My Short Conversation with Soros

In the 1990s, I had a few words with the famous financier, who is often smeared by authoritarians and conspiracy theorists as an alleged puppet master. This is the story.

"File:George Soros - Festival Economia 2018 1.jpg" by Niccolò Caranti is licensed under CC BY-SA 4.0.

Any conspiracy theorists among you will probably be interested to learn that I had a short conversation with speculator, philanthropist and alleged puppet master George Soros in 1995. I would love to tell you the story. Before we get there, though, please forgive me for reminding you of a research principle, then teaching you a little bit about the plumbing of high finance and then giving some background to Soros’ life and thought. Please make yourselves comfortable!

At the risk of sounding like a broken record, research is meant to be a team sport. One of the worst mistakes that an amateur researcher can make is to try and work things out by himself or herself. Always start with a literature review to see what the experts say before developing any contrarian positions. Take some time to think about your methodology.

I have talked about open-source intelligence (OSINT) before. It has one basic principle. If you want to find out about someone like Soros, who has published books and articles, you should start with his own words before reading what his critics think he says.

Before we do that, though, let’s backtrack a little. Financial investment is split between productive capital and speculative capital. Many people will assume that productive capital is good and speculative capital is bad.

Unfortunately, this would be a naive conclusion. Hedge funds, which deploy speculative capital, specialize in highly complex situations with high but uncertain rewards and difficult-to-assess risks. They often deliberately take positions in these situations, particularly when they believe they have some kind of an edge over other investors, such as a better understanding of the underlying dynamics.

Conventional institutional investors, who mostly deploy productive capital, are able to breath a sigh of relief and move away from these complex situations when hedge funds move in. Mainstream investors might lose a little upside by selling out to a hedge fund but they also lose a lot of potential downside. This makes it easier for institutional investors to deploy their capital in easier-to-understand situations. As is often the case, liquidity - being able to buy and sell easily - is the key to understanding high finance.

Pension funds and the like also put a small percentage of their capital into hedge funds to provide a little bump in volatile times. This sits alongside more prosaic strategies, which often involve deploying capital into productive assets. Issues are rarely black and white in finance.

Before making a fortune from hedge funds, Soros was born in Budapest to a non-observant middle-class Jewish family in 1930. When he was young, the family changed its surname to Soros (a Hungarian name) from Schwartz (a German-Jewish name), due to rising levels of anti-Jewish prejudice at the time. His father Tividar was an author in Esperanto. He chose the name because it reads the same backwards and forwards; and also because it means “will soar” in Esperanto.

When Soros was 13, Nazi Germany occupied Hungary. He was banned from attending school. However, his family was able to buy documents saying they were Christians. His father worked to save a number of Hungarian Jews from the Holocaust during these years. Soros survived the Siege of Budapest. After the war he moved first to Paris and then at London.

While working as a railway porter and a waiter in the UK, the young Soros enrolled at the London School of Economics (LSE). While there, he became a student of Karl Popper, one of the greatest philosophers of the 20th Century, who was himself from an assimilated Jewish family from Austria-Hungary.

Popper had published his masterful defence of liberal democracy, The Open Society and its Enemies, in 1945. It would change Soros’ life, just as it would change mine when I read it after the fall of the Berlin Wall. Popper also taught the world how science can only be a negative discipline. It will always be better at putting the boot into sloppy thinking than at establishing eternal truths.

"Karl Popper for PIFAL" by Arturo Espinosa is licensed under CC BY 2.0.

After earning a masters degree in philosophy, Soros began working as a clerk in a merchant bank in the City of London. He later moved to New York, where he specialised in arbitrage, or buying a product cheaply in one market and selling it for a profit in another one.

In the late 1950s and early 1960s, Soros thought hard about the concept of reflexivity as a complement to Popper’s ideas. I have mentioned reflexivity here. In Soros’ own words, he came to realise that “in situations that have thinking participants, the participants’ views of the world never perfectly correspond to the actual state of affairs.” However, “these imperfect views can influence the situation to which they relate through the actions of the participants.”

These points might seem somewhat obvious, but Soros gradually came to see that they contradicted some of the basic principles of economic theory. He realised that he could use them to gain an edge when it came to deploying speculative capital. He founded the Double Eagle hedge fund in 1969 to test out his emerging ideas. It later evolved into the Soros Fund in the 1970s, which later became the Quantum Fund.

There are many bright and successful hedge fund managers out there who will rarely be mentioned by the press. Soros, however, became internationally famous (or infamous) in September 1992. He thought that the UK pound was set at a level that was too high in the Exchange Rate Mechanism (ERM), which locked it in with other European currencies.

By 16th September 1992 (Black Wednsday), Soros had taken short positions against the pound worth $10bn (a short position is basically a bet that prices will fall). He leant into his theory of reflexivity by letting other traders know what he was thinking. Other hedge fund specialists used the knowledge that Soros had taken a massive short position in the pound to take their own short positions, creating an untenable situation for the UK authorities, which had to buy pounds in the market to keep the exchange ratio within a set range.

The UK currency was forced to crash out of the ERM on Black Wednesday, with devastating results for the UK economy. Soros made a profit of $1bn in one day, while the UK Treasury lost billions of pounds. He went down in history as “the man who broke the Bank of England.” He later repeated the trick by betting that a crash was coming in 2008.

Soros’ bets often seem a little icky to people without a background in finance. The best way to understand them is as a way of making money from an event that is more likely than not. The very act of making the bet increases the odds in your favour.

