“Someone dropped a bomb on the bond market Thursday – a $1 billion Armageddon trade betting the United States will lose its AAA credit rating. In one moment, an invisible trader placed a single trade that moved the most liquid debt market in the world. The massive trade wasn’t placed in bonds themselves; it was placed in the futures market. The trade was for block trades of 5,370 10-year Treasury futures executed at 124-03 and 3,100 Treasury bond futures executed at 125-01.”
The rumor is that Soros bought 5,370 of these ten year Treasury futures and is thought to have also purchased 3,100 Treasury bond futures. The news site examiner.com draws its own conclusions:
"Of course, this mystery bet could have been made by any Hedge Fund that followed Soro’s course of action, and went private on their own. However, very few people have the inside contacts with the Treasury Department and Obama administration that Soros does, and the historical evidence does point strongly to this bet being one that he has done in the past.”
By "past" they are of course referring to Soros' most infamous moment.
16 September, 1992 was "Black Wednesday": the day the British Conservative government was forced to withdraw the pound from the European Exchange Rate Mechanism (ERM). They had no choice; they were unable to keep sterling above its agreed lower limit. However, despite this economic setback, George Soros still managed to walk away $1 billion richer.
How did he do it? Shortselling.
Shortselling is the practice of selling assets, usually securities that have been borrowed from a third party (i.e. a broker), with the intention of buying back identical assets for less at a later date to return to the lender.
The whole point is to profit from the decline in the price of the asset(s) between the sale and the repurchase. The seller will pay less to buy the assets than they did selling them. Conversely, the short seller will suffer a loss if the price of the assets rises.
But Soros did not have to worry about that. He banked on the devaluation of the pound.
On September 16, 1992, Soros's fund sold short more than $10 billion worth of pounds, profiting from the UK government's reluctance to either raise its interest rates to levels comparable to those of other ERM countries (or to “float its currency”). He shrewdly bet that England's government would be forced out, thus reducing the worth of the assets he had just sold. He simply bought them back for a lower price than he had sold it for and he returned it to the lender.
The aftermath to Soros’ actions?
High British interest rates put Britain into recession as large numbers of businesses failed and the housing market crashed. Many people in the UK think of “Black Wednesday” as a national disaster although some conservatives have claimed that the forced ejection from the ERM was a "Golden Wednesday,” paving the way for an economic revival.
The British government had been vigorously trying to breath life into Sterling for some time, and this lead to a noticeable weakness that Soros exploited when he bet on the pound being devalued. He was rewarded with a huge profit for his bet.
For this, he was dubbed "the man who broke the Bank of England." Some suspect him of being the man who might try to break the bank of America.