Serpent on the Rock

by Kurt Eichenwald

  “Look, Marty, for sure I am not going to buy the company, and for sure I don’t want to sell my shares,” Belzberg said. “But yeah, I think I could be quite happy to sign that I won’t buy any more stock and get a seat on the board.”

  The deal seemed done. Belzberg was pleased. With a seat on the board, he thought, he might be able to help turn this company around and in the process see a tidy profit on his investment. This trip to California definitely had been worth his time.

  Only Virgil Sherrill, the recently appointed president of Bache, could have been trusted with the job of officially greeting Sam Belzberg for the firm. If central casting was looking for someone to play a Wall Street chief executive, the search would end when Sherrill walked in the door. Tall, regal, and handsome, with a coiffed white mane of hair and a tanned face that hinted at his love for golf, Sherrill brought a pedigree of mannered diplomacy to the firm. He honed those skills as the chief executive of Shields Model Roland until Bache purchased the investment firm in 1977 for $15 million. With his poise and calm self-control, Sherrill became Bache’s new president and the man for sensitive situations.

  Sherrill called Belzberg two days after the meeting in Los Angeles.

  “Mr. Belzberg, I understand you met with Mr. Lipton,” he said. “Thank you very much for agreeing not to buy any more stock. When are you going to be coming to New York? I’d like to get together with you and introduce you to the boys on Gold Street.”

  Belzberg found Sherrill’s ingratiating style flattering but had no idea what the man was talking about. He hadn’t researched Bache well enough by that point to know that its headquarters were on Gold Street.

  Although he rarely traveled to New York, he told Sherrill, he planned to be there in August. The two men agreed that during that trip, Belzberg would lunch at Gold Street with the boys.

  The first night of his August trip to New York, Belzberg arrived at the Regency Hotel on Park Avenue to find a message to call Sherrill. There was a last-minute change, Sherrill told him when he called. Rather than coming all the way downtown to Gold Street, would Belzberg prefer to meet closer to his hotel at the Racquet and Tennis Club?

  “Who will be coming from the company?” Belzberg asked.

  “Just me,” Sherrill replied.

  “I thought you wanted me to meet the boys on Gold Street.”

  “Well,” Sherrill said, “we’ll see.”

  Something fishy was going on. Belzberg had no idea what it might be.

  The next day, Belzberg walked the ten blocks to the Racquet Club’s three-story building on Park Avenue. The club dripped blue-blooded elegance and privilege, with its marble facade and wood-paneled walls. It admitted only men as members, who could buy meals and drinks, play tennis and squash, or lounge in overstuffed chairs beneath the soft light from brass sconces and crystal chandeliers.

  Sherrill met Belzberg in the lobby and took him to the club’s dining area. Lunch was pleasant, and Sherrill delighted in describing the club’s history, from its founding in 1875 to his joining in 1967. The visit was enjoyable, relaxed, and utterly pointless.

  By 1:15, Belzberg was restless. His plane back to Vancouver left in less than two hours. His chance to visit the Bache offices had slipped away.

  “Mr. Sherrill,” he said, “this has been most enjoyable. Unfortunately, I didn’t budget sufficient time for our meeting. So, do you have anything else you need to say?”

  Sherrill beamed. “I want to thank you very much for not buying any more stock,” he said. “I’m sure we are going to find many ways we can work together.”

  No mention of the board. No mention of a seat.

  Belzberg pressed. “Anything else?”

  “No,” Sherrill said, shaking his head.

  Belzberg sat there, numb, his anger building. Apparently, Jacobs or someone could not countenance the idea of bringing Belzberg onto the board and quashed the proposal. These people take me for a fool, Belzberg thought.

  Finally he stood up from the table. “Well, that’s fine, sir,” Belzberg said, taking Sherrill’s hand. “Thank you very much. It’s been very nice to meet you.”

  Belzberg stormed out of the Racquet Club, seething. He walked the few blocks to the offices of Wachtell, Lipton, arriving unannounced. Lipton ushered the fuming Belzberg into his office.