After making a fortune from hedge funds, Soros put $32bn into his Open Society Foundations. This non-government organization (NGO) defends Popper’s ideas about the peaceful transition of power being the cornerstone of functional societies. It has been particularly active in the countries that emerged from communism in the 1990s, including Soros’ home country of Hungary.

Now it is time for my story. It was 1995, just a few years after Soros broke the Bank of England. I was struggling to break into journalism at the time. My first job was at a trade mag for English-language teachers. I had worked as a teacher for three years in Madrid beforehand, including during Black Wednesday. I was lucky enough that my first editor, Damian Wilson, was a very experienced journalist, who knew exactly how to set interesting challenges for up-and-coming reporters in the pre-internet age.

One day, Damian told me that Soros’ Open Society Foundations were putting a lot of money into English-language education in Eastern Europe. Could I get a quote from Soros about it? I did some background reading and instantly recognized some parallels between the world-famous financier and the deeply obscure aspiring news reporter. We had both studied philosophy and had been marked by Popper (at a distance, in my case - the philosopher retired before I was born and died in 1994). Surely I could do this!

I remember calling Soros’ various organizations and trying to get an interview. One of the secretaries was most charming, but politely laughed at my attempts. Of course, Mr Soros wasn’t going to give an exclusive interview to a barely known trade mag for English language teachers!

I was just about to give up my mission, when I saw an article about Soros publishing a book, Soros on Soros. I contacted the publisher and got a copy, which I quickly read cover to cover. I also found out that he was going to do a press conference in London to promote the book and got on the list.

The press conference was my first contact with the financial media. It was very intimidating! The room was full of bright people in smart suits. Soros walked in looking self-assured and well-tailored. He was surrounded by flunkies with their ears glued to early mobile phones at a time when this was a rarity. When the questions started, it was all people from the Financial Times and the Wall Street Journal and real-time newswires barking out arcane (to me) questions about finance and scribbling furiously at the answers.

Eventually, there was a lull in the questioning. I stuck my hand up and asked my somewhat mundane question about the importance of the English language for the Open Society Foundations. Soros answered politely. I got some funny sideways looks from the reporters around me, but I scribbled down my answer. Nobody else seemed to care very much about the issue, so the quotes were still fresh when we ran the story. Damian was pleased that I had passed his challenge and I felt that breaking into the top leagues of journalism might not be so hard after all.

Soros’ press conference also opened my eyes to a new world that seemed both fascinating and foreign to me at the time. Within a few months of the press conference, I was working as a very raw cub reporter for real-time agency Dow Jones Newswires, wearing my own flashy suit from Paul Smith’s outlet store in London. Within 18 months or so of that, the company had sent me back to Madrid to become a foreign correspondent in my mid-20s. I have been a financial journalist ever since.

Soros’ take on reflexivity has stuck with me whenever one of my stories moved markets in subsequent years. Probably the most memorable was the time I sent a series of flash headlines, which moved the oil price in 2001. The background was a meeting in Madrid for oil ministers from Saudi Arabia, Mexico and Venezuela. There was no formal announcement for several hours after the meeting ended, creating opportunities for real-time reporters to have some fun.

A colleague managed to break the news that there was some kind of agreement outside the meeting under the noses of reporters from rival agencies. A little later, I was able to get a copy of the agreement from a mischievous participant in the event in a posh hotel a few minutes before the opposition joined in the fun. The oil price moved noticeably on my flash headlines. In Soros’ words, my imperfect view of the situation influenced market participants, albeit briefly.

If you have read this far, the image of Soros that I have presented is probably very different from what you have heard before. The reason is simple. Liberal democracy has many enemies. Authoritarian leaders like Viktor Orbán in Hungary and Vladimir Putin in Russia hate the ideas of the likes of Popper and Soros. The peaceful transition of power is a direct threat to them. They see it as better to smear Soros and smear him hard; to turn him into a hate figure; and to tap into ancient antisemitic myths about Jewish puppet masters.

Quite frankly, conspiracy theorists who consume this propaganda without checking it are acting as mugs. The people who are telling you these stories about Soros allegedly pulling the strings of history don’t have your interests at heart. Look at the man’s own words before jumping to any strange conclusions!

Let me finish this column with a few words about Vox in Spain, where I still live. The hard-right party, which took a drubbing in the July general election, is an enthusiastic supporter of Orbán. The party has spread many wild stories about Soros’ alleged support for Catalan independence. The stories barely make sense if you actually sit down and read Popper or Soros, who both criticised nationalism. Vox is basically just using Soros as a quasi-demonic figure to rile up its base, without caring very much about logic or attention to detail.

Soros himself has denied any support for the Catalan independence movement. There is much more evidence that Putin backed Catalan nationalism for his own nefarious reasons, including weakening Spain in particular and the West in general. This observation has the advantage of actually making sense. Meanwhile, Vox’s hero, Orbán, has a complex relationship with Putin.

Finally, let me leave you with one take-home point: ideas matter. Orbán, Putin and Vox demonize Soros because they are afraid of his ideas about openness and democracy. The financier, who is now in his 90s, says that he is proud of his enemies. If you are ever tempted to repeat wild stories about Soros on social media, why not step back and read the man’s own words first?

Vox supporters can be very annoying on the internet, largely because the party’s views are often contradictory. For example, its founder, Santiago Abascal, quoted Popper in his university dissertation; but also hails Orbán (who hates Popper and everything he stands for) as “a reference for all Europeans.” The comments are closed for the week. See you next week!

Further Reading

The Open Society and Its Enemies by Karl Popper

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