Two of the Biggest Currency Raids in History – Krieger & Soros

The Currency Raids of George Soros and Andrew Krieger, who reaped $1 billion and $300 million for their trades in the British Pound and New Zealand dollar, respectively. Here are the details, with charts.

Throughout history there have been raids on financial markets. Sometimes the raids are malicious – an attempt to corner a market or push the price to an artificially low or high price. In other situations, a trader is simply taking a huge calculated bet on what the trader sees as an inevitable outcome. The size of the bet has the added effect of often forcing the hands of other traders and politicians to see the error in their ways, thus moving the currency in the raiders favor. Such raids are a statement by the speculator about policy, regulations, manipulation or the current unsustainable price of a currency.

Two traders took huge positions in the Pound and New Zealand dollar (Kiwi) that ultimately resulted in sharp declines and huge profits from the respective currency meltdowns. The currency raids in these instances were not necessarily malicious (although some may view them as such), but the huge positions did cause the currencies to decline quicker than they may have otherwise.

Currency Raids – George Soros and the $1 billion Profit

Leading up to Black Wednesday on September 16, 1992 when the British government was forced out of the European Exchange Rate Mechanism (ERM), there were many issues facing Britain.

The ERM required that Britain maintain the currency from fluctuating more than 6% against other currencies within the ERM. The problem was that at the time Britain had an inflation rate three times that of Germany. The ERM was also under attack itself as member countries felt the model would not work in the face of real-world issues. Britain falsely assumed that by joining the ERM inflation would be curbed – after all, Germany was part of the ERM and it had a very low inflation rate at the time.

George Soros saw through this tactic. He correctly calculated that joining the ERM would do nothing to help the Pound, but would likely only hold the currency at artificially high levels. With nothing substantial to hold the currency up it would eventually come crashing down as Britain was forced to realize the ERM could not save it from declining.

George Soros and other speculators shorted the Pound leading up to September 16, expecting that policy makers would be unable to support the currency above the fluctuation band it was mandated to adhere to. In return, the Treasury tried to offset the speculators selling by buying Pounds. This temporarily allowed the Pound to stay within “the band,” but ultimately even the Treasury couldn’t support the currency. The Pound began to fall and British government got desperate.

On September 16, the government raised interest rates from 10% to 12% in attempt to bring buying support into the GBP. The plan didn’t work and the Pound continued to fall. The massive interest rate hike was seen as a desperate attempt, and a very real signal, that the Pound was in big trouble. More sellers flooded the market and that same day Britain said interest rates were moving up to 15%. The announcement had little effect and ultimately wasn’t implemented. Faced with a falling Pound and being unable to stabilize the currency within the band, Britain was forced to withdraw from the ERM.

In September alone the GBP/USD fell 15%, but the fallout continued. By December the pair had fallen 25.4%, from a 2.01100 high in September to a 1.4935 low in December, 1992.

The falling Pound ultimately allowed the British economy to rebuild. It is for this reason September 16, 1992 is also called “Golden Wednesday.” More details on the political situation surrounding the GBP decline can be found in BBC’s documentary called Black Wednesday.

Currency Raids – $300 million Kiwi Currency Raid

It is autumn 1987, and Andrew Krieger, a trader at Bankers Trust, is watching the New Zealand dollar (NZD) in the aftermath of the 1987 stock market crash. Currencies such as the NZD (also called the “Kiwi”) are being bid up by traders fearful of holding US dollars. This leads to a short-term overvaluation of many currencies relative to the USD, but Krieger focused on the Kiwi.

New Zealand has a fairly small economy, and using options Krieger is able to ultimately short the entire money supply of New Zealand (according his book The Money Bazaar). This would have been impossible if he only used the cash market.

Other traders, and even the New Zealand government, get involved. The government asks Krieger to stop the raid, but ultimately the market agrees with Krieger. The Kiwi sells-off 5% in a single day, with intra-day fluctuations up to 10% according to some sources. Much of the decline is pinned on Krieger selling massive amounts of Kiwi dollars, yet it is also other traders acting on the information which ultimately leads to Krieger being exit his positions with a profit.

The estimated profit to Bankers Trust was $300 million…of which Krieger got a $3 million bonus. This “tiny” bonus on such a well executed trade disgusted Krieger and ultimately he left Bankers Trust, going to work for George Soros in 1988.

In 1988 Bankers Trust admitted that profits from their options trading activity was overstated by $80 million in Q4 of 1987. Therefore the profits made specifically by Krieger are drawn into question, as the many of the options that were revalued involved Kiwi dollars. Such options were fairly new, and it is possible that Krieger was much of the market in such instruments at the time, making the options hard to value.

Either way, Krieger’s position is estimated to have been $700 million to $1 billion, with profits in the range of $220 to $300 million.

Kriger may have been right in the short-term, but ultimately the NZD went way higher in 1988. A great trade not only requires a good entry, but a timely exit as well.

Currency Raids – Conclusion

In both these cases, Soros and Krieger made massive bets that the rates in the GBP and NZD were unsustainably high. Whether the traders caused the decline is ultimately questionable, but there is no doubt that the large positions frightened the market in the speculator’s direction and made the market realize these currencies were overvalued.

In the case of Soros, he saw an economic and political situation which could not sustain a high GBP price. Krieger shorted massive amounts of the Kiwi, thinking it was artificially high after the 1987 stock market panic. Both traders capitalized on what they viewed as an overpriced currency, and very effectively helped to bring the currency back in line with what they believed to be a more fair value…and ultimately the market agreed.

By Cory Mitchell, CMT

For more “trading stories” see the Trader Biographies page.