The Story of Silver
Page 37
67. The spot price declined to $17.40 on March 17, for a log return of −18.8%.
68. “Prices Suffer Broad, Steep Decline Triggered by Early Drop in Europe,” Wall Street Journal, March 18, 1980, p. 36.
69. This quote and the next are from “Reserve Board, in New Attack on Inflation, Is Stressing Restraint on Debt Rather Than Higher Interest Rates,” Wall Street Journal, March 17, 1980, p. 2.
70. SEC, Silver Crisis of 1980, p. 39.
71. In 1982, the first year Forbes published its list of wealthiest Americans, there were only 13 billionaires in the world. See http://www.forbes.com/sites/seankilachand/2012/09/20/the-forbes-400-hall-of-fame-36-members-of-our-debut-issue-still-in-ranks/.
72. Williams, Manipulation on Trial, p. 47.
73. SEC, Silver Crisis of 1980, p. 156.
74. Ibid., p. 153.
75. Fay, Beyond Greed, p. 200.
76. Ibid., pp. 201–10.
77. Ibid., p. 98.
78. SEC, Silver Crisis of 1980, p. 83n72.
79. Ibid.
80. The spot price of gold on March 25, 1980, was $496.50. The peak on January 18, 1980, was $850, or a decline of 42%. The price ratio of gold to silver was $496.50/20.20 = 24.6.
81. See “Talkfest with the Hunts,” Fortune, August 11, 1980, p. 168.
82. This quote and the rest in this paragraph are from “Hunt Group Sets Silver-Backed Bonds,” New York Times, March 27, 1980, p. 81.
83. The log return of 15.80/20.20 is −24.6%.
84. “N.B. Hunt Group Shocks Silver World with Plan for Bonds,” Wall Street Journal, March 27, 1980, p. 12.
85. “Sunshine Planning Sale of Silver-Backed Notes,” New York Times, February 5, 1980, p. D1.
86. Deposition of Nelson Bunker Hunt, Minpeco S.A., et al., Plaintiff, against Nelson Bunker Hunt, et al., Defendants, April 10, 1986, pp. 90–92.
87. See “Senate Subcommittee on Agricultural Research, and General Legislation, “Price Volatility in the Silver Futures Market,” p. 215.
88. The spot price of $10.80 on March 27 is for the April Comex contract (See New York Times, March 28, 1980, p. D8). When the March contract stopped trading on the 26th, it closed at $15.80.
89. SEC, Silver Crisis of 1980, p. 87.
90. “Silver’s Plunge Jolts Hunts’ Empire and Brings Turmoil to Wall Street,” New York Times, March 28, 1980, A1.
91. Ibid.
92. This quote and the next are from SEC, Silver Crisis of 1980, p. 92.
93. House Committee on Government Operations, “Silver Prices and the Adequacy of Federal Actions,” p. 218.
94. Ibid., p. 223.
95. CFTC, Report on Recent Developments in the Silver Futures Markets, p. 86.
96. The Comex April futures contract opened at $12 on March 28, traded as high as $13 and as low as $10.90, and closed at $12 (see Washington Post, March 29, 1980, p. D12).
97. The Hunt debts are summarized in the Federal Reserve’s “Interim Report on Financial Aspects of the Silver Market Situation in Early 1980,” published in House Committee on Government Operations, “Silver Prices and the Adequacy of Federal Actions,” p. 244.
98. House Committee on Government Operations, “Silver Prices and the Adequacy of Federal Actions,” p. 282.
99. This quote and the next two are from “Markets Rebound; Silver Lining for Occidental,” Boston Globe, March 29, 1980, p. 14.
100. This quote and the story are from Jarecki Manuscript, chap. 9, p. 37.
101. Ibid.,, chap. 9, pp. 39–40.
102. The $5 billion calculation comes from the net worth pledged as collateral for the loan to the family’s Placid Oil Company. See SEC, Silver Crisis of 1980, pp. 24–25. The SEC report suggests that the collateral was really worth much less than $5 billion, but it also ignores other assets that were not pledged, so $5 billion seems like a fair estimate.
103. The original EFP called for 28.5 million ounces but only 19 million remained outstanding. The price agreed to in January was about $36 an ounce for a total payment of $684 million. At the closing price of $12 an ounce on March 28 the bullion was worth $228 million.
104. This quote and the next are from Peter Bernstein, “Engelhard’s Not So Sterling Deal with the Hunts,” Fortune, May 19, 1980, p. 86.
105. Ibid.
106. Ibid., p. 84.
107. “A Deal’s a Deal, Said Engelhard,” New York Times, April 6, 1980, p. F1.
108. The write-off of the Beaufort Sea property was disclosed to me in an interview on November 22, 2016, with Hal Beretz, president of the Philipp Brothers division of Engelhard at the time of the Hunt transaction.
