The ground rumbled under the silver and stock markets Thursday afternoon.
Silver prices plummeted, pulling down prices of gold and other commodities. The Bache Group, a large New York-based brokerage firm that handled silver trading for Texas speculators Nelson Bunker Hunt and his brother, W. Herbert Hunt, was forced to pay out $100 million -- two-thirds of its capital -- to square its accounts by day's end.
Fearing the firm might be overwhelmed, the Securities and Exchange Commission halted trading in Bache's stock. The stock market was down 25 points by midafternoon.
"A classic panic," said Newton Zinder, market analyst for E. F. Hutton.
"People were just dumping stocks at any price, rumors are flying all over the place about who might be hurt."
In the end, the rumbles subsided. Buyers, looking for bargains, appeared late in the afternoon to snap up silver contracts and blue chip stocks at depressed prices. "There were some substantial buyers, particularly from overseas," said Thomas Russo, a New York attorney specializing in commodities. The markets steadied.
"But it had been a dangerous situation," said Thomas W. Wolfe, a former director of the Treasury's office of gold and silver operations. And James Stone, chairman of the Commodity Futures Trading Commission, said "The potential for serious economic dislocation has been visibly demonstrated."
Stone was one of the banking and regulatory officials called to a Wednesday evening meeting in the Washington office of Paul Volcker, chairman of the Federal Reserve Board, as the silver crash bottomed out. The plight of the Hunts was not what worried Volcker's group. "There's no sympathy for somebody trying to corner the silver market," said a participant at the meeting.
There was a real concern that the tumbling silver prices could trigger a panicked sell-off of stocks, jeopardizing the solvency of brokerage firms and the accounts of tens of thousands of their customers.
The bursting of the silver bubble was no surprise. It was even welcomed by some policymakers and analysts as shock treatment for the speculative, inflationary mood that has dominated investment markets.
But the crunch had come at a very bad time, with stock prices in a deep slump, inflation out of control and credit being stretched tight by the government's anti-inflation policies. The safety net under the markets looked thin, said Wolfe and other analysts.
Strictly speaking, the silver collapse was a unique problem of the commodities markets rather than a direct result of the tight money strategy pressed by the Fed under Volcker to restrain speculative, non-productive lending.
"It would have happened with easy money or tight money," said Alan Greenspan, chairman of the Council of Economic Advisers in the Ford administration.
Silver prices had peaked at $52.50 an ounce Jan. 21 -- just as President Carter was announcing his federal budget for the 1981 fiscal year. The president's proposal for a $15.8 billion budget deficit sent a wave of depression through the financial markets, which had hoped for broad cuts in federal spending. Wall Street saw a balanced budget as the precondition for sizable tax cuts in 1981 to reward business investment in equipment and plant modernization. The pessimistic reaction to the January Carter budget helped send stock and bond prices sliding downhill.
Meanwhile, a belated attack on silver speculation had begun in January by the New York Commodity Exchange, which oversees silver futures contracts, the heart of day-to-day silver trading. The exchange ordered the Hunts and other large silver traders to reduce their holdings and, for several weeks, barred new traders from entering the market.
These moves were reinforced by the tightening of credit and the upward push on interest rates ordered by the Fed to restrain inflation. "Banks were on notice that it was not in the country's best interest to finance speculation in metals markets, and it did affect speculation," said Russo.
The new anti-inflation policy two weeks ago knocked out whatever props remained under silver. A decision by the president and congressional leaders to balance the budget, coupled with harder moves by the Fed to control credit, signaled a sharp slowdown for the economy and, for financial markets, a jittery, unpredictable course ahead. There were no buyers for silver left. "It was a disaster waiting to happen," says Wolfe.
The Hunts and other traders had been acquiring futures contracts to buy huge quantities of silver for future delivery at a set price, in the expectation that the silver would be worth more on delivery day than at the time of purchase.
The falling price meant that the Hunts and other traders had to pay more money to Bache and the other brokerage firms to cover their contracted silver purchases.
Bache, like other brokerage firms, is required to balance accounts at the end of each day. On Wednesday it needed $100 million more from the Hunts. According to Bache, the Hunts said they couldn't pay. Much of the Hunts' wealth now is in silver. Selling that would push the price down further.
On Thursday, the questions were ominous. Would the brokerage firms be able to raise the money to balance their accounts? Were their other customers' funds secure? Would the firms be forced into a sell-off of stocks, knocking the stock market off its feet? And if a firm faced insolvency, could it borrow what it needed in the face of the Fed's determined opposition to speculative borrowing?
On Friday, the potential crisis passed when the bargain hunters appeared to buy silver and stocks. As the price recovered, Bache was able to sell enough of the Hunt's silver to balance its accounts. Like nuclear industry officials, who noted proudly that the Three Mile Island accident didn't cause a meltdown, some traders said last week's activity showed the strength as well as the weaknesses in the commodity markets.
Anthony Solomon, president of the Federal Reserve Bank of New York and former Treasury undersecretary, said the silver crunch may even prove to be a victory in the campaign against inflation. He and others have worried about the huge flow of money into commodities trading, from silver to Treasury certificates. "Maybe the bubble has burst," he said, and the market will return to more traditional investment.
If so, the word hadn't reached one of the metals trading offices on K Street, where a crush of people were using their lunch hour Friday to jump onto the silver bandwagon at a bargain price.
Tom Sullivan, building engineer for one of the glass towers on K Street, was putting $2,500 down on silver. "I missed the first flurry. Now, if it goes up again, I'll be on it."