356 PA R T I V FYI The Management of Financial Institutions 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 US$6 an ounce to over US$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 US$10 an ounce The losses to the Hunts were estimated to be in excess of US$1 billion, and they soon found themselves in financial difficulty They had to go into debt to the tune of US$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 2002 Dow Jones and Company, Inc All rights reserved worldwide this means is that at the end of every trading day, the change in the value of the futures contract is added to or subtracted from the margin account Suppose that after buying the Canada bond contract at a price of 115 on Wednesday morning, its closing price at the end of the day, the settlement price, falls to 114 You now have a loss of point, or $1000, on the contract, and the seller who sold you the contract has a gain of point, or $1000 The $1000 gain is added to the seller s margin account, making a total of $3000 in that account, and the $1000 loss is subtracted from your account, so you now only have $1000 in your account If the amount in this margin account falls below the maintenance margin requirement (which can be the same as the initial requirement but is usually a little less), the trader is required to add money to the account For example, if the maintenance margin requirement is also $2000, you would have to add $1000 to your account to bring it up to $2000 Margin requirements and marking to market make it far less likely that a trader will default on a contract, thus protecting the futures exchange from losses