George Soros vs. the Bank of England
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In the recent flurry of cabinet nominations Donald trump has been proposing, one name stood out to us, trumps pick for treasury secretary Scott vent.

And that's because scot besson has worked in finance for decades, including for George. Sources hedge phone back in the one thousand nine hundred ninety and IT just so happens that when the announcement came out, we were most of the way they are making an episode about George soros had fund back in the nineteen .

are show about something that happened three decades ago, turned out to be way more to we thought IT would be. Now what we made is not exactly the Scott, that's an origin story, but you know, come for the treasury secretary backgrounds, stick around for the epic finance story.

or just come for the epic finance story.

Either way, here is the show.

This is planet money from npr.

The name George soros means a lot of different things to a lot of different people. For some folks, he is primarily known as a anthropic for his support of human rights and democracy around the world. Here is a us. On fresh air in two thousand and six, talking about the foundations he funds.

basically the function is to support civil society in holding governments accountable. Sorrow has also become .

kind of a boogyman in scape goat to folks on the right for his support of progressive. Often this has a fairly overt anti medic tinch. For example, this twenty ten clip from gen. Back, you have to see who's behind the puppets, who is choosing the puppets and the players, who's the puppet master, George soros.

Today, we are going to go back in time before all of those versions of sorrows to the story of how George soros made his name in the first place, which was in finance in particular. We are going back to this one trade that his hedge fund made that was so big and so bold that IT became the stuff of legends.

And while we did not find any go and interview with George sorrow himself for the show, we did get to talk to one key number .

of his team who is right at the center of .

the whole thing, me, Robert Johnson, time and time again.

sending good right.

This story takes place in nineteen ninety two. At the time, rob Johnson was in the process of leaving his job at an investment bank to join source his hedge fund as a managing director. Back then, sorrow was running his fun out of an office in midtown manhattan, which robber remembers as surprisingly on impressive.

IT had a nice view of the central parking on the fully age, that kind stuff. But IT wasn't set up to be intimidating .

in glorious and gradients at x nineteen computers.

piles of paper where IT was like, you know how you say that elbows are worn out on the sweaters, and people were just working hard.

What was impressive to rob were the people who worked there, in particular George, and the man in charge running the hedged fund data day stand drug in Miller. Every now and then, the two of them would invite rob over to pick his brain about rob area of expertise, which was fun. Currency markets.

I felt like I was going to piano lessons and listen to be over in a motor. These two guys were really, really extraordinary.

Earlier that year, duncan Miller had been talking to the analyst who covered the europe for the fund. Scott basset beent had told duncan Miller about all this trouble the british economy was having. And drug Miller had realized that this trouble had created an opportunity to go against the british to essentially short the pound, which he thought was overvalued. And he put down some big bets, over one point five billion dollars of the five billion the fund managed.

The idea was that the U. K. Central bank was vulnerable and that at some point they have to let the value of the pound go down. sorry. And jack Miller wanted robs take on when he thought that would happen.

Well, how long do you think they can hold out? And we talked about them among three, these things you know for sure. But I said, I don't think they can last three months. What do you think that the probability is that they're going to devalue in three months? And I said, but ninety five percent.

they get scot best in on the phone. He is in complete agreement and he said.

what? No, these guys are really understanding. I don't think this is going to last either.

And sorrow is sitting there looking a drug and mile. And rob, he's like, if you guys really think this is such a great idea, bet the whole fund, in fact, use leverage, you know, borrow even more than all the money the fund managers. So yes, make the bet, but don't do IT for one point five billion dollars or or even five billion, do IT for fifteen billion dollars.

And i'm thinking the permission I just got bold. It's a norm is like, oh, man, I was like a drinkin rush to say we have this much confidence and we just got license to go after this, this aggressively.

And while rob is processing this, he remembers soros uterine, a phrase that would become legendary in the world of finance.

There comes a moment when you have to go for the joker, which is you have to decide your right and go forward.

Hello and welcome to fend IT money.

I'm k proper and I am Alice gold mark. The trade that stand drug and Miller and George soros wanted to make would go down in history as one of the most odda ious bets any traders have ever made, one in which a single hetch fund took on the full economic might of the british government.

