A George Soros myth lives on
Gerard Jackson
The myth that George Soros broke the pound has been solidly entrenched. But that's just what it is — a myth. No speculator, no matter how rich, ruthless or bold can break any sound currency. What currency speculators do, and that includes Soros, is try to anticipate future exchange values. Let's look at some post-war British monetary history. Sir Stafford Cripps was Chancellor of the Exchequer. From early 1948 he ardently affirmed that there would be no devaluation. Then on 18 of September he devalued.
Cripps and his colleagues, as did every sensible economist, knew that devaluation was unavoidable. British monetary policy had created a situation where too many pounds were chasing too few dollars. (I don't doubt that Soros learned the lesson). However, the devaluation did not solve Britain's problem. The Bretton Woods agreement had fixed exchange rates. What it could not fix were changing money supplies. Loose monetary policies in Europe created the "dollar shortage". In other words, dollar became undervalued in relation to European currencies.
What this amounts to is that once a currency becomes hopelessly overvalued in relation to other currencies it becomes a matter of time before an exchange rate adjustment takes place. This was the case with Soros and the pound. One does not make money from know that currencies are overvalued but in anticipating when the adjustments take place, even if the adjustments require an occasional nudge. So how did Soros know when the pound would adjust?
The Germans were concerned because after Britain had entered the European Monetary System it became apparent that its exchange rate against the Deutschmark could not be maintained without a costly intervention from the Bundesbank. Once the situation became apparent speculation against the pound rose forcing the Bank of England into putting a floor under the pound.
The most serious allegation against Soros was that he paid off European (read German) Officials for information on German attitude towards the pound. This, so it is said, provided him the necessary knowledge he needed to time his attack. When he launched his assault this caused a drain on the bank's foreign reserves as it desperately tried to stop the pound from sinking. The attack intensified and it became clear that it was impossible for the Bank of England to hold the line. In one desperate effort they raised the interest rate to deter further speculation. But high interest rates are no solution to over-valued currencies, especially when astute traders are fully alert to the situation.
Seeing the interest rate hike for what it really was only intensified attacks on the pound. It was now a question of when the pound would drop and not if. Unfortunately, things get a little murky at this point. Traders knew that insider knowledge of German intentions toward the pound could reap enormous profits. But how to divine those intentions? This is where rumours sprouted about George Soros and certain German officials. Traders understood at the time that the gamble on the British pound was a binary trade: that is, if the Germans provided support to the pound the speculative attack would not have succeeded in the short run and the agony would have been pronounced and losses incurred.
Nevertheless, the Soros funds bet a huge amount of money that the pound would devalue. It was an amount so massive that no smart trader like Soros would have gambled unless he had an information edge. The reason is because if he were wrong it would have meant an unacceptably large loss, one with the potential to cause a massive loss in credibility to Soros in front of his clients.
This sparked further whispers that Soros traded stocks in the 80s with deep insider knowledge. He appears to have stopped using insider knowledge when the SEC began to vigorously enforce insider laws. A few years ago Soros was charged with breaking insider laws in France. He was convicted of the charge and had to pay a fine. Since going clean he has been barely able to return anything more than the risk-free rate of return, i.e. the long term government bond rate.
George Soros is an extremely vain man. A prospective employee was once in Soros' office being interviewed for a job. He noticed that Soros' office was decorated with antiques. He also noticed that the office contained no screens. He asked George Soros how he could keep track of fast moving markets if he didn't have screen services like Reuters or a Bloomberg screen. Soros relied that he didn't need screens as he always knew where markets were. In other words, Soros has God-like tendencies. He lacks sympathy for mere mortals and treats employees like dogs. The slightest indiscretion, real or otherwise, gets one immediately fired. When one considers his behaviour and his contempt for rules that he thinks only apply to the little it's no wonder he's a Kerry supporter.
A note on manipulating markets: There have been severe attacks on Bush futures with the apparent intention of driving them down in order to influence the election outcome. It would take an extremely rich, ruthless and amoral operator to pull a stunt like this. Naturally, the finger of suspicion has been pointing at Soros. Forget it. Soros is not the culprit, irrespective of how much this insufferable egomaniac hates Bush. The culprit is well known on Wall Street but, unlike George Soros, he avoids the public spotlight. Perhaps this could be a job for the Securities Commission.
Gerard Jackson is Brookes' economics editor
BrookesNews.Com
Monday 1 November 2004