Hunt Brothers demanded physical delivery too

"A billion dollars isn't what it used to be." --Bunker Hunt on the Sunday after Black Thursday when confronted with a significant payment demand from Engelhard.

If you want to know what happens when multiple long positions demand physical delivery of a commodity all at once, you need look no further than the Hunt brothers silver saga of 1979-1980. They did nothing illegal, the Chicago Board of Trade (CBOT) and COMEX changed the rules in the middle of the game, the Commodity Futures Trading Commission (CFTC) implemented new regulations, and the Hunts were bankrupted, unjustly. All they really did was simply request the delivery of the physical metal for which they held valid, legal contracts. The shorts were unable to meet the delivery at any price because enough deliverable silver did not exist - a classic short squeeze and the panic was on.

This is their story. In conjunction with wealthy investment partners from Saudi Arabia, the Hunt brothers, Bunker and Herbert initially, amassed a legendary silver hoard that had supported itself with ever-increasing prices propelled along the way by their continued margin buying on the exchanges.

Beginning in 1973 and continuing into 1974, they slowly began purchasing silver futures contracts totaling 55 million oz and then took physical delivery of all the contracts. Since Bunker was concerned with impending inflation and the potential confiscation of precious metals following Nixon's closing of the gold window, he arranged for transfer of the bullion to Switzerland. Larry LaBorde summed it up best:

"Meanwhile, back at the ranch, (the Circle K Ranch in Texas) brother in law Randy Kreiling and his brother Tilmon held a shooting contest amongst the cowboys to find the best marksmen. The dozen best marksmen were hired for a special assignment to ride shotgun on one of the largest private silver transfers in history. The Circle K cowboys flew on 3 specially chartered 707 jets to Chicago and New York where they were met by a convoy of armored trucks during the middle of the night. Forty million oz of silver was loaded onto the planes and they immediately flew to Zurich where they were met by another convoy of armored trucks. The cowboys loaded the trucks and silver was dispersed to six different storage locations in Switzerland. The transfer cost Bunker and Herbert $200,000. The storage costs for the 40 million oz in Switzerland and the 15 million oz still in the US amounted to $3 million/year." (from "H.L. Hunt's Boys and the Circle K Cowboys", January 26, 2004)

By the spring of 1974, the markets started to get worried about the amount of silver out in private hands, because annual demand was 450 million oz but annual production was just 245 million oz. Of the estimated 700 million oz. above ground, only 200 million of that was deliverable against futures contracts. Silver had risen to above $6 per oz during this time and then settled back to the $3 to $4 range for several years.

The Arabian Connection

Then, in 1978, a significant development occurred. John Connally, former governor of Texas, introduced Bunker to a Saudi sheik at the Mayflower hotel in Washington. Sheik Khalid bin Mahfouz was staying at the same hotel as Bunker and John Connally, and they met in bin Mahfouz's suite, which consisted of the entire hotel floor, complete with 30 or 40 security guards. The goal was to get the Hunts in the front door with these very wealthy Arab sheikhs, and the Hunts would sell the Saudis on the value of silver over the worthless U.S. dollar with the hope of enlisting them for coordinated joint purchases.

Khalid bin Mahfouz became intrigued, but since he had close ties to the Saudi royal family, Crown Prince Fahd and Prince Abdullah, and since the plan involved the potential elevation of silver to reserve asset status within the Saudi Arabian Monetary Authority, bin Mahfouz wished to be discreet. The operation was to be organized so that his name would not appear in public. Then on July 15, 1979, the company was formally established in Bermuda and registered under the name International Metals Investment Company, or IMIC for short. The stated object was dealing in precious metals and its shares were divided equally between Nelson Bunker Hunt, W. Herbert Hunt, and the two designated Saudi Arabian money men, Ali bin Mussalem and Mohammed Aboud al-Amoudi. The primary silver accumulation would now occur through the IMIC vehicle and two other well-connected middlemen, the Lebanese Naji Nahas and the Palestinian Mahmoud Fustok.

The Accumulation Phase

On August 1, 1979, a new name showed up on the CFTC's daily reports of silver purchasers. The buyer was International Metals Investment Company through an account at Merrill Lynch's Dallas office opened by Herbert Hunt just seven days earlier. Other buying syndicates, including Naji Nahas and the Banque Populaire Suisse, with big money behind them entered the silver market in the first week of August without being noticed.

In all during that period, over 43 million oz of silver contracts were purchased through the Comex and the CBOT with delivery to be taken that fall. In the fall of 1979 the silver price doubled from $8 to $16/oz in only two months and the COMEX and the CBOT started to panic. The warehouses of the two exchanges only held 120 million oz of silver and that amount was traded in October alone. Many buyers, including the Hunts through their International Metal Investment Company were taking delivery on all their contracts. As disorienting as the price escalation was, even more of a concern was the exact identity of IMIC since the CFTC only had a post-office box number located in Hamilton, Bermuda.

The Hunts continued to accumulate silver throughout 1979. Again from Larry LaBorde:

"Late in 1979 the CBOT changed the rules and stated that no investor could hold over 3 million oz of silver contracts and the margin requirement were raised. All contracts over 3 million oz per trader must be liquidated by February of 1980. Bunker accused the COMEX and CBOT board members of having a financial interest in the silver market themselves. Investigations later found that many had substantial silver short positions. Bunker knew that a shortage now existed or they would not be screaming so loudly. He bought even more. The price on the last day of 1979 was $34.45/oz. At this point Bunker and Herbert held 40 million oz in Switzerland and 90 million oz of bullion they jointly owned through International Metals Investment Company. In addition to all that, IMIC had contracts on another 90 million oz due for delivery that March from the Comex, bringing the grand total to 235 million oz. The younger brother, Lamar, had even entered the arena and had taken a $300 million dollar, 10 million oz, silver position by the end of 1979."