Today on the show we deconstruct that famous trade, but sorrows, rocket, Miller, besant and rob Johnson saw that made them think they could pull this off and what their that can teach us about what happens when markets and governments go to war.

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So on one side of this massive potential bet, we have sources, hedge fund. And on the other side, we have the united kingdom. And we are going to start by focusing on the U. K. Side of things.

okay. So back in one hundred ninety two, the U. K.

Had got themselves and kind of a tight spot a couple of years before they had signed up to be a part of what was essentially a precursor to the euro. IT was called the exchange rate mechanism, or E. R. M. For short.

The countries involved weren't ready to all share a currency. Instead, as a kind of baby step, the E. R M just said they had to keep their exchange rates more or less fixed against each other.

So central banks all over europe had to really stay on top of the value of their currencies with a tiny bit of vehicle room. A french Frank had to trade for this many italian lira. Lera had to trade for this many spanish, us. And so on.

The U. K. S. Prime minister, john major, he had been a big advocate for joining the erm. He was convinced that if the bank of england could keep the british pound locked in line with these other currencies, IT would help stabilize the british economy and bring down inflation.

That would keep the british economy discipline.

That was the idea, but things didn't exactly work out that way.

Well, unfortunately, at the same time as the U. K. Decided to join, germany, started to reunify east and west germany. That is.

university of michigan professor economics and public policy Cathy deming gates. Katherine says germany started spending gobs and gobs of money.

Part of the reunification involved a lot of transfer payments to the east, a lot of new investment to try to bring the east closer to the west.

and all of that spending at the german economy running pretty hot.

Meanwhile, the U. K. Was in recession. So people looking to invest, we're like, why would I keep my money in the struggling UK when I could invest in booming germany instead and make more money? But to do that, the first thing those investors would need to do is trade in their british pounds.

If they want to invest in germany, they have to move out of whatever currency they are currently holding into Marks.

And the currency works like any other asset. IT follows the law of supply and demand. And people want a currency more, the Price goes up. If people want IT less.

the Price goose down OK. So it's like people want to get their hands on german Marks and they are buying them and .

that's driving the Price of exactly. That's exactly what was happened during there's time period. The mark was strengthening and that meant on the flip side that all the other currencies were losing value.

And here's why that matters. Remember, when the U. K. Join the E. R M, IT agreed to fix its exchange rate to the other currencies in the group, the lowest the value of the pound could go in relation to the dutch.

Mark was one pound to two point seven, seven, eight Marks, but all that money flowing out of the U. K. And into germany was pushing the value of the pound down and down and down.

so much so that people were starting to wonder maybe the U. K. Should just quit the R. M. Or if the british didn't want to do that, maybe they could. At least we negotiate their deal, lower that two point seven, seven, eight threshold and essentially devalue the pound.

The british government was very clear. There's no way we are not doing that.

just in case there is the slightest and teller of diet. There are going to be no devaluations, no leaving the rm.

British finance minister Norman lamont went out on the steps of the, basically drew a line in the senate.

We are absolutely committed to the E. R. M. That is our policy, and we will do whatever is necessary. And I hope there is no room for any doubt about that at all, that the government is determined to maintain opposition.

Now to understand the options on the whatever is necessary table for the U. K.

We're going to have to talk about interest rates and is freaking amazing. We've been to avoid talking about them until now in the show. But yes, IT is time okay for this story?

What you need to know is that other things being equal, people tend to move their money from countries with low interest rates, two countries with higher interest strates like moving from a savings account that offers three percent to one that offers five percent.

Germany, remember, they were spending all this money because of reunification. So they were trying to keep their rates high because they were worried about inflation. Meanwhile, the british, they were trying to get out of a recession.

So for them, they would have been really nice if they could have lowered their interest rates to produce their economy. But if the british did lower rates than even more money would have float from the U. K. To germany, unless germany was willing to bring down its rates too.

So at this big meeting of european finance ministers and central bankers, the british start really pushing the german, the uk's finance minister, Norman lamont. He just lays into the head of german's central bank, the bonders bank. Lamont is banging his fist on the table and he is like, why wouldn't you lower your interest rates?

The german central banker who got yelled at his name was how much lazing er, he talked about this moment to the BBC for a documentary .

they made as a member of the bond's bank. One is an independent person. One cannot be treated as an employee.

