BUNKERED: THE GREAT CRASH OF 1980
Tom Dyson
"I was just trying to make some money."
That's what Bunker Hunt said to his sister having just
bankrupted one of America's richest families. It took him
just three months to lose a multi-billion dollar fortune.
The Hunt brothers will always be remembered as the fools
who dared to corner 'the market.' So notorious was the
episode, we first learned about it in a textbook at school.
To paraphrase a long story, they bought as much silver as
they could...silver futures, silver coins, silver ingots,
silver mines. By January 1, 1980, they had accumulated over
192 million ounces of the metal, valued at $35 an ounce.
On the other side of the trade, a whole group of Wall St.
types had gone short silver futures, and were getting
'squeezed.' These firms had a legal obligation to deliver
silver at predetermined prices to the counter-parties in
the trade. Only problem was, the counter-parties - the
Hunts and the other silver bulls - already controlled the
world's supply of silver.
As the old Wall St. adage goes:
He who sells what isn't his'n,
Must pay the price or go to prison.
The 'shorts' were trapped, so what did they do? They
changed the rules at the silver exchanges, limiting the
amount of silver any one individual could own and
increasing margin requirements. Stability was the official
justification. It's one of Wall St.'s favorite tricks...if
the rules don't work in your favor, you get 'em changed.
Whatever the case, the Hunts were forced to liquidate parts
of their position, and silver crashed...from over $50 at
its intra-day peak, to below $10 less than two months
later. The Hunts went bankrupt and Paul Volcker organized a
$1.1 billion dollar loan to "prevent the very fabric of
American finance from tearing apart."
That's the story we were told at school. It's also what you
read in the newspapers and in most books. But as we found
out, it's not necessarily the TRUE story.
Readers will be astonished to learn that the Rude Awakening
has inside connections to the story. You've heard us
mention Options Hotline editor, Steve Sarnoff. His Dad was
Paul Sarnoff, research chief of a large commodity house and
a major player in 1970s and 1980s commodity trading.
In fact, when researching this story at the local library,
we saw Paul Sarnoff quoted so frequently in the NY Times,
we couldn't afford to print all the references.
Sarnoff had first-hand knowledge of the entire episode, and
knew many of the principles personally. He even wrote a
book about the crash, called "Silver Bulls." You can buy it
on Amazon. We had Steve Sarnoff send us a copy.
On April 23, 1980, Sarnoff recalls, he happened to be the
speaker on precious metals at the Financial Analysts
federation in Houston, Texas. He was interviewed by the
Houston Chronicle and told them "Bunker Hunt is not a
villain, as the papers and magazines made him out to be."
"It was a personal pleasure" to tell them so, he commented
later. The Hunts were not motivated by greed in the
slightest, Sarnoff explains, but more by paranoia.
Think of it like this: Everyday his family was trading
innumerable gallons of a scarce natural resource -
petroleum - for paper dollars. Not a great trade if you're
worried about inflation. "Bunker and his family had the
ability to see twenty years down the road and realize that
the purchasing power of paper dollars could only go one
way: down," explains Sarnoff. "So it is understandable that
Bunker searched for a natural asset to replace the one sold
by the Hunts, which over a period of time would appreciate
in value despite inflation."
It's just the kind of logic we like - here at the Rude
Awakening regional branch in Baltimore - and we'd buy
silver for the same reason.
In fact, Bunker Hunt and his brother still own large
quantities of silver. How much? "If you can count it," says
Bunker, "it can't be very much."
In 1989, Bunker left bankruptcy with a net worth of between
$5 and $10 million, according to Forbes, though he still
owed the IRS more than $90 million to be paid over 15
years.
By 2000, he'd already paid it off...which made us wonder
what he's doing with his money, now he doesn't have to
divert 70% of his income to the IRS.
"Some of that [cash] is going into 4 legs," Forbes answers.
"Hattiesburg, a 3-year-old he bought for $20,000 in July
1999, has won $357,000. Asked about it, Hunt says, 'I don't
really know anything. I am just trying to win a few
races.'"
"...and make a little money," he might have added.
The Daily Reckoning
www.dailyreckoning.com
28 Jabuary 2005
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