Tuesday, September 2, 2008

The Story of The Hunt Brothers

The story of the Hunt Brothers is a fascinating tale. At one point in the story, around 1974, they rounded up the best marksman cowboys in a contest held at the Circle K Ranch in Texas. Then they hired these “Circle K Cowboys” as security to move a large amount of silver out of the country. The Hunts were worried about a 1930's style government confiscation of silver. So they chartered three Boeing 707's and the cowboys flew to Chicago and New York where they were met by convoy of armored trucks in the middle of the night. In all, 4 million ounces of silver was loaded onto the three planes and the cowboys accompanied the shipment to Zurich, Switzerland where they were met by another convoy of armored trucks. This secretive operation cost the Hunt Brothers $200,000.

In another interesting part of the story Bunker Hunt, one of the bothers, went to Tehran, Iran to try to talk the family of the Shah of Iran into investing in silver with them. But the Shah didn't know anything about the Hunt brothers and the meeting didn't go too well so the deal fell apart. Right after that, Bunker set up a meeting with King Faisal of Saudi Arabia to get him to be a partner in their silver buying company. But Faisal was assassinated just weeks before the meeting.

If you only read the American press accounts of the Hunt Brothers, they are made out to be criminals or evil rich men. True, they were billionaires. At one time in history, their father may have been the richest man in America. They were also evil oil men. And everyone knows that if you are obscenely rich, from Texas, and in oil, then of course you are a bad guy. Right?

Well I see the story a little differently. And I think there are some important lessons in this story that may shed some light on what could happen in our futures markets today.

First of all, the Hunt brothers started buying silver in the early 70's because they believed in hard money and they also believed that high rates of inflation were eating away at their considerable wealth. Why silver? Well at the time that they started buying and for the first three years of their buying, it was illegal for Americans to own gold. So silver was the next best thing. And for those of you who are fortunate enough to have a substantial amount of savings, you probably know the difficulties and costs of converting large amounts of paper money into hard money. So imagine if you were a billionaire trying to protect your wealth. You couldn't just go to your local coin shop with $10K per day. That would take 200,000 days or 547 years to convert the kind of cash they wanted to convert.

Secondly, you must understand the history of the Hunt family. You can read about it here. Their late father, HL Hunt was a poker player. He gambled both in cards and in business, and he was known for going “All In”. In fact, he even funded his early oil well ventures with money won at the tables. So the Hunt brothers inherited this “All In” mentality from their father which might explain why they tried to buy so much silver over the next decade.

So what happened to the Hunts?

Snippets from H.L. Hunt's Boys and the Circle K Cowboys by Larry LaBorde:

By the spring of 1974 silver rose to over $6/oz and rumors were flying that the Hunts were trying to corner the silver market. At the time annual production was 245 million oz and annual demand was 450 million oz. The Hunt brothers had just taken delivery of 55 million oz. The big question was how much silver was out in private hands?

only about 200 million ounces was available for delivery against futures contracts.

That same Spring Bunker appeared on the floor of COMEX in New York for the first time and declared that "almost anything is better than paper money" and "any fool can run a printing press".

The brothers quickly devised a swap where Great Western would trade 20 million oz of silver to the Philippines for sugar for their refineries; the Philippines would then trade the silver to the Saudis for oil.

the IMF killed the deal. The IMF would not recognize the silver as an asset of the Philippine government and would refuse other loans as a result. The deal fell through and the brothers sold the 20 million oz of silver the next year. Once again Bunker felt thwarted by the Eastern establishment.

The brothers then turned to another commodities play and invested in soybeans. They were a little short on cash again so they used their silver as collateral. As usual the brothers went into the market in a big way. The legal limit for a single investor is 3 million bushels. The brothers brought in family members and had a total stake of 22 million bushels. The CFTC cried foul and filed suit against the Hunts.

They were fast gaining a reputation of playing fast and loose with the rules concerning commodities trading.By the late 1970's the Hunt first family's fortune was estimated to be in the range of 6 to 8 billion dollars.

In 1978 John Connally introduced Bunker to a Saudi sheik at the Mayflower hotel in Washington.

A year later International Metal Investment was incorporated in Bermuda between Bunker, Herbert and two Saudi sheiks. It was speculated that the two sheiks were fronting for members of the Saudi royal family.

In the summer of 1979 the Hunt brothers started buying silver through the International Metal Investment group along with their Saudi partners. 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.