It's not possible. One cannot accept IT. And I thought, he's not my master. I must bring this exercise to an end. And I said to finance minister vigil on my side in bavarian dialect, I think I should go now safe to say the germans .

are not convinced to lower their interest rates.

So if prime minister don major really wants the U. K. To stay in the ARM, the british government has pretty much just one option left. IT can keep the value of the pound up by buying pounds. That is how they can try to prop up demand.

Yeah like any central bank worth, it's salt. The bank of england does have a fair amount, foreign currency on hand dollars and french Franks and dotted Marks. And because of the irm, IT is committed to spending those foreign currency reserves to keep the pound above that two point seven, seven, eight threshold.

But there is a limit to this strategy. The bank of england has billions and millions worth of dollars and Franks into each chunk, but not like infinity dollars and Franks. And to china ks, they could theoretically do so much buying that they run out of all their foreign rents, y reserves.

And this is where our story turns back to rob Johnson and stand rock Miller and Scott basson and everyone else at George source, his head fund. It's early september trucking Miller, soros and rob have just had that conversation where sorrows told them to get three times the funds value, fifteen billion dollars against the pound, and IT is worth sitting for a second with the mechanics of the bet they were going to make.

All right, let's do that. They've been paying very close attention to the U. K. Attempt to prop up the pound.

And what they noticed is that when the bank of england did manage to move the value of the pound up, IT only moved up the tiny ebit. But if the U. K. Were to come under so much pressure that they had to abandon in those fixed exchange rates, devalue the pound, the pound would just fall and fall and fall.

all of which sets up this kind of rare dreams scenario for an investor. Rob says, think of how the british government is propping up the .

pound as a system where if the system holds in your betting against the system, you lose about one percent percent like that. And what happens if IT breaks? Probably good on eighteen to twenty percent. So you have a twenty to .

one that so a lot of upside, if so, is this fund is right and very little downside if .

they are wrong. No, there is not some casino somewhere where you can roll up with fifteen billion dollars and say, I would like to bet that the british pounds will go down in value. Instead, the way you make a wager like this is you go to a bank, or I guess, lots of banks, and you borrow as many pounds as they will end you. And then you turn around and use those pounds to buy deech Marks. If the value of the pound does in fact go down, when IT comes time to pay back those pounds you borrowed, you will own less than what you borrows and you will get to pocket the difference.

So by this point, the fund is already borrow ed enough pounds and bottle up to china ks to a massive position north of one point five billion dollars.

But in that quiet period at the beginning, IT was about little bits everywhere, so nobody could see that you were becoming a tuna. I they just thought there were ripples .

on the water to avoid tipping off other traders what they are up to. They make sure to spread their bets all over the place.

So all around the world, there's a lot of accounts now that, say, soros on them. They just are filling up with touching ks over .

the course of a week. They are bet grows and grows. And rob says, so is the pressure on them. Personally.

when you're involved in an intense episode like that, physiologically, the kind of a drill one makes IT pretty hard to get a good nigh sleep. Your own edge, your checking currency Prices is like, is IT right at the boundary, is at a half percent off what's going on in the other currencies in the system?

Get up at around three am, go into the office around five A M, and stay there until the U. S. Markets closed.

Even when he goes home, he's watching markets around the world, and he is in constant contact with the fund, which is complicated by his domestic arrangements.

My wife was a new york fed official. I didn't want to talk in proximately to .

her because at the time, if your wife had heard and SHE would have a .

responsibility to inform the people at the new york fed in the federal .

reserve system, but this fund is up to is perfectly legal. But rob doesn't want the fed telling their bodies at the bank of england what they are doing, you know, give the british a chance to get out ahead of IT. So when he wants to talk to focus at the office, he sneaks out to his car and calls them on his car phone.

The size of the funds bet against the pound starts to creep up past two billion dollars, an incredible amount of money, but still nowhere near the fifteen billion dollars that sorrow authorized.

And this is by design. They are super confident that at some point that british are going to have to devalue the pound. But they don't know when it's going to happen. And if they are going to risk another, you know, thirteen billion dollars, they want some very clear sign that things are about to go down.

