1. “The Man Who Broke the Bank of England”
George Soros
“The Man Who Broke the Bank of England”
Presented By:
Vaibhav Ajmera
Patricia Lopez
Sabrina Madhani
Shabeena Meghani
Nisha Patel

2. Introduction September 16, 1992 The man who made it happen
British pound forced out of ERM by currency speculators and British ego severely bruised
The man who made it happen
George Soros, the world’s biggest currency speculator
All in a day’s work
Took home 1 billion US dollars in profit

3. Setting the Scene

4. Exchange Rate Mechanism
Founded in 1979 among 8 European countries
Move towards one currency
Adjustable peg system to the German mark
Largest member of the ERM
Bundesbank—Germany’s central bank
Ensured stability and flexibility
Fluctuation band around central exchange rates

5. Germany-A Brief History
1989—Fall of the Berlin Wall, Reunification
Focus on internal political & economic problems
1991—Government Spending Skyrockets
Causes of Spending
Consequences:
Central Bank prints MORE MONEY
Inflation
Stimulates increase in interest rates

6. England-a Brief History
Joined ERM in 1990
Benefit from one currency peg
“Recession in progress”
High unemployment, high interest rates
Response to Germany’s increasing interest rate
Two options: increase interest rates or devalue
Instead, try to defend pound by building reserves

7. International Investors Split
Most bet on bank of England
Vs.
Select few predicted inevitable devaluation

8. George Soros: Strategy
Bet $10 billion
Short pounds and long in DMs
Borrowed pounds from British banks
Sold pounds and bought DMs
Flooded Forex market with pounds

9. England’s Defense
Goal: avoid excess supply of pounds to prevent devaluation
Strategy: use accumulated reserves to buy pounds off the market
-Spent approx. 15 billion pounds

10. Simple Economics Soros WINS!! Soros: supply side
Bank of England: demand side
Tug of war
Supply curve shifted to right
Forces pound devaluation
Soros WINS!!

11. Britain is forced out of ERM
Black Wednesday
September 16, 1992
Britain is forced out of ERM

12. Aftermath… Post devaluation: -Soros sells DMs
-Buys back pounds for cheaper
Profit of $ 1 billion overnight!!
Foresight of stock market phenomenon

13. England in Shambles? Bruised ego Economic recovery Bad press for Soros
Steady inflation
Interest rates found “natural level”
Improvement in BOP

14. Can History Repeat Itself?
Most currencies get attacked soon after it’s clear they’re vulnerable
Self-fulfilled crisis (one time event)
Then vs. Now
Interconnection of economies

15. Lessons Learned…
Comes down to the fundamental concepts of economics
Governments MUST remain true to the markets
How?
Implement policies that conform with strict economic orthodoxy
Britain tried to have their cake and eat it too