A Full Stomach, a Hungry Pig
September 14, 1992, 3:00 p.m.
At the heart of Garden Queens, Texas, stood a massive building more than fifty stories tall.
Until three years ago, the vast and imposing structure had housed a jumble of companies. Now, though, one man used the whole thing by himself.
The man who had bought the entire building for more than fifty million dollars in cash had a large plaque of pure gold mounted at the entrance.
Lee Energy Holdings.
Lee Sanha. That was me.
“……”
I looked out through the glass wall at the horizon beyond the fiftieth floor.
Out there, enormous donkeys were at work.
Of course, they weren’t real donkeys, but Nodding Donkeys—pump jacks drawing crude oil from the ground.
I liked that sight very much: dozens of donkeys pumping black gold up from beyond the horizon.
That was why I had deliberately set Lee Energy’s headquarters in this rural little place called Garden Queens.
Well, that, and because it was my hometown, and because this was where my father and mother had first put down roots.
As I was lost in those thoughts—
Knock, knock, knock.
A knock came at the door.
When I opened it, Martin Channing’s face appeared.
Rarely, he looked genuinely tense, almost stiff.
“Uh… Sanha… no, sir? They’re here. Everyone.”
“Ah. Come in.”
I stepped aside, and Martin led the people waiting in the hallway into the room.
There were three of them, not counting Martin and me.
The man in front was a middle-aged Englishman with silver hair and silver-rimmed glasses.
His back was ramrod straight, and his gait had the measured dignity of a diplomat. At a glance, he gave off the unmistakable air of an English aristocrat—an upper-class man from the very top of the social ladder.
I recognized him immediately as Eddie George, Deputy Governor of the Bank of England and the leading candidate to become Governor in the near future.
The two men behind him appeared to be his aides. The one on the right looked especially pale.
“Pleased to meet you. I’m Lee Sanha.”
“Good afternoon, Mr. Lee. Edward Allen John George. I’m Deputy Governor at the Bank of England, although I’m afraid that doesn’t make me much of anything.”
Eddie George had officially come to Washington for the IMF annual meeting.
But his real reason for flying 1,300 miles from Washington to Texas clearly wasn’t the conference alone.
“Mr. Lee, let me introduce someone first. Deputy Director MacPherson, in charge of foreign exchange markets.”
Eddie George motioned to the pale aide standing behind him on the right.
The man dropped his head the moment he saw me.
From that reaction alone, I knew exactly what had happened.
“Ah, you’re the one who received my letter. I remember your name.”
“……”
This was surely the man who had thrown away the letter I had sent to the Bank of England through Martin Channing.
Eddie George spoke.
“Mr. Lee, I believe I owe you an apology. Deputy Director MacPherson’s decision was, in effect, my decision as well. Whoever had been in his position would likely have done the same. The responsibility lies with us for failing to recognize your extraordinary judgment.”
There was dignity in his words, and though he was in an unfortunate position, he did not sound servile.
Still, the hierarchy here was obvious.
No matter how much bearing and composure the other side had, they were ultimately on the lower rung.
I nodded.
“I understand. It must have been difficult to believe my warning.”
“Thank you. But your analysis was extremely accurate. That the pound was overvalued, that there were limits to defending it under the ERM—everything.”
“Let’s sit down first.”
I offered them seats, and at last all of us could sit at the table.
Quite literally, the negotiation table.
Eddie George said, “You know the situation better than anyone.”
“……”
Of course I did.
How could I not know the board I myself had set?
As of the London market close this morning, the pound-mark exchange rate was 2.7745.
Under the ERM, the pound could only move within a six percent band above and below 2.95 against the mark.
2.7730 was the floor, the lowest point allowed.
Since a pip—the smallest increment in exchange rates—means the fourth decimal place, or 0.0001, the pound now had just fifteen pips left before it hit the lower limit.
Two days ago it had been fifty pips. Now it was fifteen.
The Bank of England had been dumping reserves into the market to defend it, yet the pound was still being pushed down more than ten pips a day.