109. Bernstein, “Engelhard’s Not So Sterling Deal,” p. 86.
110. See SEC, Silver Crisis of 1980, pp. 42–43, for details of the loan to Placid. Also see the Federal Reserve’s “Interim Report on Financial Aspects of the Silver Market Situation in Early 1980,” published in House Committee on Government Operations, “Silver Prices and the Adequacy of Federal Actions,” pp. 250–57.
111. House Committee on Government Operations, “Silver Prices and the Adequacy of Federal Actions,” p. 209.
112. Ibid.
113. Ibid., pp. 218–19, for the interchange below.
114. According to the SEC, Silver Crisis of 1980, p. 26, there are six trusts that own Placid. Testimony by William Bledsoe, a former Hunt employee in House Committee on Government Operations, “Silver Prices and the Adequacy of Federal Actions,” p. 554, says there were only five trusts.
115. SEC, Silver Crisis of 1980, p. 26.
116. Ibid., p. 31.
117. The quote is from Hurt, Texas Rich, p. 415.
118. See SEC Release No. 16715, April 1, 1980.
119. “When a Billionaire’s Piggy Bank Breaks,” Guardian, May 28, 1980, p. 4.
120. Ibid.
121. “Hunt Mortgages 500 Thoroughbreds,” Washington Post, May 25, 1980, p. F12. For discussion of Dahlia’s second victory see “Dahlia Wins $194,976 in Ascot Race,” New York Times, July 28, 1974, p. 181.
CHAPTER 20: THE TRIAL
1. “Trial of Hunt Brothers in Silver Case Begins,” New York Times, February 25, 1988, p. D2.
2. Plaintiff’s attorney Mark Cymrot uses $150 million in his opening statement (see Transcript, Minpeco S.A., Plaintiff v. Nelson Bunker Hunt, et. al., Defendants, February 24, 1988, p. 418). But immediately before the case went to trial, Judge Morris Lasker reduced Minpeco’s claim from $252 million to $75 million, which could then be subject to treble damages. See “Hunts Hail Silver Ruling,” New York Times, January 7, 1988, p. D14.
3. See Williams, Manipulation on Trial, p. 3. Note that Lamar Hunt was not charged by the CFTC, although he was named in the Minpeco lawsuit.
4. Ibid., pp. 194–95.
5. Transcript, Minpeco S.A., Plaintiff v. Nelson Bunker Hunt, et. al., Defendants, February 24, 1988, p. 403.
6. Ibid., p. 417.
7. Ibid., p. 418.
8. Ibid., pp. 410–11.
9. Ibid., p. 481.
10. Ibid., p. 482
11. Ibid., p. 425.
12. From an interview on January 14, 2015, with Phil Geraci, a lawyer with Kay, Scholer, the New York law firm representing the Hunts at the trial.
13. This quote and the next are from transcript, Minpeco S.A., Plaintiff v. Nelson Bunker Hunt, et al., Defendants, February 24, 1988, p. 518.
14. Ibid., p. 521.
15. Ibid., pp. 522–23, 527.
16. Ibid., p. 414.
17. The description of the layout in court is from “Hunts Still Fighting Losses from Silver Crisis,” Washington Post, March 20, 1988, p. H1. The description and detail of what is on the videotape comes from copies of tapes that I received from an anonymous source.
18. This dialogue comes from a transcription of Bunker Hunt’s deposition, dated April 10, 1986, 1, pp. 8–11, and a videotape of that deposition.
19. Williams, Manipulation on Trial, pp. 194–95.
20. “Nelson Hunt Denies Trying to Corner
the Silver Market,” Wall Street Journal, June 1, 1988, p. 43.
21. “Nelson Hunt Denies Plotting to Manipulate Silver Market,” Los Angeles Times, June 2, 1988, p. E12.
22. “Hunt Says He Was Just ‘Bullish’ on Silver,” Los Angeles Times, June 3, 1988, p. D14.
23. The remaining discussion between Cymrot and Bunker Hunt are excerpts from Mark Cymrot, “Cross-Examination in International Arbitration,” Dispute Resolution Journal 62, no.1 (2007). A detailed description of the interchange came from an interview with Hunt Lawyer Phil Geraci, January 14, 2015.
24. From an interview with Hunt lawyer Phil Geraci, January 14, 2015.
25. See Williams, Manipulation on Trial, p. 194.
26. Transcript, Minpeco S.A., Plaintiff v. Nelson Bunker Hunt, et. al., Defendants, February 24, 1988, p. 509.
27. From an interview with Hunt lawyer, Phil Geraci, January 14, 2015.
28. For an excellent summary of the disputed evidence see chapter 4, “Testing for the Cause of the Price Rise in Silver,” Williams, Manipulation on Trial.
