The Hunt brothers will have to sell much of their vast silver holdings to qualify for $1 billion in bank loans to cover their losses from the collapse of the silver market a month ago, Federal Reserve Chairman Paul A. Volcker said yesterday.
The sale of a major part of the Hunts' fortune in silver would apparently be required by the small group of banks that is preparing to offer new loans to replace the Hunts' initial silver debts, Volcker said.
The negotiations between the banks and the Hunts, which have not been completed, "included the prospect of orderly liquidation" of the Hunts' silver holdings, he told a house Government Operations subcommittee.
The Fed chairman did not mention the fate of the Hunts' silver holdings until near the end of his subcommittee testimony, and did not provide details of the specific conditions the banks intend to impose or the timing of future silver transactions involving the Hunts.
At one time, he said, the Hunts controlled two thirds of the 170 million ounces of silver in circulation throughout the world. Their current holdings are "significantly reduced but still very large," and could provide a foundation for further speculative disruption of silver commodity markets, he said.
Volcker noted a forced sale of the Hunts' silver in depressed market conditions would not be in the interest of the brothers' creditors, some of whom reportedly have large silver holdings as well.
Following Volcker's remarks, silver prices fell sharply, as brokers anticipated the impact of new silver sales on the market.
Volcker was pressed hard yesterday by the subcommittee members to justify the new loans to the brothers, Nelson Bunker Hunt and Herbert W. Hunt, whose silver acquisitions were the prime reason for the explosive rise in the silver prices to $50 an ounce in January.
"There are farmers, small businessmen, people who want to buy houses. They can't get money," complained Rep. Elliott H. levitas (D-Ga.). "Here we have (more than) $800 million being made available solely to the Hunts."
He and other subcommittee members said the Hunts should be compelled to sell their remaining silver immediately to cover their losses.
Volcker replied the Federal Reserve could not legally prevent the Hunts' creditors from restructing the brothers' silver debts. Moreover, the new loan provided an opportunity to build in safeguards to prevent another speculative move by the Hunts, in silver or some other commodity, Volcker said.
The pending loans do not represent new money for the Hunts, Volcker said: "In the process, new creditors would in some instances replace existing creditors, while other creditors would essentially exchange old loans with new."
He said he has made it clear to the bank group, headed by Morgan Guaranty and First National Bank of Dallas, such safeguards must be provided.
The new loans, which he indicated could carry an interest rate of 20 to 25 percent, would be made to the Placid Oil Company, a Dallas-based energy company owned by the Hunt family. Volcker described it as "perhaps the strongest of the Hunt-related companies."
"Control over the silver and silver contracts, with appropriate safeguards, would pass into the hands of that same company," he said.
The loan will not rearm the Hunts for another speculative foray, he said. "In fact, they won't hold most of the silver after the loan."
Volcker said the banks were initially negotiating loans of $800 million to the Hunts, but recently, the amount under consideration has risen by $200 million to $300 million.
The initial Hunt debt, arising from the silver market's collapse, was approximately $800 million, he said. Of that, $100 million was owed by the Hunts personally, $500 million was in loans to brokerage houses and commodity dealers handling the Hunts' silver deals, and the rest was open to contracts to purchase silver at dates in the future.
The Hunts' principal silver dealers, the Bache Group based in New York City, had extended $230 million in credit to the Hunts, Volcker confirmed.
The silver crisis was precipitated a month ago by the collapse in prices, which compelled the Bache Group to demand an additional $100 million in collateral from the Hunts. They were unable to meet the demand.
The result was a brush with disaster, Volcker said. "Some institutions were placed in jeopardy and their failure could have triggered financial losses for others and severe financial disturbances."
Volcker minimized his role at that point in some frantic attempts by the Hunts to escape their predicament. On March 28, the Hunts were facing a deadline to complete a huge purchase of silver from Engelhard Minerals & Chemical Corp. at prices far above the going rate.
Engelhard faced an apparent choice of forcing the Hunts to liquidate, with the risk of a chain reaction panic in the silver markets, or helping the Hunts raise new financing from banks, Volcker said.
Volcker said he was concerned new loans at that point might violate the Fed's voluntary campaign against bank financing of commodity speculation.
Volcker denied he and the Fed had been asleep while the Hunts were tightening their hold on the silver market. "I'm not operating a police force," he said.