After family patriarch H.L. Hunt died on November 29, 1974, and before the first and second families began to bicker, Bunker and Herbert put Randy Kreiling, a second family brother-in-law who had made money speculating in commodities, in charge of transferring their silver to Switzerland. Flying 47,000 bars of the white metal, each weighing close to seventy pounds, from New York to Zurich required attention to detail, especially with the Hunt version of military secrecy.26 General George Patton, America’s premier tank commander in World War II, gave logistics the highest priority by warning, “The officer who doesn’t know his communications and supply … is totally useless.”27 Brother-in-law Randy, a square-jawed risk-taker in his midtwenties, took his job as seriously as if he were reinforcing front-line troops. He began by holding a sharpshooting contest among the cowboys he employed at the second family’s Circle K Ranch to choose the guards who would accompany the white metal on its transatlantic journey. He then chartered a fleet of Boeing 707 jets, blocked out the vendor’s name with tape so that only the registration numbers showed, and had the planes flown to New York in the middle of the night. A convoy of rented armored trucks brought the silver bars from Comex warehouses to the airport, and the guards then divided the bullion among the aircraft, making certain that the weight was evenly distributed within each plane to insure a safe flight. Another escort of armored trucks met the planes in Zurich and delivered the precious metal to six secret storage locations.
FIGURE 16. Silver bar pedigree: 999.9% pure.
Bunker always flew commercial but did not blink at chartering aircraft to transport his silver out of the country. His mistrust of the U.S. government, a suspicion bordering on paranoia, justified the intricate operation. Some experts suggest that paranoia is a genetic marker for success but more likely it resembles a heightened sense of smell, detecting dangerous odors when everyone else perceives perfume in the air. Henry Jarecki suffered the same psychosis, suggesting that prolonged exposure to the white metal’s tarnished history promotes the disease. But Jarecki’s anxiety was more personal than Bunker’s. He wanted to buy an island as insurance against chaos in the world and recalls, “I think I was motivated at least in part by my childhood experience fleeing Germany. I wanted a haven where I could be safe.”28 In early 1975 he bought Guana Island, 850 acres of tropical forest and white-sand beaches in the British Virgin Islands, which he proceeded to develop with a conservationist’s eye. Bunker could have afforded a similar retreat but instead spent his time and money touring the globe to enlist allies in the silver struggle, a battle that would launch the white metal into the stratosphere. His courtship of the Arabs made him super rich and world famous but, like his Libyan oil venture, ended in disaster, with an assist from Henry Jarecki.
CHAPTER 17
* * *
SAUDI CONNECTION
KING ABDUL-AZIZ IBN SAUD SUBDUED THE BEDOUIN FACTIONS OF the Arabian Peninsula and through a series of tribal marriages to more than one hundred women, four at a time as permitted by Islamic law, unified the desert country in 1932.1 Well over six-feet tall, with a warrior’s mustache and pointed beard, framed by a keffiyeh, Ibn Saud ruled like a medieval monarch over four million subjects until his death in 1953, but his imprint endures in more than just the name, Saudi Arabia. He left a legacy in power, religion, and monetary affairs.
Ibn Saud spawned the oil wealth that sustains the country by granting drilling rights to several major oil companies, including Standard Oil of California and the Texas Oil Company. The black gold began to flow in 1938 and has continued since. He belonged to a strict religious Islamic sect, Wahhabism, which made him abstain from the pleasures of alcohol but encouraged conjugal pursuits that sired 140 known children. His insistence on adherence to Sharia law remains a hallmark of the Saudi penal system, such as punishing stealing by amputating a thief’s right hand. And two years before he died, Ibn Saud engaged Arthur Young, a former financial adviser to the Chinese Nationalist government, to modernize the nation’s monetary system. Until then the Saudi riyal, containing .344 troy ounces of silver, was the only circulating currency in the country, two pounds of the white metal for each man, woman, and child.2 Young explained, “The people have relied upon the ‘intrinsic’ metal content of money rather than upon government measures … and thus they tend to distrust paper money.”3 Arthur Young modernized the financial system by establishing the Saudi Arabian Monetary Agency, called SAMA, which still manages the country’s monetary reserves. But the full-bodied riyal had been baked into the country’s culture like the desert sand, so at the outset SAMA linked the riyal to silver.4 Young said, “Silver coinage was more basic than gold … the Riyal was the ordinary money of the people.”5 Nelson Bunker Hunt had good reason to visit the Saudi kingdom.
