Even the most virtuous financiers can be tempted by the idea of cornering a market. They imagine the fortune that could be made by controlling so much of a commodity that they can set the price of it. It is lust: an intriguing possibility, but so tricky to execute that it almost always ends in humiliation and financial disaster.
Corners are not created by speculative investors; quite the reverse. The intention of the 'splendid financiers' who entertain such thoughts is to brutalise a market and cow it into submission. It is a gross act of market manipulation, which is why there are rules against it.
This thought is provoked by the death at the age of 88 in Dallas, Texas, of Nelson Bunker Hunt. Bunker was the son of H.L. Hunt, a mean Texan oil man who was, for a time, the richest man in the world.
Bunker followed his daddy into oil, and in the 1960s discovered the world’s largest oilfield in Libya -- which made him, in turn, the richest man in the world. He owned a string of prize-winning racehorses, and magnificent collections of Greek pots and ancient coins, but he had a terrible thirst for money. In 1979 he realised he would make even more if he could corner the world’s market in silver.
It was the most audacious conspiracy since Jay Gould and James Fisk had tried to corner the gold market in 1869. It involved unprecedented credit lines for the Hunts of more than a billion dollars; and when even that was not enough Bunker won himself a place in books of quotations with the observation that “a billion dollars is not what it used to be”. I found Bunker’s lust so fascinating that I wrote a book about it.* It is a cautionary tale.
Early in 1980, I had been tipped off by a member of the Board of the Chicago Board of Trade that the Hunts, Bunker and his brother Herbert, were trying to corner silver. In January 1980, the silver price had touched $US50 an ounce and Bunker was confidently forecasting a price of $US85. The markets in New York and Chicago appeared to be mesmerised; the regulators in Washington DC seemed impotent.
Many distinguished political and economic commentators simply refused to believe that it was possible to corner a market as large as silver. But one thing they did not know was that Bunker had persuaded the Saudi royal family to boost prices further by buying silver on a stratospheric scale.
Having begun buying, in August 1979, the Hunts and their wealthy allies now controlled a hoard of 280,000 ounces of silver, valued at $US14 billion. As long as the regulators, who did not know about the Saudis, did not know the real size of the holding, it seemed to be within the rules.
By March 1980, the Commodity Exchange in New York, known as Comex, decided that the only way to stop the rot was to change the rules. The decision was controversial because Comex board members held positions in the silver market which could result in their losing hundreds of millions of dollars if the price went on rising.
In March a new rule was made, and it meant that trading in silver could now be for liquidation only. In other words, the Hunts could no longer buy, only sell. That bought the price plummeting, and, as it fell, the Hunts were liable for margin calls. Since their holdings were so large the falling price meant margin calls in the hundred of millions.
Bunker’s pre-occupation was now to borrow the money to retain their holding, rather than add to it. The cost of margins was causing such chaos that there were calls to close the market, but it was still open on March 27, 1980, when the price collapsed, falling as low as $US10 an ounce. This became known as “Silver Thursday”.
A frantic scramble ensued. If the Hunts were wiped out, big banks in Chicago and Philadelphia would be in danger of collapse. Investment banks such as Merrill Lynch were also heavily involved, as were Wall Street brokerage houses. The fallout had dreadful implications, but if a bailout were to take place, the Federal Reserve would need to relax, solely for the Hunts, stern rules about bank lending. The chairman Paul Volcker was no friend of the Hunts, but he felt he must acquiesce, reluctantly.
The Hunts mortgaged all their possessions -- the horses, the coins, everything down to a Rolex watch -- and were permitted to borrow more than a billion dollars to pay off their debts. Their personal losses totalled $US1.825bn. They were banned from the commodity markets forever.
Bunker became a reclusive figure in Dallas, eventually developing Alzheimer’s disease before his death on October 21, 2014, almost 35 years since Silver Thursday. He had had plenty of time to reflect on his experience. He never ceased to believe that he had been cheated by Comex’s decision to change the rules to stop him. No such things were supposed to happen to disturb the “rationality” of free markets. The lesson Bunker must have learned is that free markets are not, and cannot be, as free as free marketers would like.
* Stephen Fay is the author of The Great Silver Bubble (Hodder and Staughton), or, in the US, Beyond Greed (Viking).