b81186c18c9

by andruby • 4 years ago

80 109 4 years ago

bionsystem5• 4 years ago

This has been discussed many times, but there is no responsibility on Soros part ; broadly speaking, he speculated that an event would happen, and it did, thus he benefited from it.

spacemanmatt6• 4 years ago

And has been the subject of anti-semitic rants ever since

epakai• 4 years ago

Soros opposed Russian hegemony in Ukraine (2015). Since then he has been the popular target of conspiracy theories. Some even go as far as to call him a Nazi supporter. It mirrors exactly what we see from Russian propaganda because it is exactly that.

namdnay• 4 years ago

I think that's more due to his sponsoring progressive causes since

zosima5• 4 years ago

Technically, that is not quite true. He sold $10 billion borrowed pound sterling that day, in collusion with others, which appears to have been the straw that broke the camel's back.

Sure had the pound sterling been sound, that would not have been enough. But it was at the time a lot of money, and it's unclear what would have happened had he not done it.

A lot of people lost a lot of money that day. Not just speculators or stock-traders, but many home-owners lost their homes, a lot of businesses defaulted and many people became unemployed as a consequence of what happened that day.

So, there's some motivated resentment against him.

bionsystem5• 4 years ago

It is true technically, and you get some points wrong :

- 10 billions is nothing for a currency.

- I don't think there has ever been proof of a collusion, if you have one I'm happy to read through it ; besides, some other people bought the currency, you don't sell to nobody ; had they be right in buying it and benefiting from a subsequent deflationary crisis, they still wouldn't be responsible for it, would they ?

- A currency weakening is actually good for asset prices (btw Soros bought UK stocks and shorted DE and FR stocks at the same time as part of this trade), in particular from in-debt people (most home-owners) ; the fact that some lost their homes have to do with the recession which caused the collapse of the currency in the first place, NOT Soros' trade. In fact, the consequent inflation actually helped the UK to recover after that.

- Besides, people losing their homes is always bad but it also makes for a good headline and it's always good to have a bad guy to point at, but pegging the currency meant spending all of the CB reserves for years and nobody (amongst those unfairly blaming Soros) seem to be questioning that, whereas it's actually the core issue at hand here.

tener• 4 years ago

I wonder if in current climate this could be prosecuted as a market manipulation of sorts. Things were different back then though.

Y-bar3• 4 years ago

Since open speculation can not be considered manipulation under the legal framework today I suppose you ask about the Bank's role in the problems created for itself. So... Isn't the entire point of Bank of England and other central banks to manipulate the market, so why would they be prosecuted?

t0mas882• 4 years ago

What would put him at risk in todays legal climate is his own choice to short sell the GBO, but the coordination with others to make transactions that would cause it to drop. Then you're not making investment decisions based on your belief that the value of the GBP would decrease, but you're asking others to make specific transactions with the purpose of changing the GBP exchange rate so you could benefit from it.

hajile• 4 years ago

Was it open speculation though?

Rich people and politicians get insider trading information all the time. It may be hard to prove (or effectively impossible to investigate in the case of US politicians due to Obama), but such speculations usually don't fall out of the sky.

refurb2• 4 years ago

I mean the Bank of England was trying to control the exchange rate, Soros made a bet they couldn’t maintain it and was right.

hkt• 4 years ago

The speculators betting against it added to the bank's difficulties, in fairness: they didn't stand outside the process, they were part of it.

pasiaj2• 4 years ago

Soros was a disciple of philosopher Karl Popper, one of the 20th century's most influential philosophers of science. Popper was a big influence on empirical falsification. Popper wrote the book The Open Society and Its Enemies that has greatly influenced political ideals both in the left and the right wing in western democracies.

In 2009 Financial Times published an essay by George Soros, where he describes his general philosophical theory "reflexivity", that he applies to life and investing. Reflexivity is an extension of Poppers ideas and are very well grounded.

They explain very well the reasoning that led to breaking of the Bank of England.

https://www.ft.com/content/0ca06172-bfe9-11de-aed2-00144feab...

pasiaj2• 4 years ago

This essay explains very well the reasoning that eventually led to breaking the Bank of England as well.

https://www.ft.com/content/0ca06172-bfe9-11de-aed2-00144feab...

lvl102• 4 years ago

That trade was Druckenmiller not Soros. Give credit where credit is due.

bionsystem5• 4 years ago

It was Druckenmiller idea and analysis under Soros fund and management ; also Soros encouraged sizing the bet up, he could have done the opposite and the trade wouldn't be as discussed as it has been, I guess. So yeah, some credit should go to Druckenmiller, I agree, but it makes sense to quote Soros name.

szastamasta• 4 years ago

…and many normal people have suffered so bankers could have their fun. This is so evil on so many levels, that few people in suits can have such an impact of whole country finances. We all believe in a dream that it’s competition and market prices that drive economy, and then this happens.

CamelCaseName• 4 years ago

When you say "a few people in suits", you must be talking about the Bank of England and not Soros, right?

