Destruction of a Billionaire (3 of 4)

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Preface to all four parts: with all the focus on precious metals lately, I wanted to share a chapter from my Panic Prosperity and Progress book about a germane period in financial history related to the Hunts and their attempt to corner the silver market. Part 1 is here and Part 2 is here.

Officials from the Commodity Futures Trading Commission and the two exchanges had a meeting with the Hunts to ask about their intentions and to see if, at the lofty prices silver had achieved, they might be interested in being net sellers instead of buyers of the metal. After all, the profits they had achieved were already sensational. The Hunts told them they had no interest in selling, not only because they didn’t want to deal with the substantial taxes such profit-taking would incur, but also because they actually did want to permanently retain as much silver as they could acquire.

Taking delivery of the commodity promised in silver contracts was certainly not illegal; far from it, because even if the vast majority of traders never took delivery, the fact the Hunts were choosing to pay cash for the product represented by the paper contracts was, of course, wholly appropriate.

Thus, even though the CFTC had no legal case to pursue, the Chicago Board of Trade had reached the end of its patience with the Hunts and their insatiable silver appetite, so they changed the rules: not only did they substantially increase the margin requirement for silver purchases, but they also set a strict limit that no party could have silver contracts exceeding 3,000,000 ounces.

Although it was not public knowledge at the time, 23 of the members of the board on the Commodity Exchange were short a total of 38,000,000 ounces of silver. For every dollar silver moved up, the members collectively lost another $38 million, and the unprecedented rally in the bullion was putting some of these members at risk of ruin. In retrospect, it’s clear to see that the board members were far from disinterested and objective parties when it came to suddenly changing the rules governing silver trading. With this extaordinary conflict of interest, they wanted the Hunts to be restrained and they wanted the price of silver, in turn, to drop.

Silver did indeed languish between about $16 and $18 for a couple of months, while the Hunts and the exchange officials were facing off. On the one hand, constricting buying power by way of margin increases and limiting how much silver big buyers could accumulate had a stifling effect on the price; on the other hand, the exchange’s obvious concern about running out of silver and the fact that the richest man on the planet, flanked by extraordinarily wealthy Arabs, made clear they wanted to buy up as much silver as they could, balanced out the bearish news. The price had reached an equilibrium for a while, and it was unclear whether the bulls or bears would finally break the price out of its range.

By October, the Hunts and their associates were sitting on 192 million ounces of silver, making them substantially larger owners of the metal than the exchanges themselves. As the winter of 1979 approached, it became clear who was going to win the battle, as silver commenced lurching higher, moving in limit-up moves on an almost daily basis. (“Limit-up” meaning that the exchange would not permit the price to move any higher than a certain fixed amount, which invariably meant the market was willing to pay more, but it was allowed to until the next trading day). The price soared to $20, $30, $40, and beyond.

As 1980 began, silver streaked to its highest level in history, $49, which in inflation-adjusted terms is about three times that amount in today’s dollars. The Hunts and their partners had profits in the billions, and the futures exchanges were becoming frantic with worry about what was going to happen next.

Whereas a stock exchange would have been delighted with a bull market in equities, the circumstances are different with commodities. The hyperbolic rise in silver was no cause for celebration at the exchanges. They were facing very real limits as to whether or not they could honor the futures contracts that were being traded, so they had to act even more aggressively this time.

The exchanges, backed by the CFTC, declared new and even more restrictive limits on how much silver futures investors could acquire. Bunker Hunt became the public face of the silver bull market and declared that, given these new draconian measures, “…the market will move to Europe….The silver market in this country is a thing of the past.” It seems that Bunker’s paranoia about the East coast and its meddling in free enterprise were becoming true in an awful and rapid fashion.

Even at the extraordinarily lofty prices of January 1980, the Hunts kept buying, with Bunker agreeing to take on an additional 32.5 million ounces of silver that spring. At this point, the mountain of silver the Hunts had acquired was worth about $4.5 billion dollars, the vast majority of which was pure profit. Although the Hunts had borrowed money and leveraged their positions to accrue such an unprecedented cache, the fact is that, on paper, their investment had paid off spectacularly.

Commercial consumers of silver were none-too-pleased that the cost of their raw material had soared so dramatically. The famed jeweler Tiffany’s paid for a full-page advertisement in the New York Times condemning the Hunts for their silver acquisitions and the effect it was having on prices.

In part the ad stated, “We think it is unconscionable for anyone to hoard several billion – yes, billion – dollars worth of silver and thus drive the price up so high that others must pay artificially high prices for articles made of silver.” Of course, there was nothing “artificial” about the price – it was a reflection of market reality – but such expensive silver would certainly make it harder for Tiffany’s to sell its wares at attractive prices to the non-billionaire public.

Putting an End to It

At this point, the exchanges did something extraordinary: simply stated, they outlawed buying. More specifically, on January 21, 1980, the COMEX said that the only orders they would accept would be liquidation orders. No one could buy. Customers could only sell.

The market was past the point of shrugging off news like this. With no buyers permitted, the price went into a free-fall. The day after the announcement, silver plunged to $34. To add to the selling pressure, the everyday people of the American middle class finally woke up to silver’s sensationally high price and began selling everything they might possess with silver content, from heirloom silverware to coins jingling in canvas bags.

