Stocks and brokerages survive a silver scare

The silver bubble burst last week. And with the collapse of the precious metal's price, Wall Street nearly faced a financial crisis. The Hunt brothers of Texas were forced to come up with hundreds of millions in extra cash.

The markets survived the scare, however, which had threatened to bring dowm some major brokerage houses. Indeed, stocks even showed some resilience on Friday. The widely watched Dow Jones industrial average bounced back 17.66 points to close at 777.64. For the week, the Dow closed off 7.51.

The talk of Wall Street was the activity in the silver pits. Behind the financial drama were the three Hunt brothers, members of a wealthy Texas family. Speculating on a rise in the price of silver, they had reportedly gathered 200 million ounces of it. Some of their purchases, however, were silver futures rather than the metal itself. After the metal's price dropped sharply, they failed to to meet a $100 million margin call on these futures Thursday.

The Hunts' broker, Bache Halsey Stuart Shields, faced with meeting the margin call, liquidated the brothers' silver positions and sold many of their corporate stocks that had been put up as collateral.

Wall Street held its breath. rumors were rampant. The collapse of Bache, the fourth-largest brokerage house, would shake the financial world. By Friday, however, Bache reported it had liquidated the Hunts' silver contracts at no loss to itself.

Only Paine, Webber, Jackson & Curtis reported taking a big loss -- some $10 million -- on commodity accounts it was forced to liquidate to meet margin calls. It was also reported that Merrill Lynch, Pierce, Fenner & Smith had waived a $44 million margin call for the Hunts so they could use their capital to meet margin calls at less well capitalized brokerage houses.

According to Newton Zinder, an analyst at E.F. Hutton, this kind of panic -- which at one point drove the Dow down 26 points on Thursday -- often occurs during a credit crunch. He notes that in 1968 the market was struck by the Penn Central collapse and in 1973 by the Franklin National Bank failure.

"Reports that someone is about to fold and bring down the whole house is typical of a credit crunch," he comments. He says he expects the market to stage some short-lived rallies, such as that on Friday, before testing the recently made low.

Leslie Pollack of Shearson Loeb Rhoades Inc. says he believes the market may have already bottomed, since the selling on Thursday "was a pretty classical selling climax: It ranked right up there with the top five sell-offs of the past 20 years."

Mr. Pollack also thinks the market's steep decline sent a message to Washington that won't be ignored: not to squeeze interest rates so hard that the stock and bond markets break completely. "It's not in the best interest of the Fed to run the risk of a depression," the analyst says.

Norton H. Reamer, chief executive officer of Putnam Management Company and Putnam Advisory Company, isn't certain that the market has bottomed. "There are some problems that must be taken seriously," he maintains. These include the effects of the Fed's tight-money policy and the impact of the forthcoming recession on corporate profits.

Mr. Reamer doesn't think the Fed will ease up. He is convinced it is committed to its inflation-fighting program. However, he agrees that the collapse of the commodity markets might signal the beginning of the easing of inflation pressures.

Interest rates continued to climb last week despite a rush by investors to buy government securities, often considered the safest investment. The prime rate -- the interest banks charge their best customers -- surged to 19 1/2 percent. And the federal funds rate, the interest banks charge one another for overnight loans, jumped to 24 percent. This should keep pressure on the banks to raise rates again this week, possibly to 20 percent.

The events of the past week, says Eileen Spinner, and economist with Smith Barney, Harris Upham & Co., point "toward major economic corrections." These corrections, she says, will affect the consumer and the sections of the economy that survived the inflationary economy with borrowed money. She concludes that these times may be over.

In the market last week, the most active stocks were those reportedly owned by the Hunt brothers and sold by Bache and other brokers to meet margin requirements. These included First Chicago Corporation, Louisiana Land & Exploration, and Gulf Resources & Chemical. "It's ironic," Mr. Zinder commented. "The stocks people don't want to own now are the ones owned by the Hunts, when only a few weeks ago people were buying the stocks the Hunts owned, or were rumored to own."

Many stocks were also hard hit because of margin selling. Dudley Eppel, senior vice-president for Donaldson, Lufkin & Jenrette, noted that margin calls were large as some stocks lost 30 percent of their value in Thursday's trading. "We're just all thankful that there is still a market left," he concluded.