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Wednesday, April 21, 2010

THE GREAT SILVER HUNT

I think the best way to describe Nelson Bunker Hunt is this; Archie Bunker with couple of billion dollars in the bank. He does not smoke, drink or gamble. The son of a flagrant womanizer, who openly produced two completely separate families, and a third in secret (fifteen children in total by three women), Nelson is a major financial supporter of Fundamentalist Christian political groups. Nelson was friends with and a financial supporter of both Senator Jesse Helms.of North Carolina and Senator Strom Thurmond of South Carolina. He is also a major financial supporter of the John Birch Society. He collected a thousand thoroughbred race horses and yet always flies coach. He is famous for searching his couch cushions looking to recover lost change, his own and visitors.
Said a family member; “Sometimes he’s brilliant. The rest of the time you wonder whether he’s really there with you or not.” Said a business partner; “He doesn’t just want some of it. He wants it all.” Said his father, legendary oil man Haroldson Lafayette Hunt Jr.; “I could find more oil with a road map, than Nelson could with a platoon of fancy geologists”. Says Nelson himself; “Worrying is for people with strong intellect or weak character.”
But maybe the key to his personality is that Nelson Baker Hunt was born a second son. Nelson’s eldest brother, and his father’s “run away favorite”, Hassie Hunt, was an oil wildcatter and “a millionaire in his own right by the age of 21.” And then this older, smarter brother developed schizophrenia and his desperate father decided to treat him with a lobotomy. Since that "Hail Mary Pass" of treatment, Hassie has been and will be under 24 hour nursing care for the rest of his life. Thus Nelson became the repacement son. But he was never his father’s favorite. And that may explain why one dark night in 1974 Nelson and a staff descended upon New York City in three charted 707 jets, paid for and then transported 40 million ounces of silver to Nelson's leased vaults in Switzerland.
Now, silver is a commodity, like wheat or oil or steel. You can buy a commodity, and you can even sign a contract pledging to buy it at a set price some time in the future. These futures are a bet as to what the price of that commodity will be. The vast majority of futures traders never intend upon taking delivery of the actual commodity. They merely bet on the market, providing producers and buyers a hedge against price fluctuations. These bets thus stabilize the market, which is good for everybody. And to encourage trading in futures, they are bought at only a percentage of the actual price, called a “margin”. But Nelson was willing to suffer the expense of transportation, storage and insurance, by actually taking delivery on his silver, because he believed in a doomsday fundamentalist theology,  that the world’s financial markets were going to collapse. Paper money would be worthless. A commodity like silver would still have intrinsic value.
In 1974 the world wide production of new silver was 245 million ounces, while annual consumption was 450 million ounces. The imbalance (67%) was made up through recovery of “scrap silver”, everything from industrial applications to melting down family heirlooms. But the imbalance also meant that the control of a tiny percentage of the world’s silver could swing the price. This meant that every ounce of silver that Nelson bought and stored in the vaults was another ounce removed from the market. And that drove the price of the remaining silver up. As the price went up, the silver in Nelson’s vaults increased in value. He cashed in on that increase by using it as collateral for loans, which he used to buy more silver and silver futures. He was gambling that the price would always go up, and he had enough control of the game, called leverage, to insure that it did.
The price rose from $6.22 per ounce in November of 1971 to $11.00 per ounce by the end of 1979. Nelson now controlled 1/3 of all the silver in the world, not sitting in various government vaults. But Nelson’s manipulations had not gone unnoticed. Tiffany took out a full page ad in the New York Times naming Nelson, and stating, “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.” By the end of December 1979 the price of silver had risen to over $50 an ounce. Five years after that first late night silver flight, the Nelson and his brother, had earned between two and four billion dollars in paper profit from the (by then) 100 million ounces of silver they owned and had future contracts to buy more.
But while Nelson had been buying silver futures “long”, betting that the price would go up, he was also squeezing the manufacturers who needed silver. They would have to pass their price increases to the hundreds of millions of customers who used their products, all in the name of higher profits for Nelson Baker Hunt, his family and friends. On January 7, 1980 the United States Commodity Trading Commission, which had oversight of the futures market in America, issued “Silver Rule 7” which increased the margin required for silver futures. Four days later the price of silver had fallen to $25 an ounce.
As the value of Nelson’s collateral began to fall, the brokerage house and banks which had made him loans to buy silver futures, now put the squeeze on Nelson. By March they issued a “margin call” of $100 million on those loans. In effect, Nelson would either have to make that payment, or fulfill the entire contract, and take delivery on and pay fpr $1.7 billion in silver.
Early on the morning of Thursday March 27th 1980, before the commodity markets opened, Nelson’s younger brother and partner, Herbert Hunt, placed a telephone call to the chairman of the Futures Commodity Trading Commission and asked him not to open the market. The reason given for the extraordinary request was that the Hunt brothers would not be meeting their margin calls that morning – “would not”, Hunt had said, not “could not.” As John Bloom noted in an article he wrote for the magazine “Texas Monthly” “Here was one of the leading spokesman for unbridled free enterprise in America, asking a federal regulator to close a market. If the federal government would not do that, then he simply wouldn’t pay up.”
That day, the silver markets did open. They simply collapsed. The price of silver futures fell to $10.20 an ounce. The day passed into history as “Silver Thursday”.
As the Federal government attempted a postmortem, they discovered that Nelson Hunt had assets of $1.5 billion, and now owed $2.43 billion. In addition he owned 6.5% of one of the brokerage houses which had loaned him money on the Silver Futures, a fact never revealed to the Security Exchanges Commission, which regulated those houses. That was illegal. And, the feds also discovered that Federal Reserve Chairman Paul Volcker had met with Nelson several times in an attempt to find funding to save him from bankruptcy. As Time Magazine noted, Volcker’s “continual monitoring of the situation was interpreted by bankers to mean that the Federal Reserve…favored some kind of bailout to keep the Hunts from going under…(which) showed that when big speculators lose millions, “telephone calls come to Paul Volcker for a quick fix.” Those banks put together a one billion dollar line of credit to save, not the Hunt brothers, but the brokerage house he had defaulted. Yes, it has all happened before.
The aftermath to Bunker Hunt’s silver manipulation is also informative. The banks eventually went after the Hunt’s seeking return of another billion dollars lost in their game. Like all good defendants, Nelson countersued, accusing the banks of lending him money because they knew he couldn’t possibly repay it. It was an absurd argument, but it allowed the Hunt’s fifteen lawyers to negotiate a reduction of the repayment. In 1998 a federal jury found both Nelson and Lamar (another brother) guilty of fraud and a conspiracy to monopolize the world's silver market. Nelson was banned for life from ever trading in futures again. And finally Nelson Bunker Hunt was forced into Chapter 11 bankruptcy.
The extended family remains wealthy and well connected. Nor was Nelson reduced to poverty, either. A reporter for the Dallas Morning News in March of 2009 found the 83 year old living “in relative modesty in a North Dallas house with his wife of 57 years”. Nelson insisted he had no regrets.
In better times, Nelson Baker Hunt said, “People who know how much they're worth, aren't usually worth that much.” Stephen Susman, one of Nelson’s lawyers, said, “These people are gamblers. If you’re a gambler, you take your shot.” Except, of course, these powerful folks always think they have the biggest gun in town.
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