  “What’s going on here?” Belzberg demanded. “He didn’t offer me anything, and I’m not about to come asking for it.”

  Lipton looked stunned. “I can’t understand it,” he said. “That was the deal.”

  Irritation is not the best motivator. Still, at that moment, Belzberg’s anger led him to a decision. He hadn’t given Bache much thought before this, but damned if he would let these people humiliate him.

  “Marty, this offended me,” he said, visibly incensed. “And I have my interests to look out for. So if I don’t hear from them in two weeks, the deal is off. I’m going to buy more stock. You tell them that. Two weeks.”

  The deadline came and went. No word from Bache. Bitter, Belzberg called Clark, his broker. Start loading up on more Bache stock, he ordered.

  The takeover threat that Bache tried so long to avoid was starting to be created.

  Jacobs felt helpless. By October 1979, the Belzberg problem had escalated from a manageable threat to an absolute crisis. The Canadians bought Bache shares relentlessly, increasing their stake in the firm from 5.1 percent in March to almost 7 percent—a number that would have been higher if Bache hadn’t countered by issuing more shares.

  Nothing Bache did slowed them—even political pressure, exerted through New York senator Jacob Javits, failed to stop Belzberg. At Bache’s request, Javits, who knew Belzberg through his work for Jewish charities, telephoned him in Vancouver to warn that a hostile takeover of Bache would harm the Jewish people. But Belzberg simply denied he planned a takeover, hostile or friendly.

  Jacobs and Sherrill agreed to meet their new largest shareholder on September 13 at the Regency Hotel, but all they learned from that tense encounter was that Belzberg intended to purchase as much as 25 percent of the firm. With his rough no-nonsense approach, Belzberg reminded Jacobs of a truck driver.

  The time had come to pull out the stops. Jacobs ordered a full-scale investigation of the Belzbergs, in search of damaging information that might be used against them. In late 1979, Bill Jones, a former agent with the Federal Bureau of Investigation who had just been hired as Bache’s new head of security, was recruited to dig up dirt. He turned over anything he found to the firm’s legal team, including Arthur Liman, a well-known securities lawyer whom Bache had retained, and Clark Clifford, the former secretary of defense and adviser to five presidents who now worked as a Washington lawyer. Despite all that heavy talent, nothing usable was found in the first weeks of investigation.

  So Bache stepped up its defense. It retained First Boston to search for a large institutional investor interested in buying a stake in a securities firm. Its annual proxy statement contained a series of bylaw changes, which, if approved by shareholders, would impede a takeover. Still, Jacobs feared that even if the measures were approved, they probably wouldn’t stand up in court.

  The normally excitable Jacobs was getting even more hyper. He called an endless series of strategy meetings about the Belzbergs—at six in the morning, at ten at night, and every time in between. He buttonholed even junior executives in the hallway, anxiously pressing them for suggestions. But before they could answer, Jacobs would interrupt with the next question. His usual nervous habits worsened: While at his desk listening to someone speak, he would quietly tear a sheet of paper off a pad and slowly rip it into smaller and smaller pieces. After dropping confetti to the floor, he would grab another piece, starting over again.

  The agonizing finally produced a decision: Bache needed to line itself up with someone with more money than the Belzbergs. Somebody who could buy Bache shares that came available on the market. Somebody with a long-standing relationship with the firm. Somebody who could b
e counted on to side with management.

  Jacobs thought he knew just the people.

  The Hunt family of Texas was the richest in the country. It could buy and sell the Belzbergs before breakfast. The progeny of H. L. Hunt, an Illinois-born wildcatter who reached mythic status after striking it rich in the east Texas oil patch, played in their own multibillion-dollar empire, all of it privately held and veiled in secrecy.

  After H. L. Hunt died in 1974, the undisputed head of the clan became Nelson Bunker Hunt, the first son. Weighing in at about three hundred pounds, with thick glasses accentuating the family trait of small eyes, Bunker Hunt was the family’s idea man. His brother, W. Herbert, took care of the details. With a fondness for health food and a taste for well-cut suits, Herbert was slimmer and less imposing than Bunker, and he usually deferred to his brother’s business judgment.

