September 16, 1992: the day George Soros had been eagerly awaiting.
It would be remembered in history as Black Wednesday; for Soros, it was the day that made him one billion dollars richer.
Just less than two years earlier, British Prime Minister Margaret Thatcher entered the country’s currency, the pound sterling, into the European Exchange Rate Mechanism (ERM). The system was designed to reduce exchange rate fluctuation in the EU region in preparation for the introduction of a generic currency, the euro.
The UK entered the ERM more than a decade after the program was established, and in unfavourable conditions. The nation’s inflation rate was high, and interest rates unsteady, yet the Thatcher government fixed the value of the pound at 2.95 Deutsche Marks.
If the value of the pound fell below 2.773 DM, the ERM required the UK to intervene. Keen currency speculators knew the float price was too high, and that this contingency would likely become a necessity in due time.
One of these speculators was Soros, a Hungarian-American investor who had been making steady but relatively minor profits with his Manhattan-based hedge fund, Quantum Fund.
In the spring of 1992, Soros began to buy billions of pounds in anticipation of a crash.
“Our total position by Black Wednesday had to be worth almost $10 billion. We planned to sell more than that. In fact, when (British finance minister) Norman Lamont said just before the devaluation that he would borrow nearly $15 billion to defend sterling, we were amused because that was about how much we wanted to sell.”
On September 15th, Quantum Fund began to sell short their pounds while Europe slept.
London markets opened the next morning to find the shift resulting in rapid devaluing of the pound.
The next day, Black Wednesday, the UK government was forced to intervene. The Bank of England bought approximately $1 billion pounds that morning in a hasty attempt to defend the currency. It failed, as did an interest rate rise from 10% to 12% a few hours later, a move intended to attract investors.
7.00PM: the British government declared they would no longer stick to their promise of supporting the pound, and would be withdrawing from the ERM.
When the dust settled, George Soros had made a profit of $1 billion USD. He was branded ‘The Man Who Broke the Bank of England’; a whipping-boy for a government that had failed to react to its own economical viability in time to save itself.
Many leading economists now refer to Black Wednesday as Golden Wednesday, lighting the path to economic reform under John Major’s conservative government. However, public opinion differed. Support of the government dropped to 29% following the incident, leading to Tony Blair’s Labour party coming into power in the next election.
As for Soros, he’s continues to chair Soros Fund Management at the age of 85. It is estimated that he has donated over $11 billion USD to philanthropic causes throughout his career.