The harder they fall
Victor Knight on the boom and bust of Nelson Bunker Hunt, 1926-2014
In the autumn of Big Red’s Triple Crown, they were comments that American racing fans might have considered tantamount to sacrilege. After the French-trained filly Dahlia had triumphed in 1973’s Washington International at Laurel Park, her trainer, the charismatic Maurice Zilber, was asked to compare her to America’s champion. “She could beat Secretariat any day in any country,” he reportedly replied. “I would like to see a match race and I would even put up my money.”
Brave words, bold words and big words. However, they would have found an agreeing audience in Dahlia’s owner, Nelson Bunker Hunt. This 21-stone Texas oil tycoon, billionaire and good ol’ boy did nothing in half measures: he was Texan in both physique and the size of his ambitions. He and his family were the original inspiration for not only the Ewings, the pivotal characters in the TV series Dallas, but also the patrician Duke brothers, who took Eddie Murphy (as Billy Ray Valentine) from poverty to riches and were then wiped out by a fall in the price of orange juice futures, in the film Trading Places.
Nobody ever made a film about Nelson Bunker Hunt, but maybe someone should have done: both John Candy, the shower curtain ring salesman in Planes, Trains and Automobiles, and Richard Griffiths, Uncle Monty in Withnail and I, would have been perfect in the fat man’s shoes. He struck gold as one of international racing’s biggest players in the 1970s, but it is his rise and fall in a vain attempt to corner the world’s silver market for which he is still remembered today – all part of a rather ‘interesting’ business career. “Making money is the way you keep score, in both life and business,” he once said. “A billion here, a billion there, and soon you are talking real money.”
His father was Haroldson Lafayette Hunt, a maths prodigy who loved to gamble and is said to have turned $100 into $100,000 playing poker in New Orleans. In turn, H L Hunt became a ‘wildcat’ prospector and purchased oil properties in Arkansas. At Hunt Oil, he was a generous employer who inspired great loyalty, and his staff subsequently informed him of a massive oil field in East Texas. As a result, Hunt Sr managed to secure ownership of the largest known deposit of oil in the world. He was made for life and, by the time of his death in 1974, reputedly one of America’s three richest men, alongside Paul Getty and Howard Hughes. As his son would later reflect: “People who know how much they are worth generally aren’t worth much.”
Nelson Bunker Hunt, the second of 15 children from three wives (none of whom, bizarrely, knew about the other two…), was born in 1926 (fittingly, in El Dorado, Arkansas) and was clearly destined to go into the oil business. He did exactly that and, among a whole host of business deals, played a significant role in the development of oil fields in Libya, including the Sarir oil deposits, the largest oilfield in north Africa with reserves estimated at between 11 and 13 billion barrels. As well as this business acumen and penchant for the oil business,he inherited his father’s love of gambling, and bought his first racehorse in 1955.
By the 1970s, his racing and breeding operation was among the world’s largest and most successful. He bred and/or owned a host of top-class horses. He owned a half-share in Arc winner Vaguely Noble, and in 1976 had the distinction of winning both the Derby and the Prix du Jockey-Club in the same year, with Empery and Youth. On the other side of the Atlantic, there were the likes of Trillion, an Eclipse award winner on the racecourse and later the dam of Triptych, and Exceller, who beat Seattle Slew and Affirmed in the Jockey Club Gold Cup and also triumphed in the Hollywood Invitational Handicap, Hollywood Gold Cup and San Juan Capistrano Handicap.
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, from baby spoons to tea sets
At one point, Hunt was reported to own a thousand thoroughbreds, centred around the 8,000 acres he owned around Lexington under his Bluegrass Farms umbrella. The best of them all was Dahlia, the Enable of her day. She was a homebred from the first crop of Vaguely Noble and won at the top level in England, Ireland, France, the USA and Canada, en route to becoming the all-time leader in earnings for a filly or mare and entering the Hall of Fame. She won the Irish Oaks, the King George VI and Queen Elizabeth Stakes (twice), the Washington International, the Benson and Hedges Gold Cup (twice), the Grand Prix de Saint-Cloud, the Man o’War Stakes and the Canadian International, and triumphed in the Hollywood Invitational as a six-year-old after being transferred to Charlie Whittingham.
Sadly, though, it is those curious dealings in the silver market that ensure Hunt’s own fame. It was a course of action that led to a spectacular crash on international financial markets, as well as the comprehensive unravelling of his own empire.