In mid-March 1975, after Bunker returned to the United States from Iran, where he failed to convince the Shah to invest in silver, he arranged through a trusted intermediary to meet with sixty-eight-year-old King Faisal of Saudi Arabia.6 Faisal was the third son of Ibn Saud, had reigned over the desert kingdom since 1964, and could have been Bunker’s fraternity brother. Although an absolute monarch like his father, Faisal was unpretentious, using a single car rather than the royal fleet, was married to one woman although permitted four, and was most famous as a staunch anti-communist and anti-Zionist. He dismissed the Soviet Union’s pro-Arab policies with Machiavellian creativity: “Communism is a Zionist creation designed to fulfill the aims of Zionism. They are only pretending to work against each other in the Middle East.”7 Bunker needed barely a month of Faisal’s oil revenues to make a major impact on silver, but on March 25, 1975, just days before Bunker’s scheduled departure, King Faisal was shot to death in his palace in Riyadh.
The assassination smacked of a communist plot to destroy Faisal and Bunker in one shot, a reasonable suspicion from the Texan’s perspective, but Faisal was gunned down by a thirty-year-old nephew who had undergone psychiatric treatment and had sought revenge for Saudi police killing his brother years earlier.8 The royal family moved quickly to fill the void, naming Faisal’s younger brother Khalid Ibn Abdul-Aziz as the new king. Khalid was not nearly as well known abroad as Faisal, so Bunker had to put the Saudi plan on the backburner, where it simmered while he cooked up a scheme to evade U.S. regulations.
The United States ranks just below Mexico, Canada, and Peru in world silver production, but more than 65% of its annual output of about 35 million ounces is a by-product of base metal mining, especially lead, copper, and zinc.9 The Sunshine Mining Company in the Coeur d’Alene region of northern Idaho is an exception, devoted almost exclusively to the white metal, which is why Bunker and Herbert, through their company Great Western United, tried to gain control of Sunshine Mining on March 21, 1977, by tendering for one-third of the outstanding stock.10 Listed for trading on the New York Stock Exchange, Sunshine opened in the 1880s and became the largest silver producer in the United States, extracting as much as 6 million ounces a year in the mid-1960s.11 Production had been interrupted by a fire in 1972 that killed ninety-one miners and by a strike in 1976 that lasted most of the year, but in 1977 the company regained its prominence as the nation’s leading producer.12 The New York Times explained, under the banner headline “Sunshine Mining: Why Hunts Want It,” that some local shareholders believed “Sunshine Mining is the most poorly managed company in the state,” and “stockholders have been looking for a way to rid the company of its inept leadership, and Great Western seems to be a sound solution.”13 All of which may be true, but Sunshine’s main attraction to Bunker related to a bizarre connection between silver and soybeans.
