The power of the Market Prevails

Over the course of the first couple of days of the week, pressure was starting to build which wasn’t subsiding at any time. John Major who had ousted Margaret Thatcher as Prime Minister in late 1990, a little after the UK joined the ERM, was constantly in discussion with his Chancellor, Norman Lamont, who had taken over from Major himself. The support for Sterling was becoming more and more frantic as the market “smelt blood in the water” and was seemingly closing in for the kill.

On the Monday and Tuesday nights, we were inundated with calls from banks and brokers in Asia looking for insight into what could happen but primarily we were also being cosseted since most of the market understood other than speculators like George Soros, we held the highest volume and value of orders were something to happen.

The market took on an almost fatalistic air in that it knew that Sterling was going to have to withdraw from the ERM but how that would happen and what the effect would be was very much an unknown quantity. There are clear similarities with Brexit today since no one really knows the effect it will have on the economy or currency and it was taking on the characteristics of a snowball rolling down a hill.

The Pressure Builds

George Soros, chairman of Soros Fund Management

All through Tuesday September 15th, George Soros’ Quantum fund was selling Sterling building on the short position he had been creating for a number of months. It was clear to all that the UK had entered the ERM at an artificially high rate but Major and Lamont both believed that the fall engendered by a departure from the ERM would create a spike in inflation which was already rising seemingly out of control. Interest rates had been hiked to no avail.

The Bank of England intervened twice before 8.30 am to no avail. The Governor, Robin Leigh-Pemberton was in constant contact with Chancellor Lamont. The Bank of England was still under the management of the Treasury then not being made independent for another five years.As all traders knew when there is only a single bid in the market (that of the Bank of England), there can be only outcome it had become a question of when not if.

My colleagues who arrived for work at 7am on Wednesday September 17th seemed to be ready for the dam to burst. I left that morning fully expecting it to all be over by the time I returned to the office that evening.

In mid-morning, interest rates were hiked from 10% to 12% and still the selling persisted. It seemed there was no alternative now but still Major refused to pull out. During the day, it was indicated that rates would rise to 15%.

The moment arrives

When I arrived at the bank at 6pm, the room looked like a bomb had gone off, the floors were strewn with paper, chairs were left were their occupants had simply got up and left them. It was obvious that it had been an incredible day but there was more to come!

I sat down and surveyed my order sheet as the Head of Treasury approached. “Tonight is the reason we created this desk”, he told me. “Be careful, and no heroics!”. I smiled at him eager to assume the responsibility.

As the few remaining day traders drifted out, stopping to wish me good luck, a feeling was building that I was going to see history made. We had decided that it would be best if we remained square across all currencies. A few orders were being executed in other currency pairs, but I concentrated on watching the Gbp/Dem cross, the news pages and TV.

At 7.00 pm the alert alarms on every dealer station in the room suddenly erupted with the news that the UK, at an emergency Cabinet meeting had decided to withdraw from the ERM.


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