All that said, the reasons behind it are often misunderstood. Hunt is often assumed, inaccurately, to have been a ‘pump and dump’ corporate raider, an exploitative and predatory force – think Gordon Gekko. In reality, however, nothing could be further from the truth: with his coke-bottle glasses and rather gormless grin, he was the absolute antithesis of the city slicker in both appearance and deed. He lived frugally, always flew ‘coach’ (economy class), took subway trains when in New York on business and drove a series of beaten-up and dented old Cadillacs. He neither smoked nor drank, preferred to eat at cheap beef and chilli joints (or, possibly, places that served both) and always turned the light off when leaving a room. He was deeply conservative, and his activity in the silver market, to start with at least, was all about preserving a fortune rather than making one. Sadly, it was later on that he would become an Icarus who flew too close to the sun.
Hunt and his brothers turned their legacy from their father into a $5 billion empire. However, they became distrustful of the East Coast establishment of Washington, DC and Wall Street, a sentiment accelerated by the fate that befell the oil holdings they built up in Libya. These were seized and nationalised by Colonel Gaddafi, who took power in a military coup in 1969, and Hunt always resented that the US Government didn’t do more to help him and his brothers fight for what was theirs. When Richard Nixon had become President in January 1969, he had taken the Dollar away from the gold standard. Three of the Hunt brothers, Nelson Bunker Hunt, William Herbert Hunt and Lamar Hunt, came to distrust America’s political and economic systems and became paranoid that inflation rates as high as 13% would tear American industry and commerce to shreds.
They desperately sought a way to preserve their wealth, worried that the dollar would be debased, and their fortune diluted, by a Government just printing more money. It has also been suggested that they were heavily influenced by their evangelical Christian faith: that despite the business of rich men, camels and the eye of a needle, they had become convinced that the Bible was warning them of an imminent apocalypse that would make paper money worthless.
At the time, it was illegal for American citizens to own, or trade in, gold bullion, itself (then as now) the best-known safe haven for investment. It was silver, therefore, which the three of them would pursue, to protect their fortune. And they put all their chips onto the table.
The results would prove dramatic. From the turn of the decade to 1979, the brothers started to purchase large amounts of silver. During the last nine months of 1979, the brothers made, on paper at least, an estimated $2 billion to $4 billion through continuing to both invest in silver and speculate on its price. What made them different to ‘smash and grab’ corporate raiders was that they made a point of taking delivery of huge amounts of the silver they bought (much of it to a warehouse in Switzerland via three chartered Boeing 707 jets), rather than just pieces of paper. They were buying for long-term security and peace of mind, not a quick buck.
Their first silver purchases had been at the approximate price of $1.50 per ounce. Directly because the brothers then acquired so much of the commodity – at one stage, they held an estimated 100 million troy ounces (three million kilogrammes) – the price of silver increased from around $6 an ounce in January 1979 to $50 an ounce four months later. In paper terms, they had turned a $1 billion investment into $3.5 billion.
Because the brothers thought they were cornering enough of the silver market to control supply and drive prices only in an upward direction, they also entered speculative futures contracts. These are similar to modern spread betting and enable investors to make huge profits from small movements in market prices, without even having to purchase the underlying investment. Importantly, when buying any market position through the use of a futures contract, the investor only has to pay a small amount of cash, known as the margin.
These contracts can make the buyer a lot of money for a small initial outlay – assuming, of course, that the price of the commodity underlying the contract moves the right way. If it goes the wrong way, contract holders can incur huge losses, despite their initial outlay being small. Obviously, if the price of a contract goes the right way for the buyer, the margin becomes less relevant because the bet is in profit. However, if it doesn’t go the right way, the margin becomes critical, and the buyer will have to pay up much more than they initially laid out should the price move beyond that margin level. Speculating in this way is known as using leverage.
At one point in 1979, it was estimated that the Hunt brothers held between a third and a half of the world’s supply of silver. What they seemed to overlook, and what would subsequently nearly bring down the entire American financial system, was quite how much of a furore their action would stir up.
The complaints were loud and came from far and wide, not least from the jewellers Tiffany & Co, who took out a full-page advertisement in the New York Times to vent their frustration. “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, from baby spoons to tea sets,” said the advertising.
