The Story of Silver

by William L. Silber

  The exchanges may have started the slide, but silver prices remained remarkably stable for more than a month before the next avalanche. On Monday, March 3, 1980, with the cash price of the white metal at $34.25, virtually unchanged since the liquidation orders by Comex and the CBOT crushed the market on January 22, Engelhard’s Raymond Nessim notified Herbert Hunt that his company wanted to exercise its option in their EFP to deliver bullion early.57 Herbert politely told Nessim that the Hunts’ funds were fully invested until the end of the month and that it was “not convenient” for them to take delivery on March 3. Nessim just as politely insisted that the Hunts pay $1.7 million more on the mandatory delivery date, March 31, to reflect the cost of the delay, which was fair and proper since Engelhard lost interest income on the money it should have received. It was fair, but the delay by the Hunts and their willingness to accept the penalty alerted traders’ antennae to a faint odor of weakness in Bunker and Herbert’s finances.

  The Hunts had borrowed almost a billion dollars during February and March to pay for bullion on maturing futures contracts, bringing their total silver-related loans to almost $1.5 billion.58 But they needed more cash, in part, to help coconspirator Naji Nahas, Norton Waltuch’s client, take delivery to avoid Comex position limits and to meet their own increasing margin payments.59 On Tuesday, March 4, Barclays Bank International rejected the Hunts’ request for a $100 million loan to be secured by silver bullion. Herbert and Bunker had flattered Barclays, saying their loan would be one-third of a $300 million package from top European banks, but that tactic backfired and increased Barclays’ reluctance. According to an internal memorandum, Barclays refused because “the amount of silver collateral … was so enormous that any attempt to liquidate in the event of default would so erode the price of silver that collateral coverage could be insufficient.”60 The brothers had become too big, and Barclays’ prudent concern would spread like a mudslide and smother silver prices.

  The Hunts had been accused of questionable business practices in the past, including manipulating soybean prices, wiretapping an employee, and using information from their oil drilling business to front-run competitors, but they had always paid bills on time.61 Their impeccable credit rating allowed them to borrow, without providing the usual documentation, almost $500 million from brokerage firms, including Merrill Lynch, Bache & Company, and E.F. Hutton, among the biggest companies in the securities industry.62 All of those loans were collateralized by silver that would be dumped on the market if the Hunts defaulted—an unlikely, but catastrophic, event that would trash the price of the white metal. On Thursday, March 6, 1980, two days after Barclays’ loan refusal and three days after the Hunts failed to honor Engelhard’s early-delivery option, silver declined by 8.5%, the largest drop since January 22, and on Monday, March 10, after Deutsche Bank refused a similar loan request, the price fell 10.1%.63 None of these loan rejections appeared in the press, but they displeased Bunker, and bad news seeps into the market and sinks prices like gossip destroys reputations. And more was coming.

  President Jimmy Carter’s March 14, 1980, announcement of a credit restraint program to control inflation seemed designed to destroy the Hunts, and silver traders panicked. Sellers drove down the spot price of the white metal by almost half over three days, from $29.30 per ounce to $17.40, anticipating that the program would reduce credit availability for speculative loans.64 According to the Wall Street Journal, on Thursday, March 13, silver prices declined “following the announcement that President Carter plans to release his anti-inflation program.”65 On Friday, March 14, as details emerged before the scheduled 4:30 p.m. speech, prices dropped again.66 And on Monday, March 17, after the market digested the facts over the weekend, prices fell by another 19%.67 The press reported that Monday’s decline surprised the professionals: “Like many in the industry, Jack Boyd, Drexel Burnham Lambert Inc.’s commodity-research chief, spent the weekend expecting futures prices to show little response to the package, as they had fallen steeply in anticipation of such measures.”68