In the first couple of months of 1980, it was reported that 16,000,000 ounces of silver coins and 6,000,000 ounces of scrap silver (including more than a few silver tea sets from little old ladies across the nation) were poured into the silver market, causing prices to shrink even faster.

In spite of seeing his profits vanishing by hundreds of millions of dollars on a daily basis, Bunker kept a stiff upper lip and stated, “Why would anyone want to sell silver to get [paper] dollars? I guess they got tired of polishing it.” As nonchalant as he may have appeared in the press, his billions of dollars of silver were suddenly plunging limit-down in price, day after day.

Bunker Hunt kept behaving in the same fashion as he had before, confident that the recent downturn was just a blip in silver’s inevitable rise higher. He continued taking delivery of bullion, buying up more contracts, and taking up a multi-million dollar stake in another silver mine. He even announced that his employees would be given their bonuses in silver or gold, instead of cash, if the metals were more valuable when the bonuses were due. Bunker was, in sum, trying to give silver whatever positive press it could garner, given the unfortunate circumstances.

Silver Thursday

By March 3rd, silver had slipped to $35.20 per ounce, a drop of about 30% from just two months before. Although the overall Hunt position was still profitable, a meaningful amount of the gains had disappeared. The bull market was clearly over, and the price kept getting hammered on a daily basis, reaching $21 by March 14th. Paul Volcker, the Chairman of the Federal Reserve, had declared open war on inflation, and he was pushing interest rates to levels the nation had never seen before. The fantastically-high interest rates were mopping up cash from around the world and drawing it away from such alternatives as silver.

The Hunts had many expenses related to their silver holdings, such as the storage costs. But the biggest cash drain of all was the making of margin payments, because as the price of the metal continued to drop, the exchanges demanded larger and larger cash payments so that the International Metals partnership could avoid a margin call, which would compel the selling of their futures contracts.

Although the margin calls had been paid obediently during the collapse, that all changed on March 25, 1980. The Hunts’ silver broker, Bache, contacted the partnership with a $135 million margin call. The Hunts stoically informed Bache that they couldn’t make the payment. The game was at an end.

Bache started dumping the Hunt silver, and they likewise notified the CFTC about the margin call and its consequences. Bache warned the CFTC that the Hunts would be facing more calls, given the ongoing plunge in silver’s price, and that they would likely have an account with a significant negative balance. Word of the dire situation quickly leaked out, and full-scale panic took hold of the precious metals markets.

In a last-ditch effort, Bunker made an announcement from Paris that he and four Arab partners had completed the acquisition of more than 200 million ounces of silver and that they would be issuing silver bonds to investors, both small and large, that were backed by the metal. In a way, Bunker was going to distribute his own metal-backed currency, returning to the tradition that national governments had long-ago abandoned.

One aspect of the announcement that was visibly lacking was the name of any large banks that would be participating in such a venture. The public swiftly concluded that Hunt was just announcing a hoped-for plan, not an actual public offering of silver-backed bonds, and that he hadn’t even found any credible banks to partner with him.

Although Bunker hoped to shore up silver’s price with such a bold announcement, it had precisely the opposite effect. On March 27, 1980, the day after Bunker’s announcement, the silver market went into an unmitigated free-fall. It opened at $15.80, and frantic trading flooded the pits. Unfounded rumors begin to circulate, such as that the Hunts were facing a billion-dollar margin call they couldn’t meet, and that their broker was about to shutter its doors.

Silver’s plunge had not gone unnoticed by the equity markets. The Dow Jones Industrial Average had been above 900 early in the year, but the pummeling that both gold and silver had been taken had a wasting effect on equity prices, particularly since there were rumors that the Hunts would need to dump vast quantities of their own public holdings in order to meet their silver market requirements. The Dow was trading at about 760, a 15% drop, during what would be known as “Silver Thursday.”

As the trading day wore on, the damage was becoming extraordinary. Silver was trading at $10.80 an ounce, nearly 80% lower than it had been just a couple of months before. The Dow was showing a loss of 25.43 points, a fall of over 3% in a single day and the lowest price it had seen in five years.

The investing public was beginning to perceive the Hunts as having created a financial debacle that reached far beyond their beloved silver. Before the closing bell rang, bargain-hunters bucked up equity prices and reversed almost all the losses for the day, although silver was still hammered down to its $10.80 bid.

On January 17, the Hunts had $4.5 billion silver, $3.5 billion of which was profit. By the closing bell of Silver Thursday, the picture had changed dramatically: now the Hunts silver misadventure had $1.5 billion in assets (the bullion itself) and $2.5 billion in liabilities. The Hunts were presented with just about the last thing they wanted to see: another margin call, this one for $100 million.

Just about the only people happy with the events of Silver Thursday were those fortunate enough to have sold silver short at higher prices. Armand Hammer – the same man who infuriated the Hunts by being the first to bend to the will of Qaddafi – locked in a gain of $119 million with silver’s collapse, since he had the foresight to see that silver’s parabolic rise would soon come to an end.

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