Then on friday, the eleven of september, they get their first glimpses of that sign. The italian lera, like the pound, is a currency in the erm that has been struggling to keep up its value. Anaya ends up coming under so much pressure that over the weekend, italy is forced to devalue IT relative to the dutch mark by seven percent.

That doesn't necessarily mean the pound is done for italy's economies and pretty rough shape. And italy has devalued a bunch of times before. But rob and sorrows and drug mir, they start to move.

Part of what we try to do is be kind of general until we had enough of a position on and then had, I say, press IT. But as we got into the thirteen, fourteen to september, you could feel the pressures and you could feel the market building up like you could get away from us.

So the fund accelerates their plans, borrowing even more pounds to buy even more dotty Marks.

We could be right, but if we were too general, we wouldn't get a big in a position. So we started pressing on tuesday.

the fifteenth of september, their sign to take action turns into a flashing neyland bill board, the head of german's central bank, how its slazenger. The guy from the meeting who didn't want to be pushed around, he makes a comment to a journalist. He says that he thinks more countries than just italy might need to adjust the value of their currency.

He doesn't mention the U. K. By name, but he doesn't need to.

And what that did was IT fortified our confidence that, old boy, the germans aren't a little, marry this pickle, and now the whole world is gone to see this. They're all gonna dive on the pile.

The news of slashing his comments comes out in the afternoon new york time and the sorrow fund goes for the juggle.

That's when we just started banging at every few minutes five hundred million pounds bomb, bomb, bomb right at the boundary and and IT basically went through the night and into the next day.

It's not clear when exactly that happens that night, the next day. But at some point the role of sorrow is fund in this drama shifts from a player that is just betting on the outcome of events to one that starts to actively shape those events when markets open .

in the morning in the U. K, the bank of england intervenes twice in quick succession, each time buying at least three hundred million pounds, trying to move the Price up from that two point seven eight doch mark threshold.

But remember, sorrow is trying to sell fifteen billion dollars worth of pounds. Three hundred and million is not going to do anything. And this really is the funds plan to sell so many pounds that the bank of england has to give up on that threshold and just let the market drive the value of the pound down by eleven.

In the morning, the british government announces that IT is doing the unthinkable despite the recession in the U. K. The bank of england tries to juice demand for the pound by using its one other big policy tool. IT raises interest rates by a four, two percent. Again.

IT doesn't matter. The pound won't move up. The sorrow fund keep selling pounds and selling pounds hundreds of millions at a time, testing how deep into its foreign ency reserves the bank of england is willing to go.

Rob, what is the whole thing? Play out from the funds officers in manhattan.

IT felt like I was in slow motion to me, and I felt like this is exactly what I expect to see unfold. And there is nothing that's contradicting that we're on the right path.

The bank of england started the day with over forty billion dollars worth of foreign currency reserves, but they are sending out billions an hour buying up all the british pounds. Everyone is selling off.

And by now all these other banks and hedged funds, they've also jumped in on this train.

The tatami of the whole world is going after this now. We've got a pretty good size position on this is looking good. In desperation.

the U. K. Announced that IT will raise interest. Strates again, go up another three percent. But it's too little.

too late at four pm london time without making any kind of official announcement. The bank of england just stops buying pounds. They stop trying to prop up the exchange train, and the pound goes into free .

fall stand truck. And Miller heard the news first .

was in the next room, and he just came to me. He said, they just let go. They just let go. And we kind of smiled. But IT wasn't that was IT wasn't like a lack room, big high flies and bolton around IT wasn't new fork a lot.

A while later, a phone call came in from George. Sorry.

there was just of a little choker. This is very good. This IT was quite serene. That night, the british finance .

minister Normal lamp went out into the courtyard at the treasury building and officially waved the White flag.

Today has been an extremely difficult and turbulent day. Massive specular flows continued to disrupt the functioning exchange rate mechanism. The government has concluded that britain's best interests are served by suspending our membership of the exchange rate mechanism.

The british were out. They were leaving the E. R. M. From here on out. The value of the pound would be set by the market.

The united kingdom, once the most powerful empire in the world, head in one day, been forced to change its entire economic policy because of a handful of hedge funds and banks. The pound fell by about fifteen percent against the dolch mark in the U. K. September sixteenth, one thousand nine hundred and ninety two came to be known as black wednesday.

