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Black Wednesday

George Schwartz was born in Budapest, Hungary in 1930. He survived the Battle of Budapest in 1945 when German and Russian forces clashed in the city streets and he emerged in England as George Soros in 1947, peddling goods in seaside souvenir shops. He landed a position in a London merchant bank and bided his time until he could come to New York and work as an arbitrage trader in 1956. Even as he harbored dreams of becoming a writer and philosopher, Soros reputation as an astute trader blossomed. In 1970 he founded Soros Fund Management.

In the early 1990s, after the reunification of Germany, Soros became convinced the value of the English pound needed to be devalued against the German mark. Other investors saw the same thing and began to take bets against the pound. But none took such a massive position as Soros. He eventually built a $10 billion bet against the value of the British pound, borrowing as much money as he could lay his hands on. Eventually, in 1992, the British government pulled out of the European Exchange Rate Mechanism, a move that caused the pounds value to indeed crash against the mark. Soros walked away with $1 billion in profit.

Guest post by FXTM

The play by the investor who became known as The Man Who Broke the Bank of England is regarded as the single greatest trade ever made on the foreign exchange market.

Druckenmiller

The money manager at Soros Fund Management who is often given credit for spotting the weakness in the pound is Stanley Druckenmiller. Druckenmiller is a Pittsburgh, Pennsylvania native who abandoned a Ph.D. program in economics to go to work as an oil analyst at Pittsburgh National Bank in 1977. In 1981, when he was 28 years old, Druckenmiller founded his own firm, Duquesne Capital Management. He came to work for Soros in 1988.

Druckenmiller was there when the Berlin Wall fell. He was bullish on the German mark in spite of the difficulties forecast in German re-unification. Betting the currency would rebound in value Druckenmiller went long on the German mark. The firm made millions on the play when the mark indeed bounced back.

A few years later when his boss launched his campaign against the British pound, Druckenmiller again went long on the mark, figuring its value would rise if the pound tanked. At the same time Druckenmiller foresaw that a devaluation of the British pound would stimulate business in Britain by making its exports more attractive. So he gobbled up stocks in British companies. It all played out exactly as Druckenmiller had wagered and his twin plays around the German mark are considered second only to Soros gamble versus the British pound as the best forex trade ever.

Krieger’s Kiwi

Until Soros and Druckenmiller became involved with the German mark and British pound the shining example of a winning trade on the forex market was attributed to a currency trader named Andy Krieger who manipulated the relatively obscure New Zealand kiwi. In 1987 after the Dow Jones Industrial Average plummeted 22% on October 19, investors were scrambling to sell off American dollars. Krieger, then 32 years old, figured the sell-off would lead to other currencies becoming overvalued. The one he picked to short was the New Zealand dollar. He accumulated so many sell orders against the kiwi that it was rumored that they exceeded the entire money supply of the island nation. The pressure to sell New Zealand dollars forced the kiwi to tumble as much as 5%, enabling Krieger to take away millions from his arbitrage.

While these trades reaped fabulous rewards for their speculators they did not necessarily damage national economies. Rather, by exploiting a fundamental weakness in a currency, the aggressive forex plays forced the countries involved, Great Britain and New Zealand, to adjust the value of their money more realistically on the world market.

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