Italian Bonds Fall While Populists Debate $300 Billion Write Down

[Read about these >American philanthropists who are giving away millions as fast as they can]

He decided that his goal would be opening closed societies. He created a philanthropic organization, then called the Open Society Fund, in 1979 and began sponsoring college scholarships for black South African students. But he soon turned his attention to Eastern Europe, where he started financing dissident groups. He funneled money to the Solidarity strikers in Poland in 1981 and to Charter 77 in Czechoslovakia. In one especially ingenious move, he sent hundreds of Xerox copiers to Hungary to make it easier for underground publications to disseminate their newsletters. In the late 1980s, he provided dozens of Eastern European students with scholarships to study in the West, with the aim of fostering a generation of liberal democratic leaders. One of those students was Viktor Orban, who studied civil society at Oxford. From his Manhattan trading desk, Soros became a strange sort of expat anticommunist revolutionary.

In the meantime, Quantum grew into a multibillion-dollar colossus. Soros made his most famous trade in 1992, when he bet against the British pound. The currency was vulnerable because it had been pegged at what seemed an unsustainably high rate against the German mark; with Britain in recession, Soros reasoned, the British government would ultimately choose to see the pound devalued rather than maintain the high interest rates needed to defend it from speculative investors. Soros’s terse command to his head trader, Stanley Druckenmiller, was to “go for the jugular.” Druckenmiller did, and on Wednesday, Sept. 16 — Black Wednesday, as it came to be known — the Bank of England stopped trying to prop up the pound’s value. It promptly sank against the mark, falling out of Europe’s Exchange Rate Mechanism and dealing a setback to the push for greater European integration. The sterling crisis turned hedge funds into the glamorous rogues of finance and demonstrated the punitive power that they could wield against policymakers in a world of free-flowing capital. The trade made $1.5 billion for Quantum, and Soros, whom the British tabloids dubbed “the man who broke the Bank of England,” became a household name.

By then, the Soviet empire had collapsed, and Soros was devoting huge sums of his own money to try to smooth its transition from Communist rule. For example, he donated $100 million to support Russian scientists and keep them from selling their services to countries hostile to the West; he spent $250 million on a program to revise Russian textbooks and train teachers to promote critical thinking. While the era was one of Western triumphalism, when it was widely assumed that Russia and other newly freed countries would inevitably embrace liberal democracy — a view most famously expressed in Francis Fukuyama’s 1989 essay, “The End of History” — Soros did not share that certitude. This part of the world had little tradition of civil society and liberal democracy, and in his view these needed to be nurtured if the region was to avoid backsliding into autocracy. “I generally have a bias to see the darkest potential,” he told me. “It is something that I have practiced in the financial markets to very good effect, and I have transferred it to politics.”

During the 1990s, Soros toggled between his day job and his philanthropy, and it was not always easy to disentangle his dual roles. For a time, Quantum and O.S.F. were run out of the same offices. In December 1992, three months after his bet against the British pound, Soros announced a $50 million donation to build a water-treatment facility in war-ravaged Sarajevo, and it was hard not to see that money as having been sucked straight from the British treasury. Soros once described his bifurcated existence rather graphically, writing that he “felt like a giant digestive tract, taking in money at one end and pushing it out at the other.”

If that was the case, indigestion was inevitable, and it came in 1997, when Quantum was at the center of a speculative attack on the Thai baht. The episode was a nearly identical reprise of what happened to the British pound. (Quantum made roughly $750 million this time.) There was one critical difference, however: While Britain was a major industrialized country that ultimately had little trouble absorbing the blow to its currency, Thailand was an emerging economy for which the consequences were devastating. Economic output plunged, banks and businesses folded and huge numbers of people were thrown out of work. The baht crisis rippled into other Asian economies. Malaysia’s prime minister, Mahathir Mohamad, called Soros and other speculators “unscrupulous profiteers” whose immoral work served no social value. Soros publicly rejected the criticism, but when investors took aim at the Indonesian rupiah in the fall of 1997, Quantum was not among them. Nor did it join other hedge funds when they targeted the Russian ruble the following year. Having already invested hundreds of millions of dollars trying to stabilize Russia, Soros would have been undercutting his own work by betting against the Russian currency. He ended up taking a $400 million loss.

“That was where the crossroads between the philanthropist and the investor became difficult,” says Rob Johnson, a longtime Soros associate who worked as a portfolio manager at Quantum in the 1990s. But by then, according to Johnson, the only reason that Soros was still running a hedge fund was to generate more money for his causes.

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