Silver Thursday
Encyclopedia
Silver Thursday was an event that occurred in the silver
commodity markets on Thursday, 27 March 1980. A steep fall in silver
prices led to panic on commodity and futures exchange
s.
and William Herbert Hunt, the sons of Texas oil billionaire Haroldson Lafayette Hunt, Jr., had for some time been attempting to corner the market in silver. In 1979, the price for silver jumped from $6/oz to a record high of $48.70/oz. The brothers were estimated to hold one third of the entire world supply of silver (other than that held by governments). The situation for other prospective purchasers of silver was so dire that the jeweller Tiffany's
took out a full page ad in the New York Times, condemning the Hunt Brothers and stating "We think it is unconscionable for anyone to hoard several billion, yes billion, dollars worth of silver and thus drive the price up so high that others must pay artificially high prices for articles made of silver".
But on January 7, 1980, in response to the Hunt's accumulation, the exchange rules regarding leverage
were changed, when COMEX
adopted "Silver Rule 7" placing heavy restrictions on the purchase of commodities on margin
. The Hunt brothers had borrowed heavily to finance their purchases, and as the price began to fall again, dropping over 50% in just four days, they were unable to meet their obligations, causing panic in the markets.
, later Prudential-Bache Securities and Prudential Securities
. When the price of silver dropped below their minimum margin
requirement, they were issued a margin call
for $100 million. The Hunts were unable to meet the margin call, and, with the brothers facing a potential $1.7 billion loss, the ensuing panic was felt in the financial markets in general, as well as commodities and futures. Many government officials feared that if the Hunts were unable to meet their debts, some large Wall Street brokerage firms and banks might collapse.
To save the situation, a consortium of US banks provided a $1.1 billion line of credit to the brothers which allowed them to pay Bache which, in turn, survived the ordeal. The U.S. Securities and Exchange Commission (SEC) later launched an investigation into the Hunt brothers, who had failed to disclose that they in fact held a 6.5% stake in Bache.
In 1988, the brothers were found responsible for civil charges of conspiracy to corner the market in silver. They were ordered to pay $134 million in compensation to a Peruvian mineral company that had lost money as a result of their actions. This forced the brothers to declare bankruptcy
, in one of the biggest such filings in Texas history.
Silver
Silver is a metallic chemical element with the chemical symbol Ag and atomic number 47. A soft, white, lustrous transition metal, it has the highest electrical conductivity of any element and the highest thermal conductivity of any metal...
commodity markets on Thursday, 27 March 1980. A steep fall in silver
Silver
Silver is a metallic chemical element with the chemical symbol Ag and atomic number 47. A soft, white, lustrous transition metal, it has the highest electrical conductivity of any element and the highest thermal conductivity of any metal...
prices led to panic on commodity and futures exchange
Futures exchange
A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. These types of...
s.
Background
Nelson Bunker HuntNelson Bunker Hunt
Nelson Bunker Hunt is an American oil company executive. He is best known as a former billionaire whose fortune collapsed after he and his brother William Herbert Hunt tried but failed to corner the world market in silver. He is also a successful thoroughbred horse breeder.-Personal:Hunt was born...
and William Herbert Hunt, the sons of Texas oil billionaire Haroldson Lafayette Hunt, Jr., had for some time been attempting to corner the market in silver. In 1979, the price for silver jumped from $6/oz to a record high of $48.70/oz. The brothers were estimated to hold one third of the entire world supply of silver (other than that held by governments). The situation for other prospective purchasers of silver was so dire that the jeweller Tiffany's
Tiffany's
Tiffany's Restaurants, Inc. is a restaurant chain with 6 locations in New Jersey. Its flagship location was opened at Union, New Jersey in 1982 as Tiffany Gardens.-Reviews:...
took out a full page ad in the New York Times, condemning the Hunt Brothers and stating "We think it is unconscionable for anyone to hoard several billion, yes billion, dollars worth of silver and thus drive the price up so high that others must pay artificially high prices for articles made of silver".
