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“The man who broke the Bank of England”

 

George Soros, an investor, hedge fund manager, author, philanthropist and one of the wealthiest men in the world. But how did he become “the man who broke the Bank of England”?

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The story of George Soros started in Budapest, Hungary in 1930. After graduating university in England he later immigrated to the United States where his real conquest of success began. He started his first hedge fund – Double Eagle, in 1969. Only a year later, in 1970, when he was just forty, Mr. Soros used the profit he made to create his second hedge fund – Soros Fund Management. Double Eagle became known with his new name – Quantum Fund and was the cornerstone of Soros’s business. The Quantum Fund started with $12 million in assets, and in 41 years, until 2011 it raised the astonishing 200% profits, or $25 billion. The hedge fund continued to raise money for the management and to this day is the most successful fund in history.

“The man who broke the Bank of England”

In 1990 the Prime Minister of the UK – Margaret Thatcher entered the pound into the ERM (European Exchange Rate Mechanism) at DM (Douche Mark) 2.95 for 1 sterling. George Soros assured that the currency will fall under the agreed minimum of DM 2.773 to the sterling, started building a huge short position in pounds sterling. Basically, he bet against the value of the sterling in the long-term while the currency was trying to maintain its position as it was stated in the Mechanism regulations.

What happened on the 16th of September 1992 and later became known as “The Black Wednesday” was a serious loss for the English financial system. A day earlier, the Hungarian-American billionaire started selling £ 5 billion pounds (even though he planned to sell £ 10 billion), but also kept the idea to buy back cheaply if the pound devalued and still make a fortune. While George Soros was selling the sterling, aided by others who understood what was happening, the Prime Minister of UK – John Major has authorized the spending of billions worth of foreign currency reserves (from the Bank of England) to buy up the sterling being sold on the currency markets for the full price listed in the ERM. But these measures failed to prevent the pound falling below its minimum level stated in the mechanism. This later proved to have been a devastating mistake by the leader of the government and the Treasury who at that time believed they were supporting the pound this way. At 4 o’clock PM the Bank of England surrendered from the battle it was losing and the pound free felt.

Finally, the UK government took the decision to withdraw from the European Exchange Rate Mechanism, thus way devaluing the pound. Soros’ profit on the bet was estimated at over $1 billion. The billionaire became known as “the man who broke the Bank of England.” The estimated cost of Black Wednesday to the UK Treasury was £3.4 billion (all of it money from the British taxpayers).

Soros was criticized heavily for taking advantage of critical situations and playing with money to build profit. Yet, to this day, at the age of 88, George Soros remains one of the wealthiest risk-takers in the world.

Written by:  Lyubomir S. Evtimov

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