From the March 2009 issue of Research Magazine • Subscribe!

The Silver Crisis

How the precious metal's turmoil in 1980 shook the financial world.

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

The Federal Reserve, under its recently installed Chairman Paul Volcker, took a dim view of banks making giant loans to support commodity speculation. A set of credit controls imposed in mid-March made such lending harder. And, if the Fed chief were really serious about curbing inflation, as some were beginning to suspect he was, then precious metals as an investment stood to lose much of their luster.

The price of silver resumed its decline in the first half of March, falling to around $20 by the midpoint of the month. The Hunts were now scrambling to raise money to meet their margin calls. Bunker flew around looking for cash from foreign banks, and tried to have bullion dealers issue silver-backed bonds. Nothing worked. On March 26, as silver fell to $16, the Hunts failed to pay over $100 million they owed their brokers. This was seriously bad news for various financial institutions, and none more so than Bache.

On March 27, Silver Thursday, a frenzied sell-off of the metal brought its price down into the $10 range. The turmoil spilled into other markets as well. The Dow, which had stood above 800 just days before, fell briefly below 730, and the SEC suspended trading in Bache. The next day, silver recovered only slightly, to $12. The Hunts would be unable to meet another round of margin calls. Plus, they owed over $400 million to Engelhard Minerals and Chemicals by Monday, for a silver deal set up earlier in the year.

That weekend, shaken bankers converged in Boca Raton, Fla., for a convention at which Volcker was scheduled to speak. Bunker showed up as well, seeking more bank credit at a meeting that lasted far into the night. Turned down, he agreed to pay Engelhard in oil, gas and silver properties. In early April, a consortium of banks made a $1.1 billion loan to the Hunts' family company, Placid Oil. Volcker approved this loan as a way to restore financial stability, and took some heat in Congress for giving the Hunts a bailout.

Silver Fallout

The Hunts' fortunes, however, took an enormous blow from the silver crisis. They and their collaborators are believed to have owned about 200 million ounces in silver assets in early 1980, which at the market's peak would have been worth about $10 billion. This stash may have been worth about $3 billion at the beginning of Silver Thursday -- and then dropped by another $1 billion over the course of that day.

The crisis also delivered a painful shock to Bache, which soon thereafter hired investment bankers to find a suitable purchaser. In March 1981, Prudential Insurance announced it would acquire the century-old investment firm. That move inspired Sandy Weill, head of Shearson Loeb Rhoades, to build up his own firm for the new era of giant financial conglomerates. Before long, he was in merger talks with American Express.

The Hunts spent most of the 1980s embroiled in litigation and investigations. By late in the decade, both Bunker and Herbert had been hit with multiple fines, declared bankruptcy and been banned from trading in American commodities markets. Sotheby's auctioned off Bunker's Greek vases and Herbert's Etruscan bronzes. The brothers remained wealthy individuals, however, with sizable assets in trusts set up under their father's estate. By the late 1990s Bunker had resumed his expensive sideline of buying and breeding racehorses

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Silver Lining at Tiffany's

One factor that helped break the speculative bubble in silver in March 1980 was the indignation of one man. He was Walter Hoving, head of the jewelry seller Tiffany & Co. A man of impeccable taste and imperious style, Hoving would place ads in the New York Times sketching out Tiffany's view of current events. He wrote these ads himself.

Hoving was appalled by the run-up in silver prices, seeing it as a crass triumph of financial over aesthetic considerations. Moreover, it posed a hardship on his customers and potentially a threat to Tiffany's business. So he put an ad in the newspaper stating that it was "unconscionable" that speculators were hoarding silver and driving prices up.

That ad appeared shortly before the Silver Thursday sell-off, contributing to the downward pressure on prices building at the time. Hoving also offered a 15 percent discount on silver merchandise, saying that Tiffany's had bought the metal at lower prices and could pass along the savings. After silver prices tumbled, Hoving increased the discount to 25 percent.

"I don't think people should buy silver as an investment," he told People magazine. They should buy it because it's beautiful or because they need an attractive present for their children or grandchildren." He had a story to further his point: "I know of a woman who inherited silver flatware from her grandmother. She in turn gave it to her granddaughter, who promptly went out and sold it. The old lady cut her right out of her will. It served the girl right.".

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Kenneth Silber is a senior editor at Research. His work on science, economics and history has appeared in a variety of publications, including The Wall Street Journal.

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