29. Ibid., pp. 104–9.
30. Ibid., p. 114.
31. The visual image was important because the statistical evidence showing the impact of Hunt holdings and silver price levels had serious statistical problems. See Williams, Manipulation on Trial, pp. 109–10 for a discussion.
32. Ibid., p. 195.
33. Ibid., p. 190, and see “Hunts Are Ruled Part of Scheme to Control Silver,” New York Times, August 21, 1988, p. 1.
34. See Williams, Manipulation on Trial, pp. 115–18, 124, for a discussion of plaintiff’s attempt to identify gold with political events. Also see ibid., pp. 92–96, for a related discussion of the gold-silver price ratio.
35. I calculated the standard deviation of returns on gold and silver from January 1981 through July 2017 with London bullion market data. Using daily returns, the standard deviation of silver is 2.45% versus 1.1% for gold. To avoid temporary volatility of daily returns I used month-end values over that same period, producing a monthly standard deviation of returns for silver of 8.34% versus 4.76% for gold.
36. Williams, Manipulation on Trial, p. 194, describes the jury’s award as “a compromise,” although different from what is suggested here.
37. The quote, cited at the end of chapter 18, is from “Peru Sustained Loss of about $80 Million because of Speculation in Silver Futures,” Wall Street Journal, February 15, 1980, p. 30.
38. “2 Hunts File for Personal Bankruptcy,” New York Times, September 22, 1988, p. D1.
39. Ibid.
40. “3 Hunt Brothers Put Oil Concern into Bankruptcy,” New York Times, August 30, 1986, p. 1. Crude oil was $11.57 in July 1986, according to the West Texas Intermediate Crude Oil series in https://fred.stlouisfed.org/series/OILPRICE and https://fred.stlouisfed.org/series/MCOILWTICO.
41. “It Takes $180 Million to Make Forbes List of Richest in the U.S.,” Wall Street Journal, October 14, 1986, p. 8.
42. “Lamar Hunt Pays $17 million in Damages to Peru’s Minpeco,” Washington Post, October 21, 1988, p. F2.
43. “Hunt Brothers’ Debts Dwarf Their Texas-Sized Fortunes,” Chicago Tribune, November 27, 1988, p. G12B.
44. This quote and the remaining in this paragraph are from “Hunts, Proving No Detail Too Small, List 67 Cent Debt in Bankruptcy Filing,” Wall Street Journal, November 23, 1988, p. B5.
45. “Hunts’ Assets Will Pay Creditors, Court Rules,” New York Times, December 17, 1989, p. 36.
46. “William Hunt’s Bankruptcy Plan Cleared,” New York Times, December 22, 1989, p. D6.
47. “2 Hunts Fined and Banned from Trades,” New York Times, December 21, 1989.
48. “Hunts’ Assets Will Pay Creditors, Court Rules,” New York Times, December 17, 1989, p. 36.
49. This quote and the remaining in this paragraph are from “Hunt’s Treasure: Oil Baron’s Belongings Go on the Block,” Chicago Tribune, July 29, 1990, p. C6C.
50. This quote and the remaining in this paragraph are from “Bankrupt Hunt Brothers Bid Adieu to Art Collections Worth Millions,” Chicago Tribune, May 10, 1990, p. C1.
CHAPTER 21: BUFFETT’S MANIPULATION?
1. “CFTC Boosts Surveillance of Silver-Futures Market,” Wall Street Journal, January 14, 1998, p. C1.
2. The cash price of silver in the CRB database closed at $5.93 on December 31, 1997. It traded above $6 an ounce from December 18 through December 30.
3. “CFTC Boosts Surveillance of Silver-Futures Market,” Wall Street Journal, January 14, 1998, p. C1.
4. The cash price of gold was $333.70 on June 30, 1997 and $288.8 on December 31, 1997, for a decline of 13.5%. Silver was $4.63 on June 30 and $5.93 on December 31, for an increase of 28%. All data are from the CRB cash price series for gold and silver.
5. “Silver-Futures Rally as Analysts Say Market Is Refocused on Fundamentals,” Wall Street Journal, January 7, 1998, p. C15.
6. “Gold Rises from 12½ Year Lows as Silver Surges,” Wall Street Journal, December 11, 1997, p. C17.
7. “Phibro and Others Sued Over Silver Prices,” Wall Street Journal, January 29, 1998, p. C18.
8. “Booming Silver Market ‘Rigged,’ ” The Guardian, January 13, 1998, p. 18.
9. Ibid.
10. Berkshire Hathaway press release, dated February 3, 1998.
11. Ibid.
12. The daily standard deviation of returns in the 90 calendar days before February 3, 1998, is 1.9%. The two-day standard deviation is 2.698%. The 10.7% return on February 4 and the 4% return on February 5 are each significant and so is the combined two-day return.