But on January 7, 1980, in response to the Hunt's accumulation, the exchange rules regarding leverage
Leverage (finance)
In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...
were changed, when COMEX
New York Mercantile Exchange
The New York Mercantile Exchange is the world's largest physical commodity futures exchange. It is located at One North End Avenue in the World Financial Center in the Battery Park City section of Manhattan, New York City...
adopted "Silver Rule 7" placing heavy restrictions on the purchase of commodities on margin
Margin (finance)
In finance, a margin is collateral that the holder of a financial instrument has to deposit to cover some or all of the credit risk of their counterparty...
. The Hunt brothers had borrowed heavily to finance their purchases, and as the price began to fall again, dropping over 50% in just four days, they were unable to meet their obligations, causing panic in the markets.
Silver Thursday
The Hunt brothers had invested heavily in futures contracts through several brokers, including the brokerage firm Bache Halsey Stuart ShieldsHalsey, Stuart & Co.
Halsey, Stuart was a Chicago-based investment bank founded in 1911.In 1952, the firm made headlines when its managing partner, Harold L. Stuart, testified before the U.S. Supreme Court for the government's antitrust case against Morgan Stanley and 16 other major investment banks...
, later Prudential-Bache Securities and Prudential Securities
Prudential Securities
Prudential Securities was the financial services arm of the insurer, Prudential Financial. In 2003, Prudential Securities was merged into Wachovia Securities, a division of Wachovia Bank.-History:...
. When the price of silver dropped below their minimum margin
Margin (finance)
In finance, a margin is collateral that the holder of a financial instrument has to deposit to cover some or all of the credit risk of their counterparty...
requirement, they were issued a margin call
Margin Call
Margin Call is a 2011 American independent drama film, written and directed by J.C. Chandor. The film has an ensemble cast that includes Kevin Spacey, Demi Moore, Paul Bettany, Jeremy Irons, Zachary Quinto, Stanley Tucci, Simon Baker, and Penn Badgley...
for $100 million. The Hunts were unable to meet the margin call, and, with the brothers facing a potential $1.7 billion loss, the ensuing panic was felt in the financial markets in general, as well as commodities and futures. Many government officials feared that if the Hunts were unable to meet their debts, some large Wall Street brokerage firms and banks might collapse.
To save the situation, a consortium of US banks provided a $1.1 billion line of credit to the brothers which allowed them to pay Bache which, in turn, survived the ordeal. The U.S. Securities and Exchange Commission (SEC) later launched an investigation into the Hunt brothers, who had failed to disclose that they in fact held a 6.5% stake in Bache.
Aftermath
The Hunts lost over a billion dollars through this incident but the family fortunes survived. They pledged most of their assets, including their stake in Placid Oil, as collateral for the rescue loan package they obtained. However the value of their assets (mainly holdings in oil, sugar and real estate) declined steadily during the 1980s, and their estimated net wealth declined from $5 billion in 1980 to less than $1 billion in 1988.In 1988, the brothers were found responsible for civil charges of conspiracy to corner the market in silver. They were ordered to pay $134 million in compensation to a Peruvian mineral company that had lost money as a result of their actions. This forced the brothers to declare bankruptcy
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
, in one of the biggest such filings in Texas history.
See also
- Silver as an investmentSilver as an investmentSilver, like other precious metals, may be used as an investment. For more than four thousand years, silver has been regarded as a form of money and store of value. However, since the end of the silver standard, silver has lost its role as legal tender in many developed countries such as the...
- Sumitomo copper affairSumitomo copper affairThe Sumitomo copper affair refers to a metal trading scandal in 1995 involving Yasuo Hamanaka, the chief copper trader of the Japanese trading house Sumitomo Corporation...
- State Reserves Bureau copper scandalState Reserves Bureau copper scandalThe State Reserves Bureau Copper Scandal refers to a loss of approximately $200 million by a single trader for the State Reserve Bureau of China at the London Metal Exchange in 2005...
- List of trading losses
Further reading
- Fay, Stephen (1982). Great Silver Bubble. ISBN 978-0-3403-3033-3
- Jerry W. Markham (2002) A financial history of the United States: From the age of derivatives into the new millennium : (1970 - 2001), , volume 3, M.E. Sharpe, ISBN 9780765607300