  The absence of explicit restrictions in the president’s program lulled researcher Jack Boyd into complacency, but traders with money at risk always worry and comb the press for an edge. On Monday morning, March 17, the Wall Street Journal delivered bad news. The Journal reported that a spokesman for the Federal Reserve, America’s central bank, suggested that “the new measures are designed in part to insure a better distribution of credit as well as a curtailment of its growth.”69 It added that the Fed “has ‘encouraged’ lenders to restrain consumer lending, discourage financing of corporate takeovers … [and] avoid financing ‘purely speculative holdings’ of commodities.” The antispeculation clause put silver speculators in the crosshairs, giving traders good reason to dump the white metal on Monday, March 17. The following day, the Royal Bank of Canada, Toronto Dominion Bank, and Bank of Nova Scotia each refused a $100 million borrowing request from the Hunts, suggesting that Canadian bankers would respect the Federal Reserve’s caution.70 Bunker and Herbert Hunt would be unable to borrow money needed to meet growing variation margin payments.

  The Hunts were still billionaires at a time when there were fewer than a dozen in the world.71 Bunker’s racing stables, Australian farmland, and cattle ranches, and Herbert’s Dallas real estate, plus their share in the family’s Placid Oil Company, and their considerable silver holdings, added up. They resembled English nobility of the fourteenth century, owners of great landed estates but with little gold or silver currency, making them asset rich and cash poor. And like England’s King Edward III, who needed to borrow cash from the Bardi and Peruzzi banking families of Florence to pay his Welsh archers to battle France, Bunker and Herbert needed to borrow money to make margin payments.

  Jimmy Carter’s credit restraint program had closed off North America’s banks, forcing Bunker and Herbert to settle with their brokerage firms in silver bullion and coins. Bache & Company, which held the Hunt personal accounts, and Merrill Lynch, which held IMIC’s accounts, advanced margin payments in cash as required by the exchanges and held the white metal as collateral but discounted its value 25–35% to reflect price risk.72 When the Hunts offered their South African mining stock as collateral, Merrill discounted its value by 65%.73 Bunker then travelled to Europe in mid-March, where his favorite institution, the Swiss Bank Corporation, did business away from the Federal Reserve’s glare. The Swiss giant had already lent the Hunts $200 million, but on Thursday, March 20, the bank delivered the message that “technical problems” prevented them from advancing funds for a loan.74 The technical problem turned out to be the Swiss Federal Banking Commission agreeing to join the Federal Reserve System in discouraging loans for speculation in gold and silver.75

  Bunker had nowhere to turn except to his Saudi Arabian partners. On Saturday, March 22, he chartered a Lockheed Jetstar, a small four-engine business jet that seats ten, and flew with Mahmoud Fustok and Naji Nahas from Paris, where they had been staying, to the port city of Jeddah to meet with their royal backers.76 Bunker knew this was not the time to fly commercial. When they arrived, Fustok smoothed the way with his family connections and spoke with Prince Faisal, son of Crown Prince Abdullah, suggesting that the metal’s decline was temporary and favorable fundamentals would soon reassert themselves. Fustok had been encouraged by rumors that SAMA, the Saudi Arabian Monetary Agency, would diversify its reserves by buying silver.77 Remonetizing the white metal would change everything.

  Faisal spoke with his father and returned with bad news. The recent losses had convinced the royal family that silver was more complicated than Bunker had let on, especially since the futures exchanges could change the rules and the Federal Reserve could starve speculators of needed credit. Crown Prince Abdullah refused to compromise SAMA’s independence by pushing for a link with the white metal. Silver had played an important role in Saudi history and that is where it would remain.

  Bunker returned to Paris after the failed trip to Jeddah and prepared a press release t
hat would stun the financial world. Bache & Company had requested an immediate cash payment of $135 million for variation margin on Tuesday, March 25, 1980, and Bunker would need $434 million the following Monday, March 31, to pay Engelhard’s installment on the January EFP.78 Engelhard held 8.5 million ounces of Bunker’s silver bullion as collateral, but spot silver closed at $20.20, making Engelhard’s collateral worth only $172 million, less than half the Hunt obligation. Herbert Hunt told Bache that they had neither cash nor bullion to meet the margin call, and Bache responded with formal telegrams to Bunker, Herbert, Lamar, and other family members with accounts at the firm: “We are commencing efforts immediately to liquidate silver and, in our discretion, futures positions to meet this call.”79