Because it's the Bank of England that was fixing the price. By breaking the peg, Soros introduced competition.

unmole2• 4 years ago

so bankers could have their fun

I don't think the Bank of England was having fun, they were under political pressure.

This is so evil on so many levels, that few people in suits can have such an impact of whole country finances.

Absolutely, it's immoral for central banks to manipulate currency markets. It only strengthens the argument for central banks to have defined mandates and be free from political interference.

We all believe in a dream that it’s competition and market prices that drive economy, and then this happens.

Well, the BoE tried to enforce its will on the market and predictably failed. Once the charade ended, inflation came down over the next years the British economy recovered from the recession it was in before the event.

Wait, you don't actually blame Soros for this, do you?

sgt1012• 4 years ago

I think Soros did us a service. He also doesn't seem to be too terrible a person in terms of what has happened to the money he made (legitimately IMO) either.

kache_• 4 years ago

Our financial instruments/primitives are horribly primtive, which makes them weak to outside attacks like these

pjc503• 4 years ago

it’s competition and market prices that drive economy

It really is competition and market prices that drive the economy... controlled by a few people in suits. And money itself is part of the market.

jmyeet• 4 years ago

This story is particularly relevant because it's about the Bank of England trying to maintain a peg in the face of changing market conditions. Many have treated Tether's peg (to the USD) as immutable or inviolate but it's subject to the same market forces as any other peg. A peg is only as strong as how much money you have to defend it.

But here we are as Crypto Andys are learning the hard way why the financial system is the way it is.

imtringued• 4 years ago

A peg is only as strong as how much money you have to defend it.

Emphasis on liquid money. You know, the reason why central banks started QE is that banks don't want to invest into long term assets and just keep their reserves at the central bank. QE effectively turned a fixed term asset like treasuries into a short term overnight asset that you can sell and buy instantly.

id2• 4 years ago

"Crypto Andys" already know this, the crypto community has been deeply distrustful of Tether since its inception.

cinntaile• 4 years ago

Both you and the parent are generalizing.

codebolt• 4 years ago

If the wider "crypto community" has been so distrustful of Tether, why have they allowed it to become such a systemically important pillar of the whole market?

belter• 4 years ago

I love "Crypto Andys" :-) but nowadays I prefer to call them "Bitcoin Karens"

sgt1012• 4 years ago

The differences being for large states that it was/is a question of how much you want to spend defending something, rather than how much you have, unless you are under attack by another state. And, for a large state run by rule of law it's not a question of going to 0 as for stable coins, instead it's going down by 20% (worst case).

pjc503• 4 years ago

Indeed. A currency peg is effectively an import subsidy/export tax arrangement. If the balance of payments is sound, it's easy to maintain. Otherwise it isn't, as you will gradually run out of export tax to pay for the import subsidy.

hnthrowaway03282• 4 years ago

Tether IMO is a completely different story. What does it have to back up the peg?

gruez2• 4 years ago

Mostly "commercial paper" (debts)

chalst2• 4 years ago

The initial claim was that Tether was 100% backed. When it was revealed beyond reasonable doubt that these claims were false, Tether's proponents pivoted to claiming that the peg was defensible. Because the peg was defended for some time, these proponents gained a certain amount of credibility among the gullible.

Looking at the history of markets to try to understand the difference between pegs that can withstand the shifting tides of market sentiment vs those that cannot is a useful exercise. I am pleased to see this article on the HN front page.

pru567• 4 years ago

TerraUSD is more immediately relevant https://www.zerohedge.com/crypto/stablecoin-terra-collapses-...

neilwilson2• 4 years ago

"A peg is only as strong as how much money you have to defend it."

Which is why, in the case of the Soros story, it was the Bundesbank that broke the BoE, not Soros.

The Bundesbank refused to issue DMs to buy up spare GBP liquidity. And that broke the peg.

For a peg to work the currency issuers on both side of the fence need to act in unison, since intervention can only cap, not collar. If both play their part then the peg will be unimpeachable.

Until the Federal Reserve decides to maintain stable coin pegs by buying them up in return for new dollars when the dollar strengthens against them, then the whole concept is doomed.

It's not the market that decides whether a peg survives. It's the currency issuer on the strengthening side.

plsbenice34• 4 years ago

It has no relevance to tether. It's strategically trivial to peg 'paper USD' to USD by having full USD reserves and allowing redemption. Pegs between different national currencies has no such solution

gigatexal• 4 years ago

This headline is needlessly aggressive. A massive bet one way or the other on a currency is all that was done and he was right. There's no "breaking" here.

55555• 4 years ago

“Break the bank” is an common phrase.

brabel• 4 years ago

Is there any mechanism today to prevent a bunch of gangsters attacking a Government's Central Bank like that?

orwin• 4 years ago

No. And some currency are particularly weak right now to this kind of attacks[0], like the CHF, as well as the colonial CFA.

The theoric ideas to resist this for a country is either:

to let your currency fluctuate freely, as the free market theory wants. But this is basically selling your small and medium business production to companies that can do faster arbitrage than them. I know this is the liberal way, but when you think about it, this is not viable if you have any industry and free trade agreements with a countries with richer banks/companies. This would be economic suicide for Mexico if you want an example.

