David von Leib has written a memoir of his decades-long career as a derivatives trader. To facilitate the flow of his prose and to keep lawyers at bay, he has framed the story through a slightly fictionalized third party alter ego, “Thornton Lurie.” Further, “David von Leib” is itself an authorial pseudonym. But most of the gestures toward fictionalization in this book are deliberately very thin. For example, the U.S. Secretary of the Treasury in the mid 1980s is named as Jim “Bacon,” and Thornton as a young man interviewed for a job at “Goodman Sachs.” Each name change, and several others, look more like typos than pseudonyms. I’ll ignore the fictionalizations hereafter.
The book is, Not my Grandfather’s Wall Street: Diaries of a Derivatives Trader, from America Star Books. A good-sized chunk of it takes up the silver market in 1979-80, the moment known for 35 years now as the “Hunt Silver Crisis.” This crisis then became the stuff of the central character’s senior thesis at Princeton, a topic that “seemed appropriate as no one had yet told the ‘inside story’ of what had transpired.”
At this moment the book gets somewhat “meta,” as literary theorists say. The story becomes how to tell such a story. For the doctoral candidate, who had been at the heart of events, was still unsure himself when he began work on the thesis, what was that inside story.
A personal memory interjects itself here: I was in my first year of law school at the time of the crisis and I remember an emphatic comment by my Contracts professor, when the subject came up in a rather free-wheeling classroom discussion, “If the Hunts’ want to be jackasses, let them!” Professor Kalodner thundered. He was expressing a common view: the Hunts had engaged in some very aggressive speculation, and it had come back to bite them in a big way. They should not be the objects of sympathy: they asked for that bite!
The Familiar Story
It is unquestionably true that through the second, third, and fourth quarters of 1979, Bunker and William Herbert Hunt acquired a lot of silver, perhaps 100 million ounces of the physical stuff. During that fourth quarter, silver prices rose dramatically, and by January 1980 they stood at an unheard of $50 an ounce. (As I write this review, more than 35 years later, silver is selling at between $14 and $15 an ounce.)
Also by January 1980, as von Leib writes, “the mere arrival of [the Hunts’] Prudential broker on the [Comex] floor … would send the fuckin’ metal limit bid. “
Commercial users of silver (from Tiffany’s to Kodak) were of course unhappy with the notion that a critical input of theirs was getting squeezed. Silver was either impossible to get or absurdly expensive for such manufacturers and retailers. Also unhappy of course, were the other traders whose positions the Hunts were squeezing.
On January 21 the Comex board declared the short squeeze an emergency, requiring unusual remedies. It raised margin requirements, with retroactive effect on all positions, and it voted to allow liquidaton-only trading. That meant: long speculators couldn’t buy any more. They could only sell.
The worm turned. The value of silver, and long positions on silver futures, fell sharply over the next couple of months, and the leveraged position of the Hunts made for a severe cash squeeze on the former squeezers.
In late March, the Hunts proved unable to meet a margin call. That set off a panic in the markets: the silver markets first, and then commodities markets quite generally. A consortium of U.S. banks stepped in to help the Hunts pay their margin call and calm the atmosphere. Time called this “Wall Street’s worst panic in nearly two decades.”
Adding to the Story
To this familiar story von Leib adds two points:
The stupidity/venality of the Hunts wasn’t the problem, or at any rate not the only problem. The situation became a crisis when and because “financial regulators and exchange officials … changed the ‘rules of the game’ to impact the outcome – not just to protect a market’s integrity.” Exchange officials were on the front line, and the brunt of the charge falls on them, though the CFTC backed them up. The attitude of the exchangewas that its honchos didn’t like the prices they saw, so they’d regulate them away.
Another point von Leib stresses here: traders, and so the market they constitute, learned and incorporated a lesson. Metals traders in particular learned to “tail” their cash-and-carry trades with a small extra long position as a hedge. They learned to set the size of that tail by the relevant metal’s price at interest rates, adjusted to match with the remaining life of the arb play.
I’ve focused here on the Hunt/silver crisis because of its intrinsic drama and because it is fairly typical of von Leib’s story telling. But, to be clear: there is much else of value in this book.
Headlines and Realities
One of von Leib’s main themes, running through the many stories of a long career in the markets, is that the relationship between headline-making events and market moves isn’t simple. For example, consider gold. It is often seen, and marketed, as a “safe harbor” investment. When the political/diplomatic world looks scariest, people ‘should’ want gold more, and its price’should’ rise. That would be the case if the headline/pricing relationship were a simple one: but it isn’t.
For example, in October 1981 a squad of heavily armed Egyptian soldiers led by Lieutenant Khalid Islambouli assassinated that country’s President, Anwar Sadat. This was, says von Leib with some understatement, “arguably an important geo-political event.” It was certainly a headline event around the world and “should” have pushed the price of gold up. But it didn’t. Or hardly so: gold rallied briefly, but soon headed sharply down.
Likewse with the silver price moves of 1979-80. There was a temptation then (and to some in retrospect there is a temptation even now) to attribute its volatility to the headline-making Iranian hostage crisis of the day. But with the one drama the other had almost no connection.
The only valid generalization one can draw from such events is that a headline event works as a catalyst, when conditions are right for a big price move anyway. Or as von Leib puts it, “when the market is off-sides or in a vulnerable position, even the most innocuous piece of news can have a huge impact,” otherwise … not so much.