Destruction of a Billionaire (4 of 4)

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And NOW, the exciting conclusion! 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, Part 2 is here and Part 3 is here.

Because the Hunts had started purchasing silver when it was much cheaper, the cost basis of their bullion was only about $10, which meant that even with the complete devastation that has been leveled against silver prices in the first couple months of 1980, they still had a small profit on their holdings. Their trouble wasn’t with the bullion, but with the massive amount of futures contracts they had secured with a price of about $35 per ounce.

The debts they owed on these obligations were enormous and so complex that no one was sure what the exact figure was, but the damage was in the neighborhood of $1.5 billion. On top of this, they already had an obligation to take delivery of silver to the tune of $665,000,000 to add to their already staggering pile of bullion. The Hunts had acquired much of their silver with leverage, which worked fabulously during silver’s unrelenting ascent, but had a devastating effect now that prices had fallen so hard.

On the Sunday following Silver Thursday, Bunker met in Dallas with some principals of his organization as well as the Engelhard organization to which they owed $665 million for a looming silver delivery. The Hunts notified Engelhard that they didn’t have the cash to take the delivery and that their tremendous holdings of silver stored abroad had already been pledged as collateral for other loans. Bunker Hunt, when contemplating their monstrous losses, uttered a phrase that would achieve some lasting notoriety: “A billion dollars isn’t what it used to be.

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The tremors that the Hunts had caused on the nation’s financial markets required the most senior attention, so that afternoon they flew to Boca Raton to meet with the leaders of the largest banks in the U.S. as well as the Chairman of the Federal Reserve, Paul Volcker. Volcker normally frowned on providing any assistance to speculative ventures, but in this instance he happened to be in town to give a speech, and he decided to get involved in the negotiations that the Hunts and Engelhard were having with the banks.

The negotiations dragged on through the night and into the early morning, with a rumpled and weary Volcker occasionally showing up in his night clothes with a dress shirt haphazardly thrown over his pajama top. The negotiations were complex and difficult, but by Monday morning, an arrangement had been made: the Hunts would hand over 8.5 million ounces of silver to Engelhard as well as a 20% interest in several oil properties. The oil interests were untapped, and the Hunts didn’t know if they were giving away an ungodly sum to get out of the mess they were in, but given the circumstances, they had little room to negotiate.

Since the Hunts and Engelhard had reached an arrangement about their own financial relationship, the Hunts now turned to the gathered bankers to get a loan that could cover all the existing debt obligations. Led by First National Bank of Dallas and Morgan Guaranty of New York, a group of banks assembled $1.1 billion in loans to the Hunt interests so that they could honor their debt obligations.

Among the terms of the deal was a pledge that the Hunts not speculate in the silver market until everything had been paid off – given the circumstance, it seems unlikely that the Hunts would need to be restricted from having anything to do with silver again in their entire lives.

What was shocking to the rest of Hunt clan was how much of the family’s assets had to be pledged as collateral for the bailout. The rest of the Hunt children, most of whom had absolutely nothing to do with the silver debacle, found their coins, jewelry, cars, oil interests, paintings, furs, racehorses, and other valuable assets suddenly collateralized. Although the other Hunts didn’t partake of the splendid (albeit fleeting) gains that had been enjoyed by the participating Hunt brothers, they did find themselves having to help pay for these financial risks across almost all their asset classes.

Gold Riding Shotgun

Throughout all the Hunts’ silver drama, gold likewise participated in its own highly-correlated bull market. Unlike silver, gold was not the beneficiary of a very focused buying spree by the richest men in the world, but it had its own reasons for moving higher.

In May of 1973, gold was pegged at $42.22 per ounce by the government, but by January 1980 – the same month silver peaked – gold hit a lifetime record of $850 per ounce, a twenty-fold increase. Besides the surging inflation of the late 1970s, political unrest in Afghanistan (specifically, the Soviet invasion) as well as the turmoil in Iran with the taking of American hostages fueled the flames of international worry. Such fears often drive money into historically safe assets, and in this case, the safest asset of all was perceived as gold.

Although gold had enjoyed a speculator run during the final years of the 1970s, once the price peaked in January 1980, gold would enter a grueling, seemingly interminable bear market of its own for nearly twenty years. It would finally bottom at $251.70 in August 1999, near the height of Internet stock mania. In inflation-adjusted terms, the peak price of gold in early 1980 was well over $2,000 per ounce, a price that, as of this writing, has never been matched.

The Double Eagle Returns

The double eagle gold coins from 1933, described in the first installment of this series, should have been completely lost to history, with the exception of the two specimens saved by the U.S. government, having been melted down by government order. It turns out, however, that a small number of the coins found their way out of the U.S. Mint, and one of them eventually become the most expensive coin sold in history.

