This is a story of speculative excess and backlash. It involves commodity prices surging and then plunging, risks spreading through interconnected markets, and financial institutions taking on unexpected exposures and scrambling into mergers to survive.
So it is that the silver crisis of 1980 echoes into the troubled financial present with historical parallels and precedents. The crisis stemmed from an effort by the billionaire Hunt brothers of Texas and collaborators to dominate the world silver market. This effort encountered resistance from public and private players alike, and when it failed it largely wiped out some Texas-sized fortunes.
Moreover, the crisis put at risk a major investment firm, Bache, impelling its acquisition by Prudential and setting off a wave of consolidations in the financial sector. The era of the "financial supermarket," to which Citigroup's recent travails arguably signal an approaching end, took shape in significant part as a consequence of silver's wild swings nearly three decades ago.
The Hunts Begin
The roots of the silver crisis stretch through the malaise days of the inflationary 1970s. In 1973, with the dollar's power eroding, oil tycoon Nelson Bunker Hunt began buying silver in order to (as he would later testify) "invest in something I could get my hands on." Some cash for these initial purchases came from compensation for oil fields that Bunker had developed in Libya, as these had just been nationalized by that country's young dictator, Col. Muammar Gaddafi.
Over the course of the decade, Bunker and his brother William Herbert Hunt, the two oldest sons of legendary oil wildcatter H.L. Hunt, bet increasingly big on silver, through futures contracts, stakes in mining operations and direct ownership of piles of the shiny metal. In early 1978, at a meeting expedited by his friend, former Treasury Secretary John Connally, Bunker made a successful pitch to some Saudi investors to join him in acquiring silver assets.
The price of silver, which had stood around $2 per ounce in 1973, moved to over $5 in early 1979. This upward trend initially may have had little to do with purchases by the Hunts and their partners, reflecting pre-existing supply-demand imbalances and the inflationary times. But as the consortium stepped up its buying in 1979, upward pressure on silver prices intensified dramatically. Silver hit $10 in August and $20 in December.
The Hunts were engaged in massive purchases. By August, Bunker and Herbert each owned over 20 million ounces of silver bullion, while Bunker held over 9,000 futures contracts covering another 46 million ounces, and Herbert had another half as many contracts. Plus, the brothers were owners, with their Saudi partners, of a new company called International Metals Investment that was buying even more silver.
Moreover, the Hunts were increasingly making their bets on silver with borrowed money. As of August 1979, they had a silver-related loan balance of about $170 million, owed to several financial institutions. By January 1980, this had increased to over $400 million, and more lenders had joined in. This debt would continue to rise, to far more than $1 billion, and the list of lenders would continue lengthening, into March 1980.
Trouble Brewing
The financial firm most heavily involved in the Hunts' activities was Bache Halsey Stuart Shields. Bache was the Hunts' primary broker, and performed extensive commodity trading for the brothers on a margin basis. In late 1979 and early 1980, Bache loaned over $230 million to the Hunts, while borrowing a similar amount from multiple banks. The Hunts' collateral — a huge stash of silver — was worth even more, though, since the metal's price continued to rise.
The Hunts also had recently become major shareholders in Bache, holding about 7 percent of the firm's shares. Bache's chairman, Harry Jacobs, had fought hard against a possible hostile takeover of the company by the Belzberg brothers, Canadian investors who had bought a growing share of Bache stock. The Hunts' investment would help to keep the Belzbergs at bay. It also gave the Hunts a logical place to do their commodity trading, the risks of which had been viewed warily by some other investment firms.
As the price of silver soared, the Hunts' stockpiling of the gleaming metal began setting off alarms among regulators and market participants. An October 1979 Commodity Futures Trading Commission staff report worried that the Hunts owned "perhaps as much as half" of the silver being traded on major exchanges in Chicago and New York. Such figures raised the possibility that an illegal attempt at cornering the market was under way, but the commissioners were divided and took no action.
Officials at the Chicago Board of Trade and New York's Comex began raising margin requirements, but this did little to slow the Hunts' binge, since as long as silver prices rose, they would not be subject to margin calls. The exchanges also imposed position limits restricting how many contracts could be held by one person. That inspired the Hunts to do business via multiple accounts under different names, but it also meant they needed to liquidate some of their contracts and take delivery of silver.
On Friday, January 18, 1980, the price of silver rose above $50. This was a level never seen before, or since. Early the next week, the exchanges took a drastic step, limiting trading to liquidation. The Hunts could no longer continue buying. Silver's price dropped to around $35 in late January. The Hunts had bought most of their silver at much lower prices, and plausibly could have at this point conducted an orderly selling program that would have left them with large profits.
They didn't. Instead, the Hunts chose to hold onto their enormous silver hoard, while borrowing vastly to cover their growing margin calls. They were now on a path toward what would come to be known as Silver Thursday.
Metal Maelstrom