If this thin wall, with only 0.0015 left to it, gave way, Britain would be forced out of the ERM.
National credit collapse, financial turmoil, political ruin.
“I’m here to ask for your help to prevent exactly that, Mr. Lee.”
Eddie George placed both hands on the table.
“Let me be frank. We need your cooperation.”
Over the past five days, Britain had spent a total of 8.3 billion dollars defending the exchange rate.
In 120 hours, 21 percent of its foreign exchange reserves had vanished.
On the first day they had committed 1.2 billion. Yesterday it had been 2.2 billion, and tomorrow it would exceed 3 billion.
“……”
I nodded slowly.
The money being spewed from Britain’s pocket was flowing straight into my account, so there was no reason for me to rush anything.
That was why I nodded so slowly.
If you wanted to put it another way, it was a kind of slow life.
“What sort of cooperation are you asking for?”
“We’d like you to liquidate the short position you’ve built.”
Even in front of my leisurely attitude, Eddie George’s own composure and dignity were starting to crack a little.
He spoke directly.
“If a ten-billion-dollar short position is closed, the attacking side loses a great deal of firepower. If you were also to join us in buying pounds, we might be able to hold the line.”
“Ah, so you’re asking for more than just stepping aside. You want me to stand with Britain? To fight the Wall Street sharks who’ve smelled blood?”
“That’s right.”
“I’m afraid I’m not very bright, so let me ask plainly: would that actually benefit me?”
“We’d have to make it so.”
At my words, Eddie George nodded.
If I kept beating Britain down, I could earn an enormous profit.
And he wanted me to give all that up and flip my position? On top of paying the penalty for changing my position?
At first glance it was an absurd request, but Eddie George seemed to have come prepared with some kind of proposal.
“I’d like to present a condition. If the defense succeeds, the Bank of England will pay you ten percent of the profit it earns.”
“If the defense succeeds… can you really overcome the flow against you, even against the top hedge funds on Wall Street?”
“If Mr. Lee helps us, certainly. The profits you’ve already made could serve as a supporting force, and beyond that, if you change your position, it will frighten off a large number of hedge funds.”
“……”
I did the numbers in my head.
My short position was ten billion dollars.
If the pound broke through the ERM floor and began to free-fall, it would crash at least 10 percent against the mark. Historically speaking, it could even drop 15 percent.
Taking the conservative estimate of 10 percent, ten percent of ten billion dollars was one billion dollars, wasn’t it?
But that was based on the notional value of the position.
In foreign exchange futures, you didn’t have to put up the full amount in cash.
All you needed was margin, the collateral that secured the position.
As of 1992, the margin rate for foreign exchange futures was roughly 5 percent. To establish a ten-billion-dollar position, the actual cash required was about five hundred million dollars.
If I put in five hundred million and made one billion, that was a 200 percent return. Including recovery of the principal, I’d end up with a total of 1.5 billion dollars in hand.
That meant a net profit of one billion dollars.
That was the amount George Soros had earned on Black Wednesday in my previous life, and I, standing on the same board, could expect similar gains.
…But what if I took the second option here?
Liquidate the position now and stand with Britain.
The condition Eddie George had just proposed was ten percent of profits if the defense succeeded.
If the Bank of England succeeded, the hedge funds would be forced into liquidation.
In the process, huge buy orders for pounds would flood the market, and the exchange rate would surge.
The pounds the Bank of England had been buying cheaply would soar in value.
Buy low, revalue high—that difference would become the Bank of England’s profit.
If the defense strategy succeeded perfectly, the expected profit would be around two to three billion dollars.
Ten percent of that would be only two to three hundred million.
And that was only if the defense succeeded.
If it failed? Naturally, nothing. No—worse than nothing.
There would be the cost of closing my current position, the penalty for early termination of futures contracts, and the additional margin needed to establish the opposite position…
Just looking at the numbers, the answer was obvious.
A guaranteed billion versus a shaky three hundred million.
This is basically asking me whether I want to be a well-fed Socrates or a hungry pig.
If I sided with the Bank of England here, would the great current of history change entirely and create a butterfly effect?