The circuitous, multi-decade route of the “escaped” coins is an interesting tale in itself. It seems that someone at the U.S. Mint with access to the gold coins – perhaps the Mint Cashier, although no one will ever know for sure – pilfered at least twenty coins and got them into the hands of Israel Swift, a jeweler in Philadelphia. This went unnoticed for years, until one of the coins appeared at a coin auction.

A reporter was intrigued by the appearance of this coin which wasn’t supposed to exist, so he contacted the U.S. Mint as part of his research. In turn, the Mint notified the Secret Service, which opened up a case to investigate the matter.

One would not normally think that a single coin from over a decade ago would have been a matter of national interest, but the Secret Service took the matter very seriously and wound up tracking down seven different coins, each of which were doomed to be melted at the Mint, as they should have been ten years earlier. Because of the age of the crime, Israel Swift had the statute of limitations to thank, since he could not be prosecuted.

Unknown to the Secret Service, there was another 1933 Double Eagle sitting in Egypt, owned by none other than King Farouk, who was an enthusiastic collector of all kinds of objects and treasures. He had, in 1944, purchased the coin and had actually taken great care to follow the letter of the law and fill out all the export paperwork so that the purchase and shipment of the coin was legal and proper. This all took place just a few days before the Israel Swift matter came to light, and the export license was granted.

Although the Treasury Department tried to get the coin back through diplomatic channels, the King saw no reason to hand over his legally-acquired property. In 1952, he was deposed from his throne, with his many treasures seized and put up for public auction. The Treasury Department asked the new Egyptian government to hand over the coin, and the government agreed that it would. Strangely, however, the coin once again vanished.

Decades later, at the Waldorf-Astoria Hotel in New York City, the U.S. Secret Service arrested British coin dealer Stephen Fenton, and among his holdings was the very Double Eagle that King Farouk had possessed so long before. A court battle ensued, and it was decided that the coin belonged to the government of the United States and that it could be sold at auction. In an interesting settlement, it was also decided that, unlike all the other Double Eagles, this one would be made into legal tender (that is, monetized), as originally intended in 1933.

The story of this small, single coin becomes more interesting still: when deciding where to store this singularly valuable coin, the Treasury officials settled on the vaults of the World Trade Center. In July 2001, only a few months before terrorist attacks would destroy the building complex, the coin was moved out of the WTC to Fort Knox.

Finally, on July 30, 2002, the coin was put up for auction at Sotheby’s and sold for $6,600,000. A 15% surcharge was tacked on by Sotheby’s plus – almost comically – a $20 fee in exchange for the intrinsic $20 “monetized” value of the coin as legal tender (although it can safely be said the coin would never be spent in exchange for $20 in goods or services).

Thus, the final bid of $7,590,020 was the price for the coin, with half the cash (plus the intrinsic value of $20) going to the U.S. Treasury and the other half going to coin dealer Stephen Fenton. After over 70 years of making its way all over the world, the coin finally found a permanent home to an anonymous buyer after only nine minutes of bidding.

Finally, it should be noted that ten more Double Eagles have been uncovered – again, emanating from the actions of Israel Swift – but that lengthy litigation has determined that these too are the property of the U.S. Government. They remain securely stored at Fort Knox and, as of this writing, their fate has not been determined.

Bankrupt Billionaires

The inflationary 1970s had been very kind to the Hunts and their businesses. Surging prices in soybeans, crude oil, silver, Texas real estate, and many other commodities augmented the family fortune by billions.

The 1980s were a mirror image for the family’s assets. Texas real estate fell in value precipitously, and crude oil collapsed from about $32/barrel in late 1985 to about $10 in early 1986. The Hunts found themselves with $1.48 billion in assets and debts of $2.43 billion. The Hunts had morphed from the richest people in the world to some of the planet’s most indebted.

In 1987, the Hunts had as many lawyers working on their financial legal battles – 15 in all –as there were children in the family. The banks fighting the Hunts on the other side of the table hired fifty times that many attorneys to wage war against them, and by 1988, the war was over, and the banks had won.

Adding to the financial pain being brought by their creditors, the Hunts also faced another unexpected nemesis: a mineral company from Peru. During the run-up in silver prices, a rogue trader inside the company sold short the metal, ultimately suffering terrible losses for the firm. In 1988, a court awarded $134 million damages to the Peruvian firm, payable by the now endlessly unfortunate Hunt brothers.

Bunker Hunt filed for personal bankruptcy in 1988, and he emerged from the formalities with several million dollars in assets but a bill to the IRS for $90 million that had to be repaid over the ensuing fifteen years. It was the largest personal bankruptcy in Texas history, and a coda that would have seem preposterous had one predicted it a few years earlier.

The remarkable tale of the Hunt saga can, at its simplest, illustrate vividly that leverage can be a powerful ally or a deadly enemy to the fortunes of even the most storied family dynasties.