13. Henry E. Hilliard, “Silver,” in Bureau of Mines, Minerals Yearbook 1998, vol. 1, Metals and Minerals (Washington, DC: Government Printing Office, 2000), 1, p. 69, available at https://catalog.hathitrust.org/Record/003909435. Global mine production in 1998 was reported at 16,400 metric tons. There are 32,150.7 troy ounces in a metric ton, translating into 527 million troy ounces. Berkshire bought 129.7 million troy ounces, which is 24.61% of the total.
14. This quote and the remaining in this paragraph are from the Berkshire Hathaway 1997 Chairman’s Letter available at http://www.berkshirehathaway.com/1997ar/1997.html.
15. Ibid.
16. Ibid.
17. Warren Buffett, “Why Stocks Beat Gold and Bonds,” Fortune, February 27, 2012.
18. Ibid.
19. See Berkshire Hathaway 1997 Chairman’s Letter for this quote and the remaining in this paragraph.
20. Ibid., for this quote and the remaining in this paragraph.
21. “Buffett Discloses Big Silver Purchases,” Washington Post, February 4, 1998, p. C13.
22. The remaining quotes in this paragraph are from “Buffett’s Company Is Amassing Silver, Pushing Up Prices,” New York Times, February 4, 1998, p. A1.
23. See CFTC Docket No. 85–12, p. 7, for a discussion of the “manipulative period” of the Hunt accumulation and the impact on “distorted price relationships.” This section of the CFTC complaint is based on the expert report of Professor Albert Kyle, “Report on the Behavior of Silver Prices and Economic Evidence of Manipulative Activities,” February 19, 1987. Kyle argues (DX2220–7ff) that during the period of the Hunt manipulation, September 1979 through March 1980, Comex silver spreads failed to reflect full cost of carry, which is a less stringent indication of distortion than backwardation. Also see Kyle and Viswanathan, “Price Manipulation in Financial Markets,” p. 276.
24. Berkshire Hathaway press release, dated February 3, 1998.
25. Buffett’s quote is from an e-mail exchange I had through his executive assistant, Joanne Manhart, June 21, 2017.
26. The Phibro connection appears in “Buffett Silver Gambit Stirs Silver Again,” Wall Street Journal, February 5, 1998, p. C1.
27. “The $10 Billion Man, on a Silver Buying Spree, Keeps Horde in Secretive London Market,” Guardian, February 5, 1998, p. 3.
28. The CFTC investigation “fell silent,” according to “In This Corner,
a Silver Bull. In That Corner, India,” Wall Street Journal, February 18, 1998, p. A23. A search of the 1998 annual report of the CFTC shows no mention of Warren Buffett and the only place silver appears is in the section entitled “Division of Economic Analysis,” which is summarized in the text. On August 14, 2017, I submitted a written request to the CFTC under the Freedom of Information Act (FOIA) for “all communications” between the CFTC and Buffett or Berkshire Hathaway during that period. On November 22, 2017, I received the following response: “Our search of the CFTC’s records did not identify any record that would respond to your request.”
29. CFTC, 1998 Annual Report (Washington, DC: Government Printing Office, [1999]), pp. 58–59.
30. “In This Corner, a Silver Bull. In That Corner, India,” Wall Street Journal, February 18, 1998, p. A23.
31. “Buffett’s Purchases Push Silver Past $7 an Ounce,” New York Times, February 5, 1998, p. D1.
32. Berkshire Hathaway 1997 Chairman’s Letter.
33. The calculation is as follows: The Berkshire Hathaway 1997 Chairman’s Letter reports that they bought 111.2 million ounces by the end of 1997 and earned a mark-to-market profit of $97.4 million in 1997. The closing cash price on December 31, 1997, was $5.93 per ounce. The $97.4 million profit on 111.2 million ounces works out to a per ounce profit of $0.876. Subtracting $0.876 from $5.93 equals $5.054.
34. On January 12, 1998, the date of Buffett’s last purchase, cash silver closed at $5.49 an ounce, but it is unlikely that he bought the entire 18.5 million then. The average price during the first 12 calendar days of 1998 was $5.8457, so the $5.50 cost is probably an underestimate.
35. Joanne Manhart’s e-mail (see earlier note) says, “It was all paid for in cash.” According to the Berkshire Hathaway 2016 Annual Report (p. 19) the company owned 400 million shares of Coke, Buffett’s third largest stock investment. His 1997 letter quoted above implies that he bought Coca Cola nine years earlier, or in 1989.
36. From Whitney Tilson’s “2006 Berkshire Hathaway meeting notes,” May 6, 2006, at http://www.designs.valueinvestorinsight.com/bonus/bonuscontent/docs/Tilson_2006_BRK_Meeting_Notes.pdf.