Well, I had to do a little indexing to remember the details. Grieder fortunately devoted several pages to the subject. Here is his account of what happened and why the Fed had to bail out the Bunt brothers:
In discussing the general trend of banks to finance speculative ventures and Paul Volcker's warnings about the threat this posed..
"Edward L. Palmer, chairman of Citibank's executive committee, assured the WSJ: "The marginal and speculative borrower has gone to Miami to sit in the sun." In subsequent weeks, Citibank would lend a total of $115 million to Texas oilman Nelson Bunker Hunt, his brother Herbert and their commodities firm, while the Hunts were furiously buying up silver as the price skyrocketed. The Hunt brothers' secret goal was to corner the world market in silver and thereby control the price--an effective monopoly that would driven other to ruin.
US banks and brokerages, despite Volcker's warnings, joined foreign banks in financing one of the most audacious speculative gambles in history. Silver sold for $10.61 an ounce in August(1979), and by late December the price had nearly tripled. In January, it would peak at $52 an ounce. The price was driven up by inflation, but also by the Hunt brothers' global purchases. Eventually, they would acquire more than 129 million ounces of silver. The Hunts, though fabulously wealthy oilmen from Dallas, bought most of their silver hoard with borrowed money.
In addition to Citibank, First National of Chicago lent them $70 million directly and First National of Dallas lent $35 million. Another $450 million was lent by First National of Dallas and twenty-nine other banks to the Hunt's oil company, which in turn, lent huge sums to the brothers for their silver buying. Major banks were also involved less directly as providers of credit to the brokerage firms that allowed the Hunts to buy vast quantities "on margin". The banks lent to the brokers and the brokers lent to the Hunts. Bache Halsey Stuart, which nearly went bankrupt when the silver bubble eventually burst and the Hunts could not pay their debts, lent a total of $233 million for the brothers' silver buying, backed by bank credit from First National of Chicago, Bankers Trust and Irving Trust, among others. E.F. Hutton put up $104 million, Merrill Lynch lent $492 million........
2 paragraphs later.... (discussion of how banks had assured the Fed they were not involved in speculative lending)
"Volcker was called out of a Board of Governors' meeting on March 26 by an urgent call. A desperate executive of Bache, one of the nation's leading brokerages, telephoned from New York, pleading for intervention by the Fed. Bache, he told Volcker, was about to be bankrupted by falling silver prices. As the value of their holdings plummeted, the Hunt's could not meet the "margin calls," the requirement to put up more cash against their outstanding loans. Bache would be wiped out if something didn't happen, Volcker was informed, and a number of major banks were going to suffer huge losses too.
Afterward, Federal Reserve officials shrugged off the fact that their warnings to the banks had been ignored. "We are under no delusions as to what our persuasion will do against the forces of the market." Governor Wallich explained. "One individual bank may say to us, 'We would like to go along with you and not make these loans, but everyone else in the market is doing it so we don't see why we shouldn't.'" The Federal Reserve, however, easily could have prevented the silver lending and other types of speculative financing by the commercial banks--if it had been willing to impose real controls on the banks loan portfolios. Instead, the central bank relied on hortatory messages and voluntary compliance. The banks, for their part, went ahead and lent hundreds of millions for the Hunt brother' silver gamble.
Now we moved forward to pg 191 where the Feds solution is explained (they could have bailed out the banks directly but that would have been politically awkward (like bailing out LTCM would have been).
"Instead Volcker gave his blessing to another solution. that weekend, quite by coincidence, the Association of Reserve City Banksers was gathering in Boca Raton, Florida, bringing together the leaders of all the vulnerable banks and others who might help out. Volcker attended too. On Sunday evening, the bankers held an all-night bargaining session with the Hunts and Engelhard representatives(note: The Hunts had bought futures contracts for silver totaling 19 million ounces from Engelhard. After silver collapsed, delivery was due on March 31, and Engelhard was demanding cash for its silver-- $665 million... now back to our story. RR). The negotiations led ultimately to the terms for a private bailout-- a new loan of $1.1 billion from thirteen banks which would extinquish the Hunt's old debts, give them the means to settle with Engelhard and stretch out their obligations over ten years."
(Then it goes on to discuss how Volcker "blessed" the deal)
"Technically speaking, the Fed did not bail out the Hunt brothers and the banks. No government money was at stake. But, practically speaking, Volcker saved them by granting a huge exception to the rules he had just imposed on the American economy."
Now ole 49r, I'm not doubting your word about how the Hunt's had two put contracts on silver for their every long, but I would have to believe that given the losses that these banks suffered, someone would have had to speak up and mention the assets they had as a result of those puts.
I provided this account... I hope you will take the time to type up the documentation that corroborates your perspective on the event.
Regards,
Ron |
