As if the Euro Zone didn’t have enough to worry about, the Wall Street Journal reports today that a large European hedge fund has made a massive bet against the Euro by purchasing $1 billion worth of “put” options. Brevan Howard Asset Management LLP will have the right to require the put counterparty to purchase Euros from it at a predetermined price at a specified future date. Brevan Howard is betting that the value of the Euro will fall in the meantime, and that it will make a profit by purchasing Euros in the market when the put comes due, and selling them at the price specified in the put.
Financial regulators and tax authorities worldwide need to put a stop to this predatory currency speculation. When a financial institution publicly bets against a currency, it relies in part on the theory of the self-fulfilling prophesy. By purchasing puts or selling short, it is telling the market it expects the currency to fall in value. Other traders, already jittery about the potential default of Greece and the effect such a default would have on the Euro, will see Brevan Howard’s action as further confirmation of the likely fall in value of the currency and will move to exit while they still have time - thereby contributing to the fall in value, and to the speculators’ profits.
This is not a new game. In September 1992, the notorious speculator George Soros made a tidy $1 billion by short selling Sterling. His actions contributed to the “Black Friday” crisis when the rapid fall in the value of its currency forced the UK to withdraw from the ERM. Soros now likes to play the role of philanthropist. He dispenses a few millions of his profits here and there to charities of one sort or another. He also (and this is perhaps the ultimate irony) gives his financial support to various progressive and left-wing causes. But don’t be fooled. He and people like him are vultures, raking in massive profits at the expense of working men and women (and those who would today be working but for the economic crisis brought about by the greed, dishonesty and irresponsibility of the financial sector). Currency speculation does not help create jobs, and does not contribute to GDP. It creates no new wealth; it simply redistributes more of the existing wealth to those who already enjoy a disproportionate share of it.
That’s why regulators need to move quickly and in unison to stamp out these predatory practices. Currency derivative transactions can serve an important business purpose, for example by allowing multinational corporations to protect themselves against exchange rate fluctuations. But transactions that are not intended primarily to serve a legitimate business purpose should be illegal, “puts” and “calls” purchased for purposes of speculation should be unenforceable, and any profits derived by currency speculators taxed at 100%.
It is intolerable that the continued and unabashed greed of currency speculators should be permitted to stand in the way of governmental efforts to clean up the mess the financial sector itself created. It is equally intolerable that governments continue to let them get away with it.
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