Interesting anecdote for those who like to read the ravings of one Sean Corrigan ... from the daily reckoning:
THE BILLION-DOLLAR KILLING
by Addison Wiggin
Many are the governments that have had their fingers burned by a rambunctious market. But on September 16, 1992, the British government had its arms ripped off.
Dubbed 'Black Wednesday,' the nation lost billions as currency speculators forced Britain out of the ERM.
We dredge up this lesson in financial history, dear reader, if only because today the pound crossed the $1.95 mark for the first time since that fateful autumn day 12 years ago. It's a fascinating story and another glaring example of a government being humiliated by the foreign exchange market...
Yesterday afternoon, we braved Baltimore's drizzle, and strolled down to the local library. We wanted to delve a little deeper into the drama.
At the back of an old chest, we found just the ticket: a dusty roll of microfilm labeled 'NY Times, Sept. 1992'...
"Europeans' Currency System Shaken As Britain Cuts Free: A Crisis In London," reads the frantic headline.
The crisis was started when the pound started nudging against the lower wall of its predetermined trading range. As part of Britain's membership in the Exchange Rate Mechanism, and as part of its commitment to a united Europe, U.K. politicians had agreed to keep the pound stable and within a fixed trading range.
Problem was, the rate was pegged too high. The Germans had a huge tab to pay after unification, and needed high interest rates to attract funding, while the rest of Europe - including Britain - was stuck in recession. Everyone could see the pound was overvalued; yet the government was contractually obliged to maintain its value. Interest rates had been pushed up to 10% for this reason, and were already strangling the economy.
So on Black Wednesday, when the pound started moving lower again, the government stepped into the market, just as it had promised, and cranked interest rates up to 13%. But the pound still fell. An hour later, and in a last ditch effort to save face, rates were pushed to 15%. It didn't work, no one was buying pounds. The game was up. Speculators had called the government's bluff and won.
Britain crashed out of the ERM, rates were sent back to 10% that same evening, and the pound crashed. By the end of September, it had dipped down to $1.68 from over $2 immediately before the crisis.
Britain wasn't the only country to suffer. On the same day, the Spanish peseta and the Italian lira both crashed, while to support the krone, Sweden moved its interest rates up to 500%!
"Find the trend whose premise is false, ride it, and step off before it is discredited," is Soros's famous advice. Soros made a 'billion-dollar killing' by betting against the pound.
He could see the pound's value was unsustainable, and the political pain associated with high interest rates made it a sure bet that the politicians would eventually crumble. So for about 6 months beforehand, he built up an enormous short position - borrowing over $6.5 billion in sterling and converting the stash into francs and marks.
When the pound gave way, Soros cashed in. But he wasn't the only one.
As a young institutional trader, our former London correspondent, Sean Corrigan, was on a trading desk that had leveraged itself to the hilt betting the same way as Soros. The British government's assurances that they wouldn't allow the pound to drop had Corrigan and his mates in a vice. They had been informed that because of their short positions against the pound, the director of the firm was flying over from New York to fire them all.
"When this news broke," Sean wrote of Black Wednesday, ten years later, "in the spirit of a Wermacht officer about to be sent with his men to the Russian front, the chief dealer called us all together and led us to our favorite local bar, fancying it might be the last time he got to enjoy the perk. He produced the company credit card and splashed out liberally on Kulta beer and dry champagne.
"Just as our sorrows were becoming drowned in anticipation, Rafael - the portly and affable Italian landlord - leaned across the bar, holding out a telephone and shouted for our good Kapitan.
"Hand clapped to his free ear in the struggle to be heard over the hubbub, David signaled irately - if ineffectually - for us to keep the noise down. He seemed to ask insistently the same thing two or three times, then passed the phone back to Raffy the barman.
"Something in his manner must have caught our attention, for we all fell silent, like naughty schoolboys, frozen when the headmaster walks in unannounced. He looked at us all, a quiet smile playing about his mouth. 'Sterling's been pulled out of the Exchange Rate Mechanism. The bank...'
"The rest of his speech was cut short by a great primal roar of exultation and relief. In minutes we had gone from the point of being sacked to recording the best ever quarter for any branch in the bank's history." |