  By 1979, the Hunt brothers had been clients of Bache for almost eight years. The relationship had grown close, particularly when Bache began accepting business from the Hunts on terms other brokerages refused. Bunker and Herbert had been speculating heavily in silver futures contracts, putting up only a small portion of the value of each investment and borrowing the rest. Placing most of their orders through Shearson Loeb Rhoades, the Hunts used millions in borrowed money to buy the contracts, which guarantee delivery of the precious metal at a later date. Most futures traders sell their contracts before that time. But the Hunts started taking delivery of billions of ounces of silver, leaving less of it on the market and in turn driving up prices further.

  In September, Sanford Weill, the head of Shearson, demanded some extra insurance from the Hunts: The brothers had to put down $25,000 in cash for each contract rather than the $7,500 they had been paying. That would decrease the risk of the Hunts defaulting on their debts if the price of silver collapsed. But it also would limit the brothers’ ability to keep buying, and they chafed at the restriction.

  The Hunts transferred their 2,400 contracts from Shearson to Bache, where the delighted executives kept the cash restrictions low. So, when Jacobs needed a rich ally, the Hunts came right to mind. With Bache casting such a strong vote of confidence in the Hunts, surely they might consider helping the firm. Through an intermediary, Jacobs asked if the Hunts would be willing to buy a large stake in Bache.

  They gladly obliged. Through a joint account at Bache, the Hunts purchased fifty thousand shares over just five days in October. Bache had found its secret weapon against the Belzbergs. Delighted, Jacobs sent the Hunts an effusive letter, thanking them for being “a tremendous friend of Bache” and adding that their effort would “never be forgotten, regardless of what happened.”

  The scheduled meeting of Bache’s executive committee in February 1980 had a packed agenda. Employee sales production was still too low, and a series of strategies to boost sales were being considered. Bache’s training program needed help. And then there was the need to consider a $186 million loan to Bunker Hunt. Since the loan was one of the easiest matters to resolve, it was taken up quickly. Without dissent, the committee approved it after a few minutes of discussion. Years later, executives who attended the meeting would speak in wonder about how a decision that almost destroyed Bache could have been reached so casually.

  The Hunts needed money because their silver-buying strategy was collapsing. For months, the brothers had been using their silver hoard as collateral to borrow more money to buy more silver. That, in turn, drove up silver prices, creating more value for their investments, which they used to obtain more loans, and on and on. For everything to work, either the market had to keep going up or the Hunts had to gain control of enough silver to be able to dictate prices. With most of their cash already tied up in the investment, the Hunts needed buckets of borrowed money to keep the cycle going. Otherwise, the market would fall, the value of the collateral would decline, and brokerages would issue margin calls, seeking more cash to cover the Hunts’ billions of dollars’ worth of purchases.

  By January, Bache became the Hunts’ favorite choice for one-stop financial shopping. They sent commodities trades through the firm and borrowed hundreds of millions of dollars from it to cover their growing liabilities. The requests were hard to refuse—by that point, the Hunts were Bache’s most important customers. Their business increased operating revenues at a critical time and created the potential of billions of dollars in international financing with oil-rich Arab families tied to the Hunts. More important, the Hunts had become large owners of the firm. By January 16, the brothers controlled more than 5 percent of Bache stock. At that level, any investor is required to file a Schedule 13-D with the Securities and Exchange Commission, disclosing the full size of the stake. But the Hunts never bothered. By March 18, they owned 6.5 percent of the stock. And no one knew outside of Bache and the Hunts.

  By the end of February, the firm had lent the brothers $233 million. Bache, in turn, borrowed the money for the Hunts from a consortium of banks, including First National of Chicago, Irving Trust, and Bankers Trust. The risk to the firm was enormous: If the silver strategy collapsed and the brothers defaulted, Bache would be on the hook for almost a quarter of a billion dollars, nearly all of its total capital.

