Brokerage Hit by Swiss Shock Gets $300M from Jefferies Owner Leucadia
businessweek.com
businessweek.com
Once it became clear the ECB was about to take the reins off when it comes to QE, the Euro was guaranteed to sink substantially, leaving the Swiss forced to foot the bill on a pegged hole that would be theoretically infinite (only theoretically). At the very least, the Swiss National Bank was going to partake in a mult-billion dollar losing effort - for no good reason - to try to keep the Franc capped against the Euro, while facing off against one of the most powerful central banks in the world. The only question then would be how much the Swiss would lose between now and capitulation later.
Since it was widely unexpected and people did lose piles of money, I expect there were other likely alternatives and perhaps your analysis may be suffering from a bit of post-hoc rationalization.
So, traders start to anticipate a revaluation and buy francs. The SNB has to print and sell francs to maintain the peg. The SNB becomes aware that it is in an untenable position and will have to print a multiple of Swiss GDP worth of francs and effectively prop up the euro.
They have nothing but bad choices: buy an unlimited quantity of euros right in the face of QE; re-peg at a higher rate or against a different currency, but have an arrow painted on their back that the new rate may not hold; or float.
So, they float. Now the traders at retail brokers like FXCM who got hurt weren't necessarily net short on balance. The problem is FXCM allowed 50-1 leverage. Say you have accounts with $40m of equity taking $2b of short exposure to swiss franc, and foolishly going long a high yielding currency to pick up carry. And you could have 10x or any number of accounts correctly anticipating and going long francs.
Now, the franc jumps 20% without any opportunity to cover shorts. On 50-1 leverage the $40m equity accounts with $2b exposure $400m, or 10x their equity. A client has a $10k brokerage account and loses $100k, the broker can't recover that from them in most cases. The people who anticipated and were on the right side of the trade make out like bandits. But the broker still has to cover for all the losers so they are SOL.
TL; DR - Going from an artificial peg to a free market rate, you can't say that the artificial peg discounted all future events. Obviously the rate needed to adjust to do so. And even if a lot of traders correctly anticipated, FXCM foolishly put themselves in the position of having to cover those who didn't.
This is probably a dumb question, but... why would it necessarily be a losing effort? What would go wrong if they just kept on printing more and more Francs?