Tomorrow marks the 25th anniversary of the day Soros dumped the pound
I was reminded again by my good friend Jim Trott, Chief Dealer FX at the BOE on that historic day, with whom I had dinner on Tuesday.
Memory plays tricks on an old boy like me so all the detail is a little blurry but the day itself remains forever etched in the brain cells given that I was fully involved as an interbank trader/market maker at Credit Suisse and we had a direct line to the Old Lady. Another big part of my job that day was essentially to unload on them any GBP we received asap.
The bottom line to the story was that the UK government was forced, after just 2 years of membership, to pull out of the ERM (exchange rate mechanism) in what might now be considered the pre-cursor to Brexit. They/the Old Lady had been unable to hold the pound at/above its lower limit as per the ERM rules. It wasn't just a weak pound at the core of the problem as Germany were jacking up interest rates in a bid to temper rising inflation putting the whole ERM under intense pressure.
The pound selling had begun on Tuesday 15th September with one George Soros adding to his already short position believing that the pound's too-high ERM entry level was unsustainable, but it was the following day that the real proverbial hit the fan.
As markets and the pound reeled in the shock the woeful double act of PM John Major and fin min Norman Lamont said they were jacking up interest rates to 15% from an already high 10% which, rather than support the currency, only added to the feeling of panic and concern that the govt had lost the plot.
Major and Lamont- aka Clueless and Hopeless
By the end of the day interest rates were back at 10% but not before Soros had started and accelerated the snowball of selling that saw the pound tumble in a move not repeated until the night of the Brexit vote. The BOE stuck a line in the sand on a couple of occasions in a bid to stave off the onslaught so all we had to do in theory was to unload on them to cover the GBP longs we were getting dumped with.
Easy money ? Well speed of quote and action to cover/unload was all but yes, when you're getting hundreds of millions of pounds below the market ( Soros/others were selling at any price you made them) and selling to the BOE at, effectively, a fixed rate then it doesn't take a rocket scientist to calculate that a large profit could be had and was.
Some of you might recall a bank trader being interviewed on BBC's Newsnight gloating how easy it all was and how the BOE had given every trading desk a fat profit with little risk. That may be true but it doesn't do well in any walk of life to start bragging. The following morning he had to be smuggled out of the back door as an angry lynch mob of people, who felt we had ruined their pound and the UK, gathered at his bank's front door demanding blood. The reality is that Major and Lamont, clueless and hopeless, left Soros and us little choice.
But it wasn't all that simple. As in any market making moment ( in our case as interbank traders that was all day every day) there was always a risk. Staying ahead of the game in a such a dramatic move was essential, and therefore adding to the momentum. When the bank pulled out it was very much dog eat dog, and some.
Jim will be appearing on CNBC and Bloomberg tv today ( Friday) to recall the day's events so check their schedules if you subscribe.
Markets are certainly a bit different nowadays. Anyone who thinks it's volatile today simply hasn't done their research.
I'll try and add some more thoughts in this piece if I get time later but just wanted to note the anniversary given that both the pound and BOE are firmly in the spotlight right now.
Meanwhile let's be hearing your own memories of that incredible day.