  Even as Bache took the audacious gamble, the Hunts’ silver game was on the verge of being shut down. On January 18, silver prices hit an all-time high of $50.35 an ounce, up from $6.50 an ounce twelve months earlier. That increase of more than 800 percent alarmed executives at the Commodity Exchange Inc., or Comex, where silver trades. For months, they anxiously watched the Hunts’ buying spree, convinced that the brothers had created a speculative bubble. When it burst, banks and brokerages that loaned money for silver purchases would be caught short. Some might fail. The Hunts had to be reined in.

  The next day of trading, January 21, the exchange announced it would only accept orders to liquidate positions. By the next day, silver dropped $10 in one trading session. Brokerage firms sent out margin calls to the Hunts, demanding millions of dollars. The brothers faced a critical cash squeeze. They turned to Bache, which agreed to lend them more money.

  The Hunts’ silver strategy finally imploded in March. In just the first two weeks of the month, silver prices dove by more than $14, to $21 an ounce. The Hunts’ silver lost some $2 billion in value; their collateral evaporated in the marketplace. The stream of margin calls became a flood. From Bache alone, the margin calls to the Hunts hit $10 million a day.

  On March 19, Harry Jacobs was traveling in Austria when he received a panicked telephone call from Virgil Sherrill in New York. The Hunt brothers just met their latest margin call, Sherrill told Jacobs, by turning over silver instead of cash. It was like paying the minimum on a huge credit card balance by turning over shirts they bought on the card the prior month—it was a sure sign of financial trouble. Jacobs canceled his trip and immediately booked a flight back to New York.

  After fruitlessly trying to raise money, on March 25, Bunker Hunt gave up. The brothers could not meet their margin calls. Through an assistant, he sent a three-word message to his brother, Lamar, to convey to Herbert: “Shut it down.”

  That afternoon, Jacobs telephoned Herbert Hunt to tell him that the brothers’ latest margin call required delivery of $135 million by the following morning.

  “We can’t make it,” Herbert replied calmly.

  America’s wealthiest family, and the most important client in Bache’s history, had run out of cash. Astounded executives at Bache decided to liquidate the Hunts’ account. The next day, Bache sold $100 million worth of the silver. The Hunts were still almost $36 million in the hole. The support under the inflated silver market had vanished. Financial disaster loomed.

  Jacobs hit the phones, imploring regulators in Washington and New York to shut down the silver market. Once the Hunts’ default became known, he argued, silver prices would collapse further, potentially crippling Bache. He and Sherrill traveled to the Comex in downtown Manhattan and waited outside the exchange’s boardroom as its senior
officers met in emergency session. But the effort was a waste of time—the exchange and federal regulators refused to shut down the market. If they did, they feared the market’s credibility would be destroyed for years.

  By morning, the Hunts joined Bache’s lobbying effort. At 8:00 A.M., Herbert Hunt telephoned the Commodity Futures Trading Commission, the market regulator. He said investors should be forced to liquidate their contracts at the previous day’s closing price. Otherwise, if the market opened, Hunt warned, the consequences would be bleak.

  “The Hunt family will be washed out,” he said. “We will go broke.”

  Within minutes of that call, a lawyer from Bache called from a pay telephone at the Comex to again urge the CFTC to close the market. For the first time, the lawyer revealed that Bache had extended $233 million in loans to finance the Hunts’ silver speculation. If the silver market kept falling, the lawyer implied, Bache might go out of business.

  But the decision was final. The government would not close an entire financial market to save one foolish brokerage firm.

  That day, March 27, 1980, the silver market collapsed. After opening at $15.80 an ounce, the market was swamped with rumors that the Hunts couldn’t meet a $1 billion margin call and that Bache was going under. Silver lost almost a third of its value, plunging to $10.80 an ounce. The chaos cascaded through the financial markets.

  The silver meltdown shook some of the highest reaches of government. G. William Miller, the Treasury secretary, was readying himself for a speech at the National Press Club when he heard of the unfolding disaster. He placed an emergency telephone call to Paul Volcker, the chairman of the Federal Reserve, but accomplished little. Miller arrived late for his speech, badly shaken. He showed the strain while talking, at one point referring to Face the Nation as “Face the Naked.”