Changing the Rules

In early January, it became evident that COMEX intended to change the rules of the game. And then finally on January 7th of 1980, the COMEX changed their rules to only allow 10 million/oz of contracts per trader and that all contracts over that amount must be liquidated before February 18th. Of course, the CFTC promptly backed up the ruling. The escape hatch for the Hunts and some of the other large longs was simply to convert their futures contracts into physicals, lease the physicals abroad at interest rates, which were tax deductions, and shift their future forward buying to the London Metal Exchange. On January 17th silver hit $50/oz, Bunker had continued to buy. At that point in time the Hunt's silver position was worth $4.5 billion dollars bringing their profits in silver to $3.5 billion dollars. The chart below illustrates the great Silver Spike of early 1980.

The "Silver Spike"

On January 21st, the COMEX announced that it was suspending trading in silver and that they would only accept liquidation orders. Predictably with trading suspended and only liquidation orders going through, the price of silver dropped $10/oz and stayed around $39/oz until the end of January. Long lines formed outside of metal dealer shops and scrap silver, old silver coin collections, and family silverware came into the market - about 22 million oz in all. In early February the Hunt group took delivery of another 26 million oz from Chicago. The Hunt's North Sea oil through Placid Oil was coming on line and generating $200 million /year from that venture alone. There was talk of a takeover of Texaco Oil. Bunker was also talking to other Middle Eastern rulers about putting together another silver buying group.

Forever the optimist, Bunker faithfully believed that he could maintain the silver spike if only he had cooperative fresh buying. From Larry LaBorde:

"By March 14th silver was down to $21/oz, Paul Volcker had raised interest rates, and the dollar had firmed up. International Metals still held 60 million oz of futures contracts. Their margin calls on those contracts amounted to $10 million dollars a day! Bunker still believed the price would go back up if only he could promote more buying. He scrambled around Europe looking for a buying partner but the more the price dropped the harder it was to borrow more money against his silver holdings to buy even more silver to hold up the price."

The Hunt's brokerage connection in New York and London, Bache Halsey Stuart Shields, sent the Hunts a margin call for $100 million on March 26th of 1980. Since the Hunts had also purchased vast quantities of Bache stock (more than 5% of issued and outstanding shares), they were technically "insiders" required to adhere to the rules of only fractional stock selling permitted on a monthly basis. With their Bache stock illiquid and silver in free fall, the Hunt brothers had run out of cash. Bunker was in Paris that day so he called Herbert and simply said, "Shut it down". Herbert promptly told his broker the following morning that they could not meet their total $135 million dollar margin call.

The Hunt's brokers immediately sold $100 million dollars worth of silver on that day. Their account only had $90 million dollars worth of equity and they were expected to lose all that the next day. The CFTC chairman, the Chairman of the Federal Reserve, and the US Treasury Secretary began an around the clock silver monitoring session. Whoever could have foreseen the day when a change in the price of silver would cause tremors through the entire stock market and adversely affect the reputations of leading brokerage and commodity firms. Wall Street was on edge.

Silver Thursday

On March 27th (Silver Thursday), silver opened at $15.80 and closed at $10.80. The stock market crashed on rumors of Hunt Brother liquidations of stocks in order to cover his silver losses, but the market then rallied to close roughly at the same level. The Hunt's bullion purchases were all averaged around $10/oz, but their futures contracts were purchased at or about $35/oz. When it was all over the Hunts owed approximately $1.5 billion dollars.

Fearing a financial disaster, Federal Reserve Chairman Paul Volker gave approval for an emergency bailout plan for the brothers and a group of banks agreed to loan the brothers $1.1 billion with the family posting $8 billion in collateral. With this final act the brother's older sister, Margaret, finally put her foot down and demanded to know just what Bunker had intended to accomplish in the silver market? Bunker sheepishly replied, "I was just trying to make some money" (see Larry LaBorde).

Nelson Bunker Hunt filed for personal bankruptcy in September of 1988. Within one year he exited bankruptcy with a net worth of $5 to 10 million dollars and a debt to the IRS of $90 million dollars which had to be repaid in 15 years. In a 1989 settlement with the United States Commodity Futures Trading Commission, Nelson Bunker Hunt was also fined US$10 million and banned from trading in the commodity markets as a result of charges of conspiring to manipulate the silver market stemming from his attempt to corner the market in silver. Bunker's trusts, set up by his father H.L. Hunt, were valued at approximately $200 million dollars. The payments to the IRS finally stopped in 2003.

For further reading:
"The Art of Silver Manipulation", Ed Zimmer, November 13, 2009
"Once world's richest man, Bunker Hunt has 'no regrets' 29 years after silver collapse", Doug J. Swanson, The Dallas Morning News , March 22, 2009
"Let's Be Hunts", David Bond, August 17, 2008
"H.L. Hunt's Boys and the Circle K Cowboys", Larry LaBorde, January 26, 2004
"Hunts are Ruled Part of a Scheme to Control Silver", The New York Times, August 21, 1988
"Trial of Hunt Brothers In Silver Case Begins", The New York Times, February 25, 1988
"The Hunt Brothers; Battling a Billion-Dollar Debt", The New York Times, September 27, 1987
Beyond Greed: The Hunt Family's Bold Attempt to Corner the Silver Market, Stephen Fay, 1982
Silver Bulls: The Great Silver Boom and Bust, Paul Sarnoff, 1980
"Silverfinger: The Hunt Brothers Story", Harry Hurt III, Playboy, September 1980
"Bunker's Busted Silver Bubble", Time, May 12, 1980
"He Has a Passion for Silver", Time, April 7, 1980