So you were running the Soros London office when the pound fell out of the ERM. Can you talk a bit about what happened on that famous trade?
We’d been thinking about it for a while. The trade is a good example of what made Soros a different sort of macro fund in that we did a lot of bottom-up research. Stan and George believed that if you can find out what’s going on at a micro level, you can figure out the big picture. My very minor contribution to the breaking of the pound was an analysis I had done on the UK housing and property market. In the United Kingdom at the time, about 90 percent of mortgages were linked to the overnight rate. If the Bank of England raised rates on Wednesday, mortgages went up on Friday. I had been short UK housing stocks for a while and George was chewing on me to cover the position because they were going up. I said, “George, I have done my work. These property stocks are going under.” George likes it when you argue with him if you’re right, which is why I think I did well there. Anyway, the housing stock trade was overshadowed by the pound trade, and rightly so. What is most interesting to me about the breaking of the pound was the combination of Stan Druckenmiller’s gamesmanship—Stan really understands risk/reward—and George’s ability to size trades. Make no mistake about it, shorting the pound was Stan Druckenmiller’s idea. Soros’s contribution was pushing him to take a gigantic position. With the pound, we realized that we could push the Bank of England up against the trading band where they had to buy an unlimited amount of pounds from us. The plan was to trade the fund’s profits and leverage up at the band’s boundary. The fund was up about 12 percent for the year at the time, so we levered the trade up to the point where if they pushed us back up against the other side of the trading band, we would lose the year’s P&L but not more. The UK economy was already weak, so when they raised interest rates to defend the currency, the average person’s mortgage went up. They basically squeezed everyone in the United Kingdom with a mortgage. When they raised rates from 7 percent to 12 percent with the stated goal of defending the pound, we knew it was unsustainable and that they were finished.