  Everyone would get burned in a fire sale of bullion by Hunt creditors, but Bunker believed in silver more than ever. The white metal had declined by 60% from its peak value of January 18, 1980, and had become cheap relative to gold, which had dropped by less than half.80 The price ratio of gold to silver now stood at 25 to 1, well above January’s near historic 16 to 1 ratio. Bunker never wavered in his belief that eventually only five ounces of silver would be needed to buy an ounce of gold, saying, “I’ll stick by my prediction of 5 to 1.”81 He was reluctant to sell anything but understood that failure to meet his financial obligations meant creditors could force him into bankruptcy proceedings, costly and embarrassing for someone worth well over a billion dollars.

  In the afternoon of March 26, 1980, Bunker Hunt announced in a press release that he had agreed in principle to “join four other men with large silver holdings to market silver-backed bonds,” which would be distributed “through big European banks in denominations of varying sizes.”82 The other participants in the sale were Prince Faisal of Saudi Arabia, Mahmoud Fustok, Naji Nahas, and Sheik Mohammed Al-Amoudi. The New York Times said the plan “comes close to remonetizing precious metals,” creating securities like U.S. Treasury silver certificates, which until mid-1968 could be exchanged for bullion, except the bonds would pay interest. Andrew Racz, president of Racz International, a division of the brokerage house Philips, Appel & Walden, said, “The Hunt group would, in effect, be printing their own money,” which was Bunker’s intention. The Hunt announcement said that the selling group owned more than 200 million ounces of bullion, suggesting a bond sale of about $4 billion, similar in size to a U.S. Treasury issue. The offering would raise more than enough money to solve everyone’s cash shortage, if it were successful.

  The market responded like a guillotine, cutting the price of the white metal to $15.80 an ounce at the close on Wednesday, March 26, a drop of almost 25%.83 The Wall Street Journal headline “N.B. Hunt Group Shocks Silver World with Plan for Bonds” sums up the reaction, although the Journal reported that prices had started to decline on Wednesday even before the Paris announcement under selling pressure from Alvin Brodsky, Bunker’s favorite floor broker.84 Traders understood the concept of silver-backed securities but Bunker’s announcement seemed as desperate as trying to escape a tsunami in a rowboat. Investors knew that a $50 million sale of similar bonds had been proposed a month earlier by the Sunshine Mining Company, Bunker’s former takeover target, which had engaged the investment banking firm Drexel Burnham Lambert Inc. to market the issue.85 But Bunker had failed to identify a bank selling syndicate for his $4 billion bond issue, almost one hundred times Sunshine’s size, nor did he set a timetable. He had rushed the announcement, left it incomplete, and violated the trader’s cardinal rule: Sell it when you can, not when you have to. Bunker conceded as much during subsequent courtroom testimony, “It might have worked two months before … but [not] on a down market. … It was a good idea, and it’s a good way to raise funds. At the wrong time you can’t raise five cents with it.”86 Had the Hunts announced silver-backed bonds in a televised press conference in November 1979, right after Iranian students had taken American citizens hostage, the issue might have been oversubscribed within twenty-four hours.

  Bunker added detail where it hurt. He identified bond cosponsors, Prince Faisal, Mahmoud Fustok, Naji Nahas, and Mohammed Al-Amoudi, perhaps to broaden international appeal for the proposal but also suggesting coordinated silver accumulation with the Arabs, which he had repeatedly denied. The cosponsors list elicited questions during subsequent congressional investigation into the silver debacle, forcing Bunker into evasive answers. Alabama Senator Donald Stewart asked: “Did you at any time … communicate either orally or through the mail with members of the Saudi Arabian royal family?” Bunker responded: “Well there are 4,000 male members of the Saudi Arabian royal family. I know a lot of Arabs and I’m not sure which ones are members of the royal family and which ones aren’t.”87 Bunker’s evasive quibbling impaired his country-boy image and his princely list failed to float the bond proposal, forcing him to watch his great speculation crumble the following day, March 27, 1980, forever known as Silver Thursday.