Other way to resist this is to have a lot of dollar/eu bonds and sell them. If you have more bonds than the attacker money, you "win" (the attacker doesn't loose much either). I'm pretty sure some money can be capted during an attack for HFT firms, but don't quote me on that, and i'd like confirmation from someone actually working with HFT systems here

And the last way is having one of the strongest currency in the world. Dollar, Euro, Yuan basically. Pound and Yen "waste" their respective central bank millions each year

[0] https://ideas.repec.org/p/nbr/nberwo/5285.html

unmole2• 4 years ago

Sure, the central bank doesn't have to worry about attacks if it doesn't artificially manipulate the currency itself.

neilwilson2• 4 years ago

Yes. You let the market know that you won't be intervening. Preferably the central bank should be constitutionally barred from doing so.

At that point there is no patsy in the market, and liquidity constraints will deal with the situation. For every seller there has to be a buyer

Couple it with the occasional 100% margin calls if the price moves too much and the risk of getting caught naked becomes very high indeed.

juusto• 4 years ago

Oh no, not the banks...

Tarq0n• 4 years ago

There's an important difference between banks and central banks.

drumhead2• 4 years ago

To remain in the ERM the UK had to raise interest rates to alarming levels causing a deep and unnecessary recession. A lot of negative equity for home owners, unemployment rising back to 3 million. It's was unsustainable. Soros and the other speculators did us a favour ejecting us from it. The UK had about 15 years of low inflation growth after we that so Soros deserved a medal.

blibble5• 4 years ago

the irony is by breaking the UK out of the ERM: Soros enabled brexit

if the UK had stayed in the ERM it would have joined the euro and exiting would have been impossible

Soros is very, very much against brexit, to such an extent he funded numerous remain campaigns and continued to fund campaigns dedicated to overturning the result (Trump style)

greggsy• 4 years ago

Interesting - I’m a bit of an outsider, but Soros always came up in Q conspiracy theories

swarnie• 4 years ago

the irony is by breaking the UK out of the ERM: Soros enabled brexit

So... Two medals?

ben_w3• 4 years ago

exiting would have been impossible

Actually impossible, or just really bad for everyone’s economies? Because every time I saw the suggestion that Brexit would be bad for the British economy (or indeed anything British), I saw someone dismiss the suggestion as “project fear”, while any suggestion it might be in any way bad for anyone else was met with the response that this was a reason the UK “would get a good deal”.

Sometimes I even witnessed both of these responses from the same person in successive sentences in contexts where it would be illogical for both to be true.

anonymous_sorry2• 4 years ago

Not "Trump style". I have not heard any claim (Soros-associated or otherwise) that the Brexit referendum was "stolen". Plenty of accusations of dishonesty and dodgy campaign finance on the Leave side, but the vote tally isn't really contested.

drumhead2• 4 years ago

The ejection from the ERM was probably the point at which the Brexit movement became more serious.

kareemsabri2• 4 years ago

For a financial novice, it's unclear what Soros actually did. It would be useful to explain what "shorting the pound sterling" actually means and the mechanics by which that places pressure on the Bank of England.

andsoitis• 4 years ago

It would be useful to explain what "shorting the pound sterling" actually means

This article (https://www.investopedia.com/articles/forex/08/greatest-curr...) talks about going short, going long, strangle and straddle, it also talks about a couple of illustrative events, including Soros v. British Pound.

kareemsabri2• 4 years ago

Thanks.

t_scytale3• 4 years ago

Here's my understanding of the details.

At the time the Bank of England had committed itself to maintaining the value of Sterling at a rate that was widely considered to be too high.

Soros and a bunch of other large funds and banks decided to take on a coordinated short position. So they...

- borrowed very large sums of Sterling

- exchanged the Sterling for Dollars (or maybe DeutschMarks?)

- waited for Sterling to depreciate

- Sterling now being much cheaper they then used the Dollars to buy back the original loan amount of Sterling and have plenty of Dollars left over

- repaid the loans

The large amounts of Sterling that they were selling would have increased the downward pressure on the price of Sterling, forcing the Bank of England to sell foreign currency reserves to keep the value within the narrow limits it had committed to as part of the ERM.

Due to the open nature of the market other currency speculators would have been aware that all this was going on, and they too started shorting Sterling, further increasing the pressure and forcing the BoE to sell more reserves.

At some stage it became apparent that this was unsustainable and Britain exited the ERM and devalued the currency, creating massive profits for the speculators.

gumby• 4 years ago

I've been thinking of this event as soon as I saw the stablecoins collapsing. I happened to be in London visiting friends the week the pound lost the peg and even though I'm not in the biz and in fact back then didn't really pay attention to the financial markets at all this was quite exciting.

merricksb• 4 years ago

Discussed less than two months ago:

https://news.ycombinator.com/item?id=30720876 (151 points/55 days ago/175 comments)

The Day George Soros Broke the Bank of England to Make $1.1B (2021)

Related Stories