Starting in mid-1976 and continuing into 1977, Nelson Bunker Hunt dreamt about soybeans, not because he considered switching to the protein-rich legume from his favorite diet of spareribs and vanilla ice cream, but because he thought the 1976 bean crop had been poor, which would boost prices. Soybeans traded alongside wheat and corn, the other two major U.S. agricultural crops, in the futures market on the Chicago Board of
Trade (CBOT). Located at the intersection of LaSalle Street and West Jackson Boulevard in downtown Chicago, the CBOT is the oldest futures exchange in the United States, dating from 1848. It was also the largest futures exchange during the 1970s, with a trading room six-stories high and bigger than a football field. The Chicago Board of Trade had traditionally specialized in agricultural commodities, reflecting Chicago’s stockyards and railroad connections, and viewed New York’s Commodity Exchange as a newcomer to futures trading, a competitor to be discouraged like an unwelcome immigrant. Comex introduced the silver futures contract in 1963, and the CBOT countered with a competing contract in 1969.14 New York retained its dominance in silver because an established liquid market usually prevails, but the competition between Comex and the CBOT pleased the Hunts, especially after the soybean caper.15
Bunker began buying soybean futures, anticipating prices would rise, but regulations at the CBOT restricting each speculator to 600 contracts, controlling 3 million bushels of beans, interfered with his banquet-size plans.16 These so-called position limits prevent a speculator from becoming dominant, cornering the market, and manipulating prices. Bunker and Herbert viewed regulations as a minor nuisance, like a traffic detour, and circumvented them by making the soybean speculation a family affair. They opened brokerage accounts in their own names as well as for their adult children: Bunker’s son Houston; Bunker’s daughters, Elizabeth, Ellen, and Mary; and Herbert’s son Douglas. Each chipped in as if buying a family birthday present, for a combined 22 million bushels, equaling about one-third of the entire U.S. crop. The Commodity Futures Trading Commission accused the Hunts of violating position limits, claiming that Bunker and Herbert manipulated prices by trading these accounts together, and demanded they sell contracts until they held only 3 million bushels, the maximum for a single speculator. The CFTC bolstered its argument by pointing out that Houston Hunt, at the time an undergraduate at the University of Tulsa, had allegedly “conducted his soybean trading from a public pay phone at the Phi Kappa Alpha Fraternity House.”17
Bunker responded to the CFTC’s friendly request by accusing the agency “of doing what they accuse the Hunts of,” which is “manipulat[ing] the price of soybeans” by “trying to repeal the law of supply and demand. Soybeans are in short supply.”18 The dispute ended in court, with each side partially vindicated, but the episode convinced Bunker to pursue Sunshine Mining.19
Speculators in futures markets, like the Hunts, absorb risk from hedgers, helping companies like Kodak avoid volatile prices, but also resemble gamblers at the blackjack table, always looking for an edge. Futures exchanges impose position limits on speculators to keep them in line, so that prices reflect commercial value, but allow hedgers a free rein so they can conduct their business. Bunker wanted to control Sunshine Mining Company, a natural hedger in the silver market, either selling contracts to protect unmined reserves or buying contracts when production declines, to avoid position limits and to speculate surreptitiously. The CFTC had authorized position limits in silver but neither Comex nor the CBOT had imposed them in 1977 because the two exchanges were competing for business. Bunker’s bid for Sunshine Mining prepared him for when the exchanges would be forced to act.20
Bunker added more insurance by shifting some of his silver buying from Comex to the CBOT, taking delivery of 50 million ounces in Chicago through Great Western United.21 He discovered that Mocatta Metals owned a storage facility that was a Comex-approved warehouse for silver, and he wanted to avoid snooping by Henry Jarecki.22 Bunker and Henry had already tangled in February 1974, the Texan pushing Mocatta to the brink of bankruptcy by driving up prices, and Henry counterpunching by selling Bunker 4 million ounces of the white metal at $6.70 an ounce, the highest level to date. But like most competitors, Bunker and Henry did business when it served their purpose. The Hunts borrowed money from Mocatta using silver as collateral because Henry made it attractive.
When the Hunts took delivery of silver, either on Comex or on the CBOT, they had to pay the full value of the underlying metal instead of just the good faith deposit, called margin, required on futures contacts. On March 1, 1977, for example, each Comex or CBOT contract covered 5,000 ounces of metal so at $5.00 per ounce the total bill came to $25,000 per contract.23 Taking delivery on 2,000 contracts for a total of 10 million ounces cost $50 million, and not even the Hunts carried that in their wallet, so they usually borrowed part of what they needed. Borrowing $40 million and investing only $10 million of their own, for example, also magnified their potential returns. A 10% jump in the price of silver from $5.00 to $5.50 produced a profit of $5 million or a 50% return on their $10 million investment—the magic of leverage. When prices decline, however, leverage works in reverse and magnifies losses, but that did not worry the Hunts back then. They borrowed money from the usual sources to finance their silver—banks and brokerage houses—and from Mocatta Metals because it charged a low interest rate.