No. Nothing of the sort would happen.
Britain’s economic fundamentals were already rotting from within, on the verge of bursting open.
Even if I stepped in as an ally and gave them artificial respiration, there was no way they could withstand more than fifteen billion dollars’ worth of Wall Street short-selling bombardment forever.
In the end, Britain would be thrown out of the ERM, the pound would crash, and interest rates would have to rise. That was the fate awaiting it.
All I needed was to wait until the very last desperate struggle, just before the Bank of England went under completely, and then hold the hilt of the knife so I could carve a little flesh from both Wall Street and Britain.
And before the ship sank, I’d leisurely transfer to the lifeboat and return to my own field: underground resources.
In the end, the conclusion of this “Black Wednesday” would unfold just as it had in history, and I only had to quietly collect my share from the gaps in the great wave.
…Because what I’m really after isn’t the petty cash right in front of me.
I looked at Eddie George and said, “All right. I’ll team up with Britain.”
“I naturally expected you’d say—wait, what?”
Eddie George had been about to exhale, then snapped his head up.
He must have been certain I would refuse.
I went on.
“However, the ten percent success fee is too small. You’ll need to make it at least thirty percent.”
“……Would twenty percent work?”
“That’s difficult. You’ll need to match the profits I’d make if I opposed Britain.”
I had planned from the beginning to make a modest amount of pocket money and pull out, but even so, I had no reason not to take what was there to be taken.
A moment later, Eddie George nodded.
“I think I can bring it up to twenty-five percent.”
“Good. I accept. But I have one more request.”
“Please, go on.”
“Set up a meeting for me. With the Energy Department. There’s someone I’d like to meet. Just have that person write me a letter of introduction.”
“Who exactly are you referring to?”
“I can’t say yet. I’ll contact you separately after this matter is wrapped up. It won’t be an unreasonable request.”
Eddie George thought for a moment, then nodded.
“Very well. I’ll cooperate within the limits of what I can do.”
He offered his hand first.
I took it and shook it as I continued.
“The Wall Street hounds will likely begin their attack on September 16, this coming Wednesday. If we can just hold them there, there’s a chance.”
“Why are you so certain it’ll be Wednesday?”
“Looking at the large-scale attack patterns of American hedge funds, most of them concentrate on Wednesdays. If they start then, they have Thursday and Friday to gauge the Bank of England’s response and decide whether they’ve won or lost. It also gives them time before the weekend to decide whether to close out or carry the position into the next week.”
Eddie George nodded.
“Their attack will likely begin with simultaneous sell orders right after the London market opens, driving the exchange rate down to the ERM floor. If we defend from our side, they’ll pour in more volume. I expect it will become an attritional battle to drain Britain’s reserves.”
“Exactly. The confirmed short positions alone, not counting Lee Energy, already exceed fifteen billion dollars. Quantum Fund, Caxton, Tudor… and if you add the smaller funds joining in after hearing the rumors, it’ll exceed twenty billion by Wednesday morning.”
“Twenty billion…”
Eddie George repeated the number under his breath.
Britain’s immediately deployable foreign exchange reserves were probably around twenty billion dollars.
The rest was either tied up in illiquid assets or inaccessible because of agreements.
But if my pocket money—no, my investment—was added to the pile, the situation could change a little.
Eddie George spoke first.
“If Mr. Lee supports us, a counterattack becomes possible.”
“A counterattack?”
“A short squeeze.”
A short squeeze was exactly what it sounded like: squeezing.
A strategy for tightening the noose around the necks of investors who had taken short positions.
Short selling meant borrowing an asset you didn’t own, selling it, and then buying it back later at a lower price to return it.
Which meant, in theory, losses could grow without limit.
That was the fatal weakness of short selling, and a short squeeze went straight for it.
Eddie George continued, “We’ll raise interest rates and deploy reserves at the same time to trigger their panic. Approval has already been secured from the Chancellor and the Prime Minister’s Office to go as high as twelve percent. The press will announce it forcefully soon.”
If interest rates rose, the return on pound deposits would rise as well.