The COMEX and the CBOT started to panic. In late 1979 the warehouses of the two exchanges only held 120 million oz of silver and that amount was traded in October alone.

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.

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. . The CFTC promptly backed up the ruling. On January 17th silver hit $50/oz, Bunker had continued to buy.

On January 21st the COMEX announced that it was suspending trading in silver.

By March 14th silver was down to $21/oz.

Finally on March 25th of 1980 the Hunt brothers ran out of cash. Bunker called Herbert and simply said, "Shut it down". Herbert promptly told his broker the following morning that they could not meet their $135 million dollar margin call that day.The Hunt's brokers promptly sold $100 million dollars worth of silver that day

When it was all over they owed $1.5 billion dollars.

After the smoke cleared it appeared that the drama was not just a one sided manipulation by the Hunts. The shorts and the Eastern establishment had just as much at stake as the Hunts. By the mid 1980's silver was bumping $17/oz again.

In 1988 Bunker filed for personal bankruptcy. In 1989 he left bankruptcy with a net worth of $5 to 10 million dollars and a debt to the IRS of $90 million dollars to be repaid in 15 years. Bunker's trusts, set up by his father H.L. Hunt, are currently valued at $200 million dollars. Last year the payments to the IRS finally stopped.


So what are the lessons we can learn from the Hunt Brothers (other than the obvious, don't buy on margin)? I will attempt to address this question in my next post. And I will look at those lessons in light of the writings of Another. One question I will ask myself is what would the Hunt Brothers have done differently if they had had the advantage of reading Another? And how would things have turned out then?

I encourage you to read the full story from the above link. And also read this article that appeared in Time Magazine right after the Hunt's appeared before Congress in 1980.

Bunker's Busted Silver Bubble – Time

From the article:
As the brothers told the tale, they were just worrying, like most Americans, about the worsening economy. As Bunker Hunt has reportedly said, "A billion dollars is not what it used to be." Inflation had destroyed their faith in the dollar, so early in 1979 they began putting even more of their wealth into a "harder" currency: silver.

"At no time," said Herbert solemnly, "did I attempt to corner, squeeze or manipulate the silver market."

In some ways this is simply the sad tale of a misguided hard money advocate who just happened to be a billionaire.

FOFOA

11 comments:

Randy said...

Very Informative post FOFOA

FOFOA said...

Thanks Randy.

Dave said...

It's a neat story about the Hunts, but the figures are a little suspect. 40 million ounces is 1,250 tons. My guess is that a 707 could carry maybe 50 tons (100,000 pounds) of cargo. It would thus take 25 planes to carry that much cargo. Three plans would have to carry more than 400 tons each! No plane in existence can carry that much.

Dave said...

Oops, my own figures are suspect. I forgot that we're talking about Troy ounces. So that's actually 1,371 tons of silver, which is 457 tons per plane.

FOFOA said...

Hi Dave,

That's a great catch. I usually catch things like that so I'm a little embarrassed.

I have an Aircraft Encyclopedia and I found a cargo version of the 707 which can carry an absolute maximum weight of 169,205 lbs.

So if you reduce the Hunt's silver by a factor of 10, to 4 million ounces, it would fit nicely in 3 planes along with seats and a few cowboys with guns.

I have written an email to the writer of the original story asking about the origin of those numbers.

Thanks.

FOFOA

Justin_n_IL said...

LOL.... You won't believe this FOFOA. HL Hunt grew up just a few miles as in 3 or 4 from where I grew up and live. I've heard old timers from around here talk about his gambling abilities. I live east of Ramsey in the country side. Just a little bit past that is an area called Carson township. It's not a town though. It's just folks living in the country side amongst the trees and fields.

FOFOA said...

Dave,
I received a response and will now change it to 4 million in the post. So thanks. Here's the response I receved:

I believe you must be correct. You are the second person to catch the typo. But as we say in the South, “Never let the facts get in the way of a good story.”

Thank you for your comments. I hope you enjoyed my little story.

Cheers,
Larry LaBorde

FOFOA said...

Justin,
Wow. That actually sounds like a great place to be from and a great place to live. Any Hunts still there?

Justin_n_IL said...

Still a pool of Hunts in the area. I graduated with one as a matter of fact.

Justin_n_IL said...

P.S.

It is a great place to live. Even more so when the coming pooh hits the fan.

D Bailey said...

I used to lease 707's, and the payload was about 20 tons

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