Tiffany’s chairman Walter Hoving also went on record to complain about the effect of high silver prices on both medical and photographic uses. “We were really ripping off the customers,” he said, “but we couldn’t help it… What was happening to silver prices was in complete disregard of other people’s welfare. I mean, photographic film was so expensive that a doctor called me to say he had to charge patients so much for x-rays that he simply wasn’t taking all [the images] he should.”
So much fuss was made that, in early 1980, the futures markets changed their rules about the purchase of commodities using futures options and leverage. At the same time, the Federal Reserve drastically raised interest rates to combat inflation. Combined, these two actions stopped the ascent of silver prices but also pricked the bubble, prompting a 50% fall in the price of silver in just four days.
It got worse. On 27th March 1980, what came to be known as Silver Thursday, prices fell by half again, from above $20 to $10 per ounce. 300 to 400 million ounces (about the amount of silver usually traded in six months) were traded in one day as their price fell. The edifice collapsed and took with it most of the Hunts’ money.
The underlying problem was that Hunt and his brothers had by now begun to borrow heavily to buy both the silver and the futures contracts. They were suddenly left facing both an immediate cash margin call of $134 million (to increase by $20 million per day) and a potential $1.7 billion loss. Such was the amount of exposure many brokerage firms had to the dealings of the Hunt brothers that it was feared several would go under. This unnerved the wider financial markets of the world and it was further feared some banks might also collapse. Even the Bank of England got in on the act, warning that if regulators temporarily froze the silver market in America, as they intended to do, a global financial meltdown was inevitable.
The Hunts couldn’t pay and the markets panicked. To stem the fear, a consortium of banks provided $1.1 billion’s worth of credit to the brothers so they could pay back their brokers. As a result of this, the US Securities and Exchange Commission launched an investigation into the Hunt brothers – not least of all because they (the Hunts) had failed to disclose their ownership of a six per cent stake in the Bache Group, one of the main brokers they had bought their futures contract through!
The Hunt brothers eventually lost over a billion dollars through their attempt to corner the world's silver market. Their oil business survived but the estimated net worth of the Hunt family fell from $5 billion in 1980 to less than $1 billion eight years later, mostly as a result of their holdings in oil, sugar, cattle and property falling in value.
In 1985, the three Hunt brothers were charged with manipulating both the price of silver and silver futures by the United States Commodity Futures Trading Commission (CFTC). “A billion dollars ain’t what it used to be,” Hunt reflected during his travails. Summoned to testify at a congressional committee, he was asked how much silver he owned. “That’s known only to God and to me,” he said. “The Lord isn’t talking, so I won’t, either.”
Three years later, in September 1988, the Hunt brothers filed for Chapter 11 bankruptcy protection, largely because of various lawsuits brought against them as a result of their speculation in silver. They had been found guilty of civil charges of conspiracy to corner the silver market and, as just one example, were ordered to pay a Peruvian mining company $134 million in compensation.
A year later, Hunt and his brothers were each fined $10 million by the CFTC and banned from trading in commodity markets. In turn, this led to Nelson having to sell off most of his breeding and racing operation. In January 1988, a dispersal sale of 580 horses at Keeneland fetched him a shade under $47 million – which paid just over half of an outstanding $90 million tax bill. For Hunt, the most painful part of it all was having to sell Dahlia, then eighteen, who was bought by Allen Paulson, the man who would later be best known in international racing as the owner of champions Cigar and Arazi.
Hunt Oil, originally established by H L Hunt ather in the Great Depression, not only survived but thrived. William Herbert became a billionaire again, through oil discoveries in North Dakota and property investments in Dallas. Another brother, Lamar, was one of American sport’s most popular figures as one of the founders of the National Football League and owner of the Kansas City Chiefs.
Amazingly, wonderfully and improbably, Hunt returned to thoroughbred ownership in 1999 when spending just over $2 million on 51 juveniles and yearlings. However, there was to be no fairytale return to the big time or champion among them.
He knew that his glory days on the turf had long gone, being quoted as saying, “At my age, I don’t plan to do any breeding or buy a farm. I just want to have some fun and try to get lucky racing.”
“He sometimes came across as a fat, squinty-eyed bumbler,” reflected his biographer Harry Hurt III. “However, he was sharp and crafty and gifted with the same mathematical mind his father had.” Nelson Bunker Hunt died at the age of 88 in October 2014, having battled the unfortunate superfecta of obesity, cancer, dementia and heart failure. Thus ended the amazing tale of a man who had clearly inherited his father’s love of gambling – but not, when it came to the silver markets at least, his ability at it.