The silver 'meltdown' that wasn't

"Come at once to the Federal Reserve Board!" That was the urgent call James M. Stone, chairman of the Commodity Futures Trading Commission (CFTC) got when he returned to his office last Thursday morning (March 27). Word was that the effort of the richest family in the United States, the Hunts of Texas, to "corner" the silver market had failed, that prices were collapsing, the stock market dropping 25 points, and that an old-fashioned "panic" faced the nation.

When Mr. Stone reached the office of Paul A. Volcker, chairman of the Fed, he found Harold M. Williams, chairman of the Securities and Exchange Commission (SEC), there and other top monetary officials. He arrived approximately at 1:30 p. m., he told a House Commerce subcommittee here March 31, and left about 5:30 p. m. By the time he left, one of the greatest potential financial calamities of the year had notm happened: Like the Three Mile Island nuclear incident, it had been close, but there had been no silver "meltdown."

What had happened? In brief, the two Hunt brothers of Dallas -- Nelson Bunker Hunt and W. Herbert Hunt -- had run the price of silver up over several years from below $10 an ounce to above $50 an ounce. Buying largely on margin, they had acquired an estimated 200 million ounces, and had then seen the boom turn to a bust as the silver market collapsed.

The situation in New York was ripe for a classic stock market "panic." Rumors of trouble in the big brokerage firm handling the Hunt account, Bache Halsey Stuart Shields Inc., and in others, as well as the difficulties for the Hunt brothers and their Arab partners, sent the stock market skittering.

Then word came that the Hunts had enough ready assets to meet the emergency. Modern communication kept Wall Street brokers and traders in immediate touch, unlike panics a century ago. The line held and, at the end, the stock market rebounded. Silver bounced back a little.

Rep. Benjamin S. Rosenthal (D) of New York revealed the Volcker meeting at Commerce, Consumer, and Monetary Affairs Subcommittee hearings held here in a mood of awed anxiety. Chairman Stone of the CFTC said it was a "close thing," to which SEC chairman Williams agreed.

For five years or longer, Mr. Stone said, there had been "cash hoarding" (physical accumulation) of silver. The situation was possible, evidence indicated, because of the huge wealth involved: Some observers regard Nelson Bunker Hunt as the richest man in the world, and he had been operating together with oil-rich Arabs.

Congressman Rosenthal and some of his colleagues argued that federal regulators have been too casual about the Hunts' operations. He said they had made forays into the soybean and sugar markets.

In a unprecedented action, Mr. Rosenthal played aloud in the committee room the transcript of a portion of the July 27, 1979, meeting of Mr. Stone's Commodity Futures Trading Commission discussion.

The Hunt silver episode has renewed discussion in the financial community of the need for "position limits" in the futures markets. These would be aimed at preventing any wealthy individual or financially powerful group from attempting to manipulate the price of a commodity through overwhelming purchases.