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A century of speculation

Sam Fletcher
OGJ Senior Writer

For more than 100 years, US legislators have passed laws to reduce price volatility and prevent manipulation of commodity markets. So why should today’s “new wave of regulation” prove any better than those in the past? asks Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC.

The US Commodity Futures Trading Commission proposes to extend to energy futures the regulation and supervision that already exists for agricultural markets. “But if legislation has not been able to curb excessive price moves in agricultural prices, why should its extension to energy markets be any different?” Sieminski asked in a recent report.

“In the past, measures to control commodity prices have ranged from raising margin requirements, increasing position limits, introducing trader reporting requirements, naming and shaming market positions of large traders, introducing price controls, banning exports, prohibiting trading in a particular commodity futures contract or, in the extreme, an outright ban of trading a particular commodity future,” Sieminski reported. “With politicians and regulators appearing to downplay the significant mismatch between commodity supply and demand as the primary factor driving many commodity prices, we are once again embarking on another confrontation between regulators and speculators,” he said.

In the late 19th Century, the government introduced the first of many bills to regulate, ban, or tax commodity trading in the US. But legislation to curb perceived excesses of speculation began to accelerate in the early 20th Century.

In 1921, legislation was introduced to confine trade of grain futures to regulated exchanges that allowed federal scrutiny. During the Great Depression, the Commodity Exchange Act was introduced to combat excessive declines in grain and cotton prices, which were blamed on speculators. In 1947 as commodity prices rose during the postwar boom, there was legislation permitting the US Secretary of Agriculture to publish the names, addresses, and market positions of 35,000 traders. In 1973, the US government introduced price controls, banned export of soybeans, and increased futures margin requirements in an attempt “to reverse a trebling in many commodity prices,” Sieminski said.

The Hunt brothers’ case
And then there was the case of oilmen Nelson Bunker and William Herbert Hunt, sons of legendary H.L. Hunt, who were accused of attempting to corner the silver market. The elder brother, Bunker Hunt, an extreme conservative, saw silver as a stable commodity in a financially unstable world—a hedge against inflation. So in the 1970s, he and brother Herbert began buying silver.

According to one version of this story, the Hunts accumulated 10% of the known world supply of silver by the mid-1970s. Another source estimated the brothers at one time held a third of the world’s privately owned silver. In the process, they drove up the price. After investing most of their own capital, the Hunts teamed with wealthy Arabs to buy more silver, which in turn increased the value of their own holdings. Others got in the game. In less than 10 years, the price of silver climbed from $2/oz to a record $50/oz. And Bunker expected it to go higher.

In time, a worried Chicago Board of Trade and COMEX, a division of the New York Mercantile Exchange originally known as Commodity Exchange Inc., changed their rules, heavily restricting purchases of commodities on the margin and limiting the size of silver contracts held by any one trader. All excess contracts were to be liquidated by February. According to sources, the Hunts’ silver position was worth $4.5 billion when the price peaked in January.

The Hunts had borrowed heavily to buy silver and were unable to satisfy financial obligations as the price began to fall. Facing a potential loss of $1.7 billion, the Hunts couldn’t meet a margin call for $100 million. On Mar. 27, 1980—“Silver Thursday”—a steep drop in silver prices sparked a panic that rocked financial markets beyond silver commodities and forced the sale of Hunt positions.

Fearing collapse of large Wall Street firms, a consortium of US banks provided a $1.1 billion line of credit to the brothers so they could repay—and thus save—the brokerage firm Bache Halsey Stuart Shields, now Prudential-Bache Securities LLC.

The Hunts pledged most of their assets, including their stake in Placid Oil, as collateral for the rescue loan, but the value of their holdings in oil, sugar, and real estate fell steadily in the 1980s, leading to bankruptcy filings by the brothers and Placid Oil and eventual sale of the company. In a 1989 settlement, Bunker Hunt agreed to pay $10 million, the largest fine then ever levied by the CFTC.

This feature will appear next on Aug. 31.

(Online Aug. 17, 2009; author's e-mail:
samf@ogjonline.com)


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