The long and the short of the George Soros strategy

In this excerpt from George Soros' recently published The Tragedy of the European Union, the famed investor and philanthropist chats to Der Spiegel European correspondent Gregor Schmitz about the time he broke the Bank of England, the role of currency speculators, and his thoughts on how to fix the state of global financial regulation.

Gregor Peter Schmitz: Every time Der Spiegel publishes an interview with you, the standard comment of many readers is: “Why should anyone listen to the thoughts of an aggressive speculator on the global financial system who repeatedly undermined the stability of that system?”

George Soros: Given the attitude to hedge funds in Germany, I am not surprised, but I should like to convince them that I understand the financial system better than some of the regulators who are in charge. I have been successful within the capitalist system. Who is better qualified to criticize the system than somebody who flourished within it?

Schmitz: Does it upset you when people call you a ‘speculator’?

Soros: No, I do not mind that at all. As a matter of fact when I was given an honorary degree from Oxford and they asked me how I wanted to be described, I suggested “financial, philanthropic, and philosophical speculator.” But they talked me out of it.

Schmitz: But speculation can upset markets and trigger instability.

Soros: That is true and I recognise it. As far as my actions are concerned, I always play by the rules. I have always acted within the existing legal framework. So if my actions serve to undermine the stability of the system, it means that there is something wrong in the system that allows market participants, call them ‘speculators’, to disrupt it. As a concerned member of society, I have spent a lot of time arguing that the rules governing the global financial system need to be improved. In doing so, I often suggest changes that may be detrimental to me as a speculator.

Schmitz: Really? Can you give us an example?

Soros: In the United States, hedge funds spend a lot of money lobbying for lower taxes for their industry. I don’t do that. In fact, I advocate for higher taxes, which would mean I would have to pay more. Nowadays, I can afford to stand up for principles. True, I cannot expect others to do the same. I did not always do it myself until I became rich.

Schmitz: But the perception many people have of you and your colleagues is very different. They blame speculators for the latest financial crisis in the United States or the euro crisis. Is that the reason you’ve decided to give billions of dollars to charity and your foundation?

Soros: Do people think I am giving away money because I have pangs of conscience?

Schmitz: Isn’t there some truth to it?

Soros: No, it is a total misconception. I have a clean conscience. The big events in which I participated would have occurred sooner or later, whether I speculated on them or not. For example, whether I had been born or not, the British pound would have been forced out of the European Exchange Rate Mechanism in 1992. My talent has been to anticipate or recognise a coming wave, and to ride it, not to cause the waves.

Schmitz: But are you really such a little wheel as you claim? If you bet against gold or currencies, many other investors follow suit. You can definitely influence markets, for better or worse.

Soros: To some extent that’s true. Since I became a public figure, the man who allegedly “broke the Bank of England”, I have been cast as a financial guru who can influence markets. That has forced me to impose self-censorships on my statements -- exactly because I can move markets.

Schmitz: Many scrutinise every single statement you make. Do you actually like that role?

Soros: No. It has made my life more difficult as an investor. My position changed after the sterling crisis. Before that, I did not have to concern myself with the effect of my statements on markets.

Schmitz: Are you truly so careful not to influence markets? For instance, cheap money -- demanded by you publicly, in your role as a financial guru, as a recipe for the euro crisis -- would also help you as an investor.

Soros: That is true, but it would also help all other investors and, more important, it would help the EU. After nearly 60 years in the markets, I think I understand the financial system better than some of the people who are in charge of regulating it. So, as a concerned citizen, I feel justified in expressing opinions. I do not espouse policies in order to make a profit. I put public interest ahead of my private interests.

Schmitz: But when you speculated against the British pound, the United Kingdom had to leave the European monetary system. That led to chaos in the markets while you made a fortune basically overnight.

Soros: Look, even if I had not speculated against it, the British pound would have been devalued. There would have been a sterling crisis without me. When the markets are as large as they are in major currencies like the pound and the former deutschemark, no single investor can have any lasting effect.

If I had been the only one speculating, my speculation would not have been successful. I succeeded only because the rest of the market was doing the same thing. It was not my actions but Britain’s policy of keeping the pound overvalued that led to chaos. More specifically, it was the policy differences between the British and German central banks that caused the crisis. I was merely better than others in detecting these differences and better in betting on it.

Schmitz: That is a very convenient excuse. Someone would have done it. How exactly did you try to improve the system in the case of your speculation against the pound?

Soros: I was not trying to improve the system. I was speculating that the pound would have to be devalued, and I was right. So I made money. If I had been wrong, I would have lost money. But a weakness in the system was exposed by speculators like me, and that is ultimately a good thing. The forced devaluation of sterling, which made me so famous, actually had a very beneficial effect on the British economy, as almost everyone subsequently agreed, including John Major and even his finance minister, Norman Lamont, and central bank governor Eddie George, who spent billions trying to fight off the speculation.

In fact, Britain emerged from recession within months of the devaluation and then enjoyed its longest-ever period of steady noninflationary growth. I am not trying to take credit for helping the British economy in this way -- I am just pointing out that, in this particular case, my successful speculation had a clearly beneficial result. To use a Marxist term, I shortened the birth pangs of an inevitable event.

Schmitz: Are you really retired? You are reported to have bet against the yen at the end of 2012 and allegedly earned more than $1 billion.

Soros: That was not me personally. My team handles my money. I still own the Quantum Fund but leave all management decisions to my managers.

Schmitz: Let’s look more closely at this famous bet against the British pound: in the months leading up to it, you borrowed as much as $10bn --

Soros: Correct.

Schmitz: What would have happened if you had lost big? You could not have covered all those losses, and chaos would have ensued in the financial markets, right?

Soros: No, you are wrong. Because of the way the odds were set up, the amount of money I could have lost was well within my means and the only person who would have lost would have been me, and my investors.

Schmitz: But what would have happened to the money that was borrowed? Who would have paid that amount back?

Soros: I would have had to pay it back. But the maximum that I could have lost was the cost of borrowing plus 2 per cent, which was well within my fund’s means. It was an asymmetric bet. That is why I could do it on such a large scale. If sterling had remained in the ERM, it would have had to remain within the prescribed trading band and could not have gained more than 2 per cent. So, the most you could lose on a dollar would have been 2 cents plus interest. In the event, the pound was devalued by 20 per cent, and those who bet against it made 20 cents on the dollar.

Schmitz: I understand that. I am just so insistent because when people are critical of short selling, they often cite your speculation against the pound as an example of an investor getting a lot of leverage with a relatively small amount of personal capital, so that he can influence markets. Don’t you see that as a problem?

Soros: There is a problem with short selling, but my role in the sterling crisis is not a good example. Short-selling raids can sometimes destroy a financial institution or a currency that might otherwise be reasonably sound. Therefore, there should be rules against short-selling raids. But sterling was not sound in 1992; it was obviously overvalued and Helmut Schlesinger, the president of the Bundesbank, publicly said so at the time. It was his famous comment to this effect in the Wall Street Journal that actually triggered the breakup of the ERM in September 1992. So if any individual was responsible for the speculation against sterling, it was Dr Schlesinger and his colleagues at the Bundesbank.

This article is an excerpt from The Tragedy of the European Union by George Soros with Gregor Peter Schmitz, published by PublicAffairs.