Thursday, July 30, 2009

Case Study : Finance

The Hunt Brothers and the Silver Crash

In early 1979, two Texas billionaires, W. Herbert Hunt and his brother, Nelson Bunker Hunt, decided that they were going to get into the silver market in a big way. Herbert stated his reasoning for purchasing silver as follows: "I became convinced that the economy of the United States was in a weakening condition. This reinforced my belief that investment in precious metals was wise . . . because of rampant inflation." Although the Hunts' stated reason for purchasing silver was that it was a good investment, others felt that their real motive was to establish a corner in the silver market. Along with other associates, several of them from the Saudi royal family, the Hunts purchased close to 300 million ounces of silver in the form of either actual bullion or silver futures contracts. The result was that the price of silver rose from $6 an ounce to over $50 an ounce by January 1980.

Once the regulators and the futures exchanges got wind of what the Hunts were up to, they decided to take action to eliminate the possibility of a corner by limiting to 2000 the number of contracts that any single trader could hold. This limit, which was equivalent to 10 million ounces, was only a small fraction of what the Hunts were holding, and so they were forced to sell. The silver market collapsed soon afterward, with the price of silver declining back to below $10 an ounce. The losses to the Hunts were estimated to be in excess of $1 billion, and they soon found themselves in financial difficulty. They had to go into debt to the tune of $1.1 billion, mortgaging not only the family's holdings in the Placid Oil Company but also 75,000 head of cattle, a stable of thoroughbred horses, paintings, jewellery, and even such mundane items as irrigation pumps and lawn mowers. Eventually both Hunt brothers were forced into declaring personal bankruptcy, earning them the dubious distinction of declaring the largest personal bankruptcies ever in the United States.

Nelson and Herbert Hunt paid a heavy price for their excursion into the silver market, but at least Nelson retained his sense of humour. When asked right after the collapse of the silver market how he felt about his losses, he said, "A billion dollars isn't what it used to be."

Source: G. Christian Hill, "Dynasty's Decline: The Current Question About the Hunts of Dallas: How Poor Are They?" Wall Street Journal, November 14, 1984, p. C28. Republished by permission of Dow Jones, Inc. Via Copyright Clearance Center, Inc. 1984 Dow Jones and Company, Inc. All Rights Reserved Worldwide.


Shantanu Biswas said...

For every action there is an equal and opposite reaction. As can be seen here, the very purpose of buying Silver was not met while the prices kept on increasing. They forgot to count in regulatory risk. The worst problem in buying too much of a commodity is being the very market yourself. You sell the market falls...u might be sitting on a pot of gold but as soon as you touch it... its no more gold... something like we have heard of King Midas in fairy tales. What they might have done is by asking their close associates to hold the silver forward contracts due to new regulation. They could have also tried to sell-off the contracts in other markets which were insulated to US markets. It is successful only till the time when it comes into the recognition of the market.

Manoj said...

It seems from the price difference mentioned here that it was a part of unstated strategy of Herbert Hunt to stock in such large quantity so that he could inflate the prices to such an extent that he could make maximum out of it. In such a case he could have already opened multiple accounts in his associates names and then could distribute the contracts in such a way that it is untraceable. It is something obvious that whenever market goes up or down so dramatically, regulators always looks at it with a suspicious eye, and probe and bring out some rule to stabilize it. what could have been the alternate solution was that they could have opened multiple accounts with other people's detail when the regulation was passed to reduce the single trader holding and then sell them at a later date gradually.

Akhi said...

The hunts got the right result of the mischief they had planned to play by trying to corner the silver market.
every bad intention has to meet a sad end so did the Hunts.
but just in case they had acted smartly they could have escaped.
they could have simply bought silver through others.... means they could have bought actual bullion by telling some of their close associates to buy on their behalf.....
now when their intentions were not good they could have smuggled out silver out of America and sold it in markets where their were less restrictions.......