Home Business & Economy He Made a $1 billion Profit in One Day!

He Made a $1 billion Profit in One Day!

Soros in 2011 (Image: Wikimedia Commons)

His name is George Soros. And on 16th September 1992, he brought the British pound sterling to its knees and made a profit of $1 billion. In England, that day has now come to be known as Black Wednesday.

If it’s your first time hearing of it, you’d probably be wondering what kind of job can make such a gargantuan one-touch profit in a day, without breaking the law. George Soros is now known as “the man who broke the Bank of England.” But make no mistake. It was not a bank robbery and neither was there anything criminal about what he did.

Let’s go into how George Soros did it. But before that, we need to acknowledge that he already had a lot of money. You need money to make money. He had a lot of money available to him and he even borrowed more money to go and make more money.

The Plan

George Soros, an investor and speculator, was a hedge fund manager during the time. A hedge fund is simply a big fund managed by a competent team of investment advisors. They gather money from big investors and wealthy individuals who have millions, and then invest the money in something, according to an investment plan. The hedge fund then makes profits for the fund manager and his team and the rich individuals who invested. A hedge fund is not a golden goose, so it can make significant losses when things go wrong.

Now back to George Soros.

In 1992, Britain had a not-so-strong economy. Unemployment and inflation were quite high. Despite this, Britain stubbornly insisted on having a high and unrealistic exchange rate for their currency. The European Union had a shared Exchange Rate Mechanism (ERM) for trading currencies which proud Britain had joined in 1990.

But by 1992, it was getting clear that the pound sterling was overvalued and the British economy was not strong enough to support the kind of value that they placed on their currency. Many investors were observing the situation closely and some believed a correction could happen soon in the price of the pound sterling. George Soros and his team was one such group.

When the time was right, his hedge fund decided to massively “short” the British pound.

If you don’t know shorting or short selling is, it’s simply the profit-making tactic of borrowing an instrument (like a stock or currency) which is about to depreciate, then selling it and buying it back cheaper after it has depreciated.

Suppose that today $1 = ₵4.30 on the forex market. I have done some deep and thorough analysis and I surely know that the dollar is about to depreciate significantly against the Cedi because of certain economic factors. What do I do to profit? I go to a broker and borrow for instance, $500 at a small fee. I then exchange the $500 and sell it for ₵2,150 (rate of $1 = ₵4.30), then I keep the money. Assuming after three weeks, my expectation comes to pass and now $1 = ₵3.50, I will be smiling to the bank. To grab the profit, I must simply return the $500 I borrowed from the broker. So I bring out the ₵2,150 and go and buy $500. At the new exchange rate, $500 now costs ₵1,750 which is ₵400 less than three weeks ago. So basically I’ve made a profit of almost ₵400 in three weeks – almost, because I need to pay my broker a small fee for lending me $500 for three weeks.

Shorting can be dangerous because in the example above, if the prediction goes wrong and the dollar rises instead, I will pay big to my broker and lose more than the $500 I borrowed.

So that’s how shorting works. Now when you consider a hedge fund which deals with millions or billions of dollars, then you know the profits (or losses) can be massive.

The Jackpot

But George Soros was definitely sure and he knew what he was about. So before Black Wednesday, his hedge fund started shorting millions upon millions of British pounds. The pound had started depreciating and was going down even more because of Soros and his team’s massive selling.

Big investors and speculators tend to lead and have a lot of impact on markets. By selling off billions of pounds on behalf of wealthy investors, Soros and his hedge fund actually decreased market confidence in the pound sterling and caused a stampede against it. The reason is simple. If millionaire investors are running away from your country’s currency, it’s not a good signal for the rest of the market, so the price of your currency will go down.

The Bank of England stepped in and tried to control the situation by also buying billions of pounds that day. They bought and bought and bought, but it wasn’t working. They also increased interest rates twice on Black Wednesday to try and attract the forex market to buy the pound. The Bank of England couldn’t match the selling and they were losing a lot of money buying the pound, as the price and value of the pound kept dropping.

On the evening of black Wednesday, the British central bank gave up and announced that Britain would get out of the EU’s exchange rate mechanism. This meant they will no longer be able to fix and insist on any unrealistic price for the pound. Market forces in the foreign exchange market would now decide the value of the pound sterling.

But by the time the central bank officials were making this announcement, the market was already doing that and the pound was already on its knees.

George Soros had won on his bet that the pound would fall, bagging a profit of more than $1 billion on Black Wednesday. To do that, his firm had sold off about £10 billion.

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