Hoarding

The Hunt Brothers

In 1973, the Hunt family of Texas, possibly the richest family in America at the time, decided to buy precious metals as a hedge against inflation. At the time, private citizens could not legally own gold, so the Hunts began to buy an enormous quantity of silver. In 1979, the sons of patriarch H.L. Hunt, Nelson Bunker and William Herbert, together with some wealthy Arabs, formed a silver pool. In a short period of time they had amassed more than 200 million ounces of silver, equivalent to half the world's deliverable supply. When the Hunts had begun accumulating silver back in 1973 the price was in the $1.95 per ounce range. Early in 1979, the price was about $5. Late 1979 and early 1980, the[Page 398] price was in the $50s, peaking at $54. Once the silver market was cornered, outsiders joined the chase but a combination of changed trading rules on the New York Metals Market (COMEX) and the intervention of the Federal Reserve put an end to the game. The price of silver began to slide, culminating in a 50 percent one-day decline on March 27, 1980, as the price plummeted from $21.62 to $10.80. The collapse of the silver market meant countless losses for speculators and the Hunt brothers declared bankruptcy in 1987. In August 1988, the Hunts were convicted of conspiring to manipulate the market.

The Salomon Squeeze

Another example of an attempt to corner a market was the Salomon Squeeze. During the May 1991 two-year Treasury note auction, Salomon Brothers Inc., was in violation of the rules of the treasury auction procedure. They submitted some bids on behalf of customers without obtaining their authorization and, in the process, ended up controlling a major fraction of the May 1991 two-year note supply. During July and the first half of August 1991, government regulators launched a sweeping investigation of Salomon alleging the firm might have controlled 85 percent of the two-year Treasury notes that were auctioned on May 22, 1991. Treasury auction rules bar any one organization from buying more than 35 percent of a single issue at auction.

Treasury note prices commonly decline modestly right after auctions, when interest in the note sale fades. In a strategy designed to profit on the two-year note's trading pattern, many traders and arbitrageurs sell the two-year note short ahead of the auction. With most of the notes owned by Salomon Brothers after the May 1991 auction, the only way the short sellers could meet their delivery obligations was by buying the notes from Salomon Brothers at whatever price Salomon demanded.

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