There would be an incentive to hold pounds, and if foreign buyers came in, the exchange rate would climb.
In Britain before my regression, this strategy had done fairly well at first, blocking the fangs of the Wall Street hounds… but in the end, the reserves had run dry and the country had sunk.
But if I helped, they could buy more time, and the firepower of Wall Street’s short sellers wasn’t the kind of thing that could last forever.
“Margin call.”
Eddie George said, “Prime brokers will demand additional collateral from them. And if they can’t meet it, they’ll be forced to liquidate.”
If hedge fund shorts were forced into liquidation, the buy orders would pour into the market, the exchange rate would rise even more, more hedge funds would be pushed into collateral shortfall, and the short sellers would be slaughtered.
So the likelier outcome was that they would pull out before being trapped in something that extreme.
I asked George, “When do you want to time it?”
“The morning of the 16th, right after the London market opens. The rate hike announcement and the reserve deployment need to hit at the same time. If even one leaks first, the hedge funds get time to react.”
“Hmm.”
At this point, I could feel how much preparation the other side had already done.
…Still, British capitalists are never what they seem, so even if we shake hands, it’ll only be temporary.
Even in the original history, George Soros and the hedge funds took their profits at the right moment and pulled out.
Britain was badly wounded, but it avoided the worst-case scenario of national bankruptcy, gradually lowered the sharply raised interest rates, and returned to ordinary life.
I wasn’t going to forcefully twist that flow. I would simply ride the timing when history rolled back into place and maximize my own profit.
And there was no need to worry that they might betray me after we got through the crisis.
We weren’t bound by something as flimsy as trust to begin with.
The fact that the Bank of England had begged a private American citizen to save the fate of the nation—I would keep every detail of this negotiation, and every flow of money, as perfect documentary evidence.
That record of their humiliation would become the surest collateral on the Bank of England’s leash.
More than that, the fact that I could be their savior also meant I could become the reaper who cut off their breath whenever I pleased.
I was also planning to use this sturdy shackle later, when I had some of Britain’s garbage real estate deeded over to me under the concept of a private domain.
For that, I’ll need to tie them up tight with special clauses in the contract.
The legal review was already complete.
Of course, at this point Eddie George had no idea what sort of trap he—or rather, all of Britain—had just stepped into.
“Please help us, Mr. Lee.”
That was why he was asking with such desperate eyes.
…Even in the original history, George Soros and the other hedge funds pulled out at the right time. Britain, too, avoids national bankruptcy at the proper moment, lowers the rates it had raised, and everyone rather tidily returns to their own ordinary lives. I’ll just ride the wave without changing that flow too much.
Once I finished thinking it through, I nodded.
“Not at all. I’m the one who should be asking for your support.”
“Then we’ll need to keep in close contact.”
The meeting ended well.
What I was after in Britain was something else entirely, and it was already clear enough in my mind.
So there was no need to overdo anything during this pocket-money phase.
…From here on out, I should start reducing the scale of leverage.
And from here on, there were mountains of new matters to discuss.
The timing of Lee Energy’s short-position liquidation and the switch into pound buying, the scale of the purchase and the pace of deployment, whether the buy orders should begin at the same moment the rate hike was announced, the division of roles during the first thirty minutes after the London market opened, coordination of the Bank of England’s intervention and my own purchases, real-time sharing of the Bundesbank’s support results, setting up channels for exchanging hedge-fund movement intelligence, joint monitoring of Quantum Fund and Caxton, cooperation on collateral conditions with the prime brokers, division of responsibilities for securing support from Goldman Sachs and Morgan Stanley, allocation of additional buy volume at the moment the short squeeze was triggered, whether to add more capital if margin-call cascades began, the timing of interim settlement and the for dividing profits, the threshold for declaring a counterattack failure and setting loss limits, the timing for a joint exit and the order of liquidation, how to handle positions if the ERM was abandoned, the emergency contact network and the scope of decision-making authority, the settlement procedure after the operation ended…
All of it would have to be built from scratch, one item at a time, again, within forty-eight hours.