Mocatta had become a bullion department store by mid-1977, the Macy’s of precious metals. The company still bought pre-1965 silver coins and melted them into bars, the arbitrage that had started Henry’s new career, but it also bought and sold physical gold and silver throughout the world, stored bullion for investors, executed orders for customers on Comex and the CBOT, bought and sold customized gold and silver options, and leased the physical metal to those needing it temporarily. Mocatta had been unsuccessful in becoming the Hunt’s floor broker on the exchanges, but the company’s bullion-leasing operation helped Henry turn Bunker and Herbert into clients.
When Bunker borrowed money from a bank to take delivery of silver, he gave the white metal as collateral for the loan, which the bank held in its vault. When Bunker did the same transaction with Mocatta, Henry took the silver and leased it for a fee to his customers, perhaps to Kodak, 3M, or DuPont, who were temporarily short of the white metal needed for X-ray film production. If the bank charged Bunker 6%, Mocatta charged less, depending on how much it made on leasing Bunker’s bullion, which is why the Hunts borrowed money from Mocatta even though they worried about Jarecki—it was cheaper. Henry never told the Hunts what he was doing, nor did he have to, since this was normal industry practice. After the price of silver rose, Henry used Bunker’s silver as collateral to expand his own borrowing from the banks. When the Hunts discovered what Henry had done, Herbert, who was in charge of the fine print, complained that Jarecki “always had conflicts of interest” and “when he told you something you had to look at it with suspicion.” 24 Herbert, the boss of details, should have read the loan agreement more carefully but he was right to worry.
Silver perked up in October 1978, pushing above the $6 level for the first time since May 1974, just as Bunker renewed his pursuit of the Saudis.25 The white metal’s four-year slumber had bottomed in the first quarter of 1976, when it traded as low as $3.85 an ounce, and the climb since then mirrored the rise in gold, which increased from $130 an ounce to over $225.26 The precious metals rode a wave of displeasure with the dollar throughout the world as American inflation hit record peacetime levels. International investors sold the greenback as though the U.S. currency were confetti so that a dollar cost only 1.8 German marks in October 1978, compared with 2.4 marks two years earlier, a decline of about 25%. Bunker’s prediction that anything, but especially silver, was better than paper dollars found an eager audience in Paris following the prestigious Prix de l’Arc de Triomphe race on October 1, 1978. His horse Trillion, owned with his friend Edward Stephenson but bred in Bunker’s Bluegrass Farm in central Kentucky and ridden by famed jockey Willie Shoemaker, came in second—a performance that gained attention from Saudi Arabian royalty.27
Horseracing had been a favorite pastime in the Arabian Peninsula for centuries, and the founding father of the country, King Abdul-Aziz Ibn Saud, had infused a passion for the sport in his bloodline. One of his sons, Crown Prince Abdullah, standing second in succession for the Saudi throne at age fifty-four in 1978, Commander of the National Guard, and an a
ccomplished horseman, had founded the Equestrian Club of Riyadh in 1965. Abdullah had thirty wives (no more than four at a time, of course) and one of his former brothers-in-law, Mahmoud Fustok, had attended the October 1st Paris race on a mission for the Crown Prince that brought him into friendly competition with Bunker.28
Fustok was in his early forties, his face dominated by thick lips and slicked-back hair, someone who looked out of place at a friendly poker game, but a close business relationship with Abdullah made him quite popular. He came to Paris for the horse auction at the Polo de Bagatelle sporting club on the day following the big race, looking to buy a future winner for his sometime brother-in-law. He was joined by Naji Nahas, a debonair thirty-five-year-old, with a square face and thinning hair, who was born in Lebanon but had lived in Brazil for a number of years investing in real estate, including some deals through Fustok for the Saudis. Both Fustok and Nahas had taken advantage of the royal family’s reticence to participate directly in commercial ventures, funneling sovereign wealth into preferred business activities in their own names, but returning the profits and principal, minus a finder’s fee, to their imperial patrons. Wealthy merchants from Riyadh and bankers from the more cosmopolitan Jeddah, a port city on the Red Sea, would also front for princely undertakings.
The Story of Silver Page 20
