Banks and brokerage houses loaned the Hunt brothers of Texas millions of dollars to finance their silver speculation at a time when the Carter administration and federal banking authorities were trying to stop speculative loans in order to fight inflation.
Some banks and brokers refused to participate in the Hunts' silver speculation spree, but others helped the billionaire brothers borrow more money, the Washington Post has learned.
Using their vast horde of silver as collateral to get loans, the Hunts bought so much of the metal they pushed the price past $50 on ounce and jacked up the price of silver products ranging from photographic film to fancy flatware.
Among those who loaned money to the Hunts were The Bache Group and ACLI International, a commodity firm headed by A. C. Israel, Chairman of the Board of People's Drug Stores.
Bache, in turn, took the silver put up as collateral by the Hunts and used it to borrow more money from First National Bank of Chicago sources familiar with the transaction say.
That step allowed the Hunts to obtain silver speculating funds that otherwise would have been denied to them under the Federal Reserve's lending guidelines.
First National Bank of Chicago issued a statement last night saying it "catergorically denies" making any loans that violated the Federal Reserve's policy.
A Bache metals trading subsidiary went to First Chicago after other lenders -- suspecting the Hunts might be involved -- refused to consider a large loan backed by silver, sources close to Bache reported.
Bache normally wouldn't have to tell the bank where the collateral came from, but the size of the loan and the silver backing were a good clue about who was involved, the sources said.
Since last October Federal Reserve Board Chairman Paul Volcker has been urging lenders not to make loans for speculative purposes. The Fed has tried to dry up money for speculative lending by restricting the availability of funds.
President Carter himself took a swing at speculators last month, urging banks not to finance such investments.
The role of the banks in the collapse of the silver market is under congressional investigation.
Despite riches reported to total billions of dollars, the Hunts are known to have borrowed heavily to finance the biggest speculative spree in commodity market history.
Getting money was easy for the Hunts when the price of silver was going up last fall. They either used profits they made as the price rose, or borrowed money using their increasingly valuable silver holdings to back the loan.
But when the price began coming down, the Hunts found money hard to get. Not only were lenders unwilling to lend them more than a fraction of the value of their silver, but the banks also were risking the wrath of Volcker.
The night before the silver market hit bottom, on March 27, the Hunts met secretly in New York with representatives of their major silver creditors -- Bache, ACLI and Merrill Lynch, Pierce, Fenner and Smith, it was learned.
At the meeting, W. Herbert Hunt warned that he and his brother, Nelson Bunker, wouldn't be able to pay their silver speculating debts immediately. The Hunts at that point reportedly owed at least $100 million to Bache, $123 million to ACLI and undisclosed amount to Merrill Lynch.
Bache's involvement with the Hunts was made public the next day when the Securities and Exchange Commission took steps to protect Bache shareholders in case the company went under.
ACLI -- the commodity firm controlled by A. C. Israel -- acknowledged yesterday for the first time its widely rumored role in the involvement with the Hunts.
"As a matter of policy, we do not comment on customers' accounts," the company said in a statement issued in response to an inquiry. "But in fact, we have no problems with the Hunts." Unlike the banks, ACLI doesn't come under the control of the Federal Reserve.
ACLI is called "ack-lee" in the trade. The initials stand for Adrian C. and Leon Israel, who are brothers. A third brother, Sam, heads the futures operation.
A. C. Israel is known as "Ace" in commodity circles. He is far more prominent there than in Washington business, even though he heads one of Washington's biggest retailers.
As chairman of the Board of People's Drug Stores, Israel owns 35.4 percent of the chain's stock, giving him solid control of the $440-million-a-year business. His 1.3 million shares of People's are worth about $13 million at current prices, and last year earned dividends totaling $312,000.
The nearly 500 People's drug stores are almost a sideline for Israel. He leaves day-to-day management in the hands of the chain's president, Sheldon Fantle.
Israel's ACLI operations are based in White Plains and do business from Wall Street to West Africa through many subsidiaries. There is ACLI Sugar Co., ACLI Metal & Ore Co., ACLI Produce, A.C. & Leon Israel Coffee Co. and A. C. Israel Rubber Co. A. C. Israel Cocoa Co. was a prototype of a major cocoa trader for a 1971 Harvard Business School study.