After the break, the world figures out who was responsible for breaking the bank of england. Now over thirty years later, we try to get our heads around what exactly we're supposed to think about that giant bet that the s fun made.

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Outside the financial world, nobody really knew at first who the big mover behind the collapse of the british pound had been. Rob Johnson says, I was by design.

We talked about not being communicated like, stay away from cocktail parties, no black tie dinner. You just go quiet for a while.

IT was pretty well. While the fund unwound its position and cashed in its profit, the public had no idea how bigger role the source fund hid played until a little over a month later.

Janee, who is the owner of field motor company, was a dinner in london and announced something in the press that he had made more money being a George soros investor than his motor company made year.

The day after that dinner, the cover of the british paper, the daily mail, was a picture of sorrow with the headline, I made a billion as the pound crashed that number.

By the way, a billion IT seems to be right. And if you take into account the additional bets that the source fund made on british stocks and bonds and how they would behave after devaluation, the profits go well above a billion dollars.

The world of finance has a pretty easy to interpret or card. How much money did you make? And in that sense, rob and stand drug miler and George soros did very well. This is made their names, especially so.

But for rob, he says it's more than .

that many people said to me the in the aftermath of that, well, we saw that coming to and the answer is probably right because there was sort of, I call macroeconomic fundamentals. But these things are always about timing. And George sorrow, standing broken million myself, Scott misson site, just like other people, but we acted at the same time.

Rob totally gets how some people outside of the world of finance view what happened. He feels IT too.

What is this when small groups of people can take on large governments and prevail in this open the regulated capital market system?

Years later, the british government did a study, calculated that the U. K. Spent the equivalent of around five billion dollars trying to defend the pound. Five billion dollars that they basically took from british taxpayers and gave to all the speculators, betting that the pound would have to devalue. Understandably, that made some folks a little sauty with the headline name George soros.

And sure, if sorrow is fun, hadn't attack the bank of englands so suddenly, so intensely, the british probably could have found a way to devalue the pound that wasn't so costly. But Catherine deming gates, the economist from before SHE, says, even so, the impulse that some people have to be managed, George soros, is a little misplaced.

We can blame George soros or say that he made money off governments. But I guess I wouldn't really put IT in moral terms. IT is one of the fundamental a cost of the fixed exchange rate.

You're setting yourself up for the potential of a run. I would say economic incentives were such that this was largely inevitable. The british .

were probably going to have to devalue the pound one way another. IT was just too far out of line with economic reality. And in the years that followed devaluation, british goods got cheaper for the rest of the world.

Exports started to take up, and the U. K. Saw real economic growth.

Also, Katherine says it's worth keeping in mind that IT wasn't George sorrow who set up the rules of the currency game he played.

IT was the european governments. If you didn't want I had fun in uh way, then you could have restricted their ability to do so. If you have basically free mobility of capital, then I think you have to assume that if a Price doesn't seem like the appropriate Price, that there is going to be an attempt to make money off of that mispricing.

So fine. This is how markets work. People poke at the Prices of things.

They make bets. This Prices too high. This Prices too low. And if they're right, they get to profit. That incentive is what makes the whole thing go.

But every now and then, someone like George soros and his hedge fund will come along and book a profit so massive that the system just seems absurd. Not bad, not evil, just absurd. Like, why should these people in manhattan a billion dollars from british taxpayers? Because they could see the U.

K. Was being too, and about his economic policy. But on the other hand, why shouldn't they? They are the ones .

who made the bet three decades on from the trade. Rob Johnson says, ah, he he shares that ambivalence.

If I go to the equivalent of saint Peter someday and try to get in to heaven. We're not can be talking about the british pound evaluation. I mean, we won't be in the plus column, might be in the minus cole. But but but I don't sure about that.

This episode was produced by willow rubin and edited by Martinia castro that was fact checked by c. Watters and engineered by senate. Left to I like gold mark, you are our exacting producer.

I am a, and I will say some of the archive audio we use today came from our friends at the BBC from a documentary they made title black. I also feel like I have to say the best way to support planet money and the work that we do is to become a member of planet money plus or N P R plus, you get sponsor for your listening and bonus episodes. And IT really, really does mean a lot to us. Please sign up at plus that N P R that ward and thank you to everyone who already has. And alex gold.

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