  Brokerage firms, led by Bache & Company and Merrill Lynch, sold the Hunts’ silver positions on Thursday, March 27, to recoup their loans to the Texas billionaires, driving down the spot price of the suddenly tarnished metal by one-third to $10.80 an ounce, eclipsing previous record declines on Comex.88 Sales by Bache, which had the biggest exposure to the Hunts and relatively little capital, required the delicate balance of a tightrope walker. Bache had to sell Hunt silver futures to stop the hemorrhage of cash, but its selling drove down the price, increasing losses. A Securities and Exchange Commission report found that Hunt debit balances as the price of silver declined “carried the potential for losses to [the] Bache Group that were very substantial in relation to its overall financial resources.”89 The diplomatically correct report avoided the word “bankruptcy,” but the SEC suspended trading in Bache stock on the New York Stock Exchange at 2:15 in the afternoon of March 27, 1980, citing “undisclosed material corporate events relating to commodities futures trading.”90 The New York Times headlined the spreading carnage, “Silver’s Plunge Jolts Hunts’ Empire and Brings Turmoil to Wall Street.”91

  FIGURE 18. Herbert Hunt and Bunker Hunt promise to tell Congress the truth.

  Bache CEO Harry Jacobs had asked the Comex board to close the silver market to avoid the debacle and also telephoned Paul Volcker, chairman of the Federal Reserve board, to warn him of the impending danger. Jacobs explained later that he called the six-foot-seven-inch central banker because “I thought that there was an extremely illiquid situation developing there and it was in the national interest that I call him as the senior central banker of the world.”92 Jacobs then admitted, “Secondly … we thought it would help put pressure on the Comex.” Volcker had no direct authority over futures trading, but the formal regulatory body, the Commodity Futures Trading Commission, had shown no leadership during the entire silver episode and had deferred decision making throughout the crisis to the exchanges. Volcker knew little about futures markets and refused to push Comex to close, but Jacobs had gotten his attention. He joined the vigil on March 27 because banks had extended credit directly to the Hunt brothers and to brokerage firms like Bache, and stability of the financial system was Volcker’s first order of business. He would tell the House Subcommittee on Commerce, Consumer, and Monetary Affairs, “The situation was a serious concern to financial markets. … When there are major brokerage houses in potential difficulty, I am concerned.”93 Volcker added a broader caution: “I don’t think there is any question that an incident of this sort in what is, after all, in some sense a relatively small market—the silver market isn’t the biggest market in the world—can potentially have very grave repercussions.”94

  Volcker’s point that “small does not mean benign” summarizes the history of the white metal. Silver mining never contributed much to U.S. economic activity, but the white metal molded American politics since the Crime of 1873, which simply omitted coining the silver dollar, heightening the battle between the conservative rural West and the liberal urban East. FDR curried favor with the small silver bloc in
the Senate during the 1930s by subsidizing the white metal, which helped Japan subjugate an economically weakened China, encouraging the Japanese march to World War II. And now Volcker worried that a small brokerage firm—Bache was the eighth largest in the country—threatened the stability of the financial system because of the Hunts’ obsession with silver, continuing the “small but explosive” legacy of the white metal.

  Bache waited until Friday, March 28, to sell the bulk of the Hunt futures contracts and survived by luck and prayer, trading tactics that usually spell disaster.95 That morning bargain hunters scooped up at $12 an ounce the white metal that only two months earlier had sold for $50, allowing Bache to liquidate the Hunt silver contracts to cover the family’s obligations to the firm.96 The crisis eased, but the Hunt brothers still owed $1.7 billion to other creditors and had lost a fortune, even by Hunt standards, which they blamed on everyone but themselves.97 In subsequent testimony before Congress Herbert cited the exchanges that “finally broke the silver market on January 21 and 22, 1980,” by imposing trading for liquidation-only.98 He failed to mention that the collapse really began in early March when the Hunt liquidity crisis rippled through the market.