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Europe: George Soros--The Man Who Broke The Bank Of England

Prague, 4 November 1997 (RFE/RL) - Many governments, numerous international companies and countless individuals were affected by a severe markets plunge at the end of October. The downfall has not spared global speculators like financier George Soros, whose companies suffered heavy losses as a result of plummeting stock markets and weakening dollar values.

Shawn Pattison, a spokesperson for Soros' Quantum Fund, which is the flagship of a group of seven funds under the Quantum Group of Funds, said that the fund lost more than $2 billion.

Soros, who made $1 billion after the British economy collapsed in 1992, admitted in a radio interview (BBC Nov. 1) that he may have lost even more in last week's crash than what he made five years ago.

He put it this way, "I think I happened to lose more than that probably - or about the same this week, so people can feel there is divine justice after all."

Quantum Group of Funds manages more than $20 billion in overseas money. Last week Quantum made millions of dollars trading bonds, but lost more in the stock and currency markets.

But what went wrong?

The answer lay in the interplay of the bond, stock and currency markets. Bonds are promises to repay loans. U.S. Treasury bonds, known as T-bonds, played a major role in speculators' profits during the crash.

Stocks represent ownership in corporations.

The currency market consists of trading in the world's different monetary units like the American dollar, the British pound, the Japanese yen and the German deutschmark. These currencies are worth more or less depending on the daily strength of the stock and bond markets and internal economic developments.

Last week, when worldwide stock prices dropped in response to plummeting Asian markets, speculators -- in this case people who anticipated world economic shifts -- applied their expertise.

They started weeks before the market plunge and bought thousands of millions of dollars of bonds, anticipating that currency troubles in Asia would slow Asian and U.S. economic growth. They expected the slowing growth to drive investment money from stocks into bonds.

It happened. Stock prices plunged, and worried stock owners sold their stocks and put their money into the relative safety of government bonds. Weeks before the market plunged, Quantum bought about 10 billion in Treasury bonds. When bond prices rose in response to investor demand, Quantum sold. But Quantum's profits in the bond market were offset by heavy losses from the steep dip in the stock and currency markets. The value of the dollar weakened in response to the selloff on Wall Street.

Quantum's loss? $2 billion.

Soros amassed most of his fortune by taking huge risks in financial markets. He makes his money by anticipating what he calls "trend-following behavior." He explains this way: "By trend-following behavior, I mean people buying in response to a rise in prices and selling in response to a fall in prices in a self-reinforcing manner."

International financial analysts and investors watch Soros closely. Grethe Schepers, an emerging markets analyst at Nikko Europe, a leading investment house in London, puts it this way: "He's a very big investor. If word gets out that Soros is pulling back, it has a direct psychological effect on the market."

But Soros has lost before. In 1987 The Quantum Fund tumbled 30 percent after the market crashed. He made up for the loss in 1992 betting against the British pound. His profit gave him the grudging title of "The Man Who Broke The Bank of England."

Soros' critics say his business acumen is damaging to world economies. In July Malaysian Prime Minister Mahathir bin Mohamad accused Soros of attacking Southeast Asian currencies for his own political agenda. Mohamad said Soros and other global speculators prompted the sharp fall in the Thai bhat, the Malaysian ringitt, the Filipino peso and the Indonesian rupiah. Soros has denied the accusations.

The same month, bank officials in Russia who lost a failed bid for the telecommunications holding company, Svyazinvest, cried foul saying that Soros unfairly influenced the auction. Quantum Fund was a member of the winning group. Soros said he put up $980 million for the company.

And recently Belarusian President Alyaksandr Lukashenka fined a Soros foundation $3 billion on allegations of tax violations and seized its bank account.

But despite criticism from people who say Soros exploits his global position in the markets, he says he gives as much as he gets from investing. And like many investors who lost in the markets this week, Soros says he isn't perfect.

"I make as many mistakes as the next guy. But where I do think that I excel is in recognizing my mistakes, you see. That is the secret to my success."