A Billion in One Day

Becoming a billionaire is not all that uncommon. We know it can be done over decades. Or even just a few years, as happens so often in Silicon Valley. But I doubt anyone will ever beat George Soros’ time of doing it in a single day!

Well ok, the build up to the event took time. But Soros’ net worth moved from way below a billion to more than a billion on a single day. And in the process, the man broke the British Pound and brought the Bank of England to its knees. Here’s the story as told by Rohin Dhar.

But first, the backdrop. In 1979, the European Exchange Rate mechanism (ERM) was created “to fix their exchange rates with each other instead of “floating” their currency and letting capital markets set the rates”. But of course, one can’t just “set it and forget it”. As trade happens, market forces will put pressure that currencies increase or decrease in value. So the government needs to intervene, in one of two ways:

1)      Buy or sell its own currency from the market;

2)     Adjust its own interest rates to attract or repel interest in its currency.

England did not join the ERM until 1990. And given what happened next, you’ll understand why they don’t want to join the Euro. By 1992, England was impacted by the global recession. But unlike older times, being part of the ERM, they couldn’t just print money or change interest rates (both would have impacted the currency exchange rate). Worse, the market could see that the sterling was overvalued. But devaluation under the ERM wasn’t an (easy) option. The pressure was building up on the pound. Something had to give.

Next, the Germans started making statements indicating that they didn’t think the pound could stay at its current value. And that is when Soros decided to “go for the jugular”. He borrowed heavily (more than $10 billion) and bet against the pound, i.e., he bet the pound would have to be devalued.

Then came the fateful day, what the Brits now call Black Wednesday. The British government started buying up pounds from the market to prop up their currency. It was too late. Most speculators sensed the pound value was unsustainable and they too started betting against the pound. So the government tried raising interest rates from 10% to 12% and then 15%, all on the same day! It made no difference. People kept dumping the pound all over the world.

And so that evening, the British government threw in the towel and announced its exit from the ERM. And devalued its currency. That was what Soros had bet would happen: devaluation. By betting right, Soros made a billion on that single day.