The Auction Syndicate

This is a work of pure fiction. I'm almost certain this could never happen in real life.

Almost.

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Several years ago a friend was watching an online auction for a 1971 Duster 340 clone. It wasn't a very good clone -- original slant six car, bodywork was wavy, wrong instrument cluster, fake fender tag, fake window sticker, 7-1/4 axle, motor mounts looked homemade -- it was wrong in many ways. He thought it would be a good start for a project he had in mind so he kept an eye on it.

To his astonishment, the bids crept up to $10,000, then $12,000 and it kept on climbing. This was at a time when a real Duster 340 in #2 condition would go for about $12,000. This clone eventually got up to $17,000 bid with a couple days until the end of the auction. My friend contacted the seller to ask what the reserve was. "Ooh, it's so close! The next bid will buy it!". (Funny the seller didn't think there would be any bids after the next one.)

The auction ended, reserve not met. A little bit of research showed that the very same car had been auctioned unsuccessfully several times before by different sellers. Same bidders, though, and all the bidders had very low or zero feedback ratings.

When my friend told me about that, I said it sounded like a bidding syndicate except that in this instance it's amateurish at best, more like shill bidding. "Hey Bubba, you and Cooter bid on my car to drive the price up for me and I'll do the same for you". They bid it up to just under the reserve price, then wait for a sucker to bite and hit the reserve. Perfectly legitimate in many venues, but not in the big online auctions.

My friend knew that I had studied stock syndicates and asked me to explain what a bidding syndicate is. On a grander scale, it's similar to the old stock trading syndicates of a hundred years ago. Several wealthy traders (the syndicate) would buy as much of a particular stock as possible, then sell it back and forth to each other at ever-increasing prices to run the price up. The sheep (less sophisticated traders) see the magical charts on the rise and smell easy money. When sheep smell easy money, they buy and that drives the price up even more.

When the syndicate perceives the stock price is near the top (resistance), they feed the stock back to the market until the price starts to falter, then they dump the remainder and count their profits. The sheep are left holding the bag as the prices subsequently plummet back to reality. The practice became illegal concerning stocks after the Securities Exchange Act of 1934 was enacted. Since then, disreputable types have applied the practice to all manner of tangible assets, including precious metals, art, real estate and collector cars.

Collector cars?

Unfortunately yes. Here's a simplistic example:

Let's say there is a low production car that is pretty desirable. Let's pretend it's a '64 Hemi Valiant convertible, one of 5 built. The last time one sold it brought an estimated $95,000.

We're going to have five friends, from A to E, in our syndicate: Al, Bob, Chuck, Don and Ed.

For a fee, Some Expert can tell Al where all 5 '64 Hemi Valiant convertibles are and that one is for sale privately for a hefty $100,000. Al buys it and tells Bob where another is. Bob contacts that owner and pays a premium for the car, $110,000. Chuck, Don and Ed contact the owners of the remaining cars and make offers. Maybe they sell, maybe they don't. If they don't, then Chuck, Don and Ed contact all three owners at different times, making higher and higher offers. All of a sudden, the cars that Al and Bob own are "worth" more because nobody can buy one for less than the outstanding offers. So Al takes his car to a high-profile auction in Florida where Chuck and Don bid by proxy against each other, reaching $150,000 and $155,000 respectively, and the car goes to Don. Now the public knows about these cars, and more important, they know that at least two people are willing to pay good money for them. There's an old stock market axiom that says, "It takes two horses to make a race".

Next, Bob puts his car on an online auction where Chuck and Ed bid it up to $200,000, but it doesn't meet reserve. Now the public knows beyond doubt that these cars are out of reach for the average collector. Wanna one-up your rich buddies? Here's a car that would do it. By now interest in Hemi Valiant sedans and clone Hemi Valiant convertibles increases, driving up the prices of real ones even further. Meanwhile, the syndicate continues to make higher offers on the remaining 3 cars. The temptation is too great for one owner, and he sells his to Chuck for a whopping $300,000. Through some well-placed gossip, the price leaks out and is published in Extreme Valiant magazine. Time for Bob's car to go to a large auction in California. Al and Ed, through proxy bidders, run the price up and Ed buys it at $400,000.

So far, the syndicate has purchased three $100,000 cars for a total of $510,000 at a mean average of $170,000 each. They resold one (to themselves) for $155,000 and another (to themselves) for $400,000. The one on the online auction didn't meet reserve. But the two that sold didn't really cost them anything other than the 16% auction fees (8% from the buyer, 8% from the seller) plus taxes. So their total cost to sell and buy back the cars at auction is $24,800 and $64,000, plus minor expenses and 20% short-term capital gains on $345,000 (another $69,000, which can probably be creatively eschewed or not claimed as income...). But they now have three cars "worth" roughly $400,000 each at auction. Perception is reality. They have $667,800 on the debit side, $1,200,000 on the credit side and they're not done yet.

$100,000car 1 bought by Al
$110,000car 2 bought by Bob
$300,000car 3 bought by Chuck
$11,000short term capital gain on $55,000 profit from selling car 1 to Don
$24,800buyer/seller commission of 16% on $155,000 sale of car 1 to Don
$58,000short term capital gain on $290,000 profit from selling car 2 to Ed
$64,000buyer/seller commission of 16% on $400,000 sale of car 2 to Ed
$667,800total cost (minor expenses of a few thousand bucks excluded)
  
$400,000new "worth" of car 1
$400,000new "worth" of car 2
$400,000new "worth" of car 3
$1,200,000new total "worth" of three cars
  
$532,200perceived profit so far

This whole thing goes through a few more iterations over the course of a year or two. Three cars are bought and sold several times by the same five people, anonymously or through agents. The remaining two cars are being held by owners with dollar signs in their eyes and won't be sold cheap to anyone.

"Why, Hemi Valiants are better than money in the bank!", says Extreme Valiant magazine.

"They've been doubling in price for years!", says Some Expert.

In time the auction bidding will show signs of resistance, meaning the market has borne about as much as it can. For a fee, Some Expert can put them in touch with two or three interested parties who might want a Hemi Valiant for their private collections. Maybe two of the cars are quietly sold off at very high prices. Maybe the last, the best example, is hyped at a high-profile auction on TV. Hopefully it breaks a record. If not, that's OK. They made a small fortune out of thin air. The prices may continue to rise and that's OK too because when the bottom falls out, for whatever reason, they don't want to own one. Besides, they're already buying the next hot model.

The above example would work even if the syndicate owned only one of the cars as long as the syndicate makes sure that the owners of the remaining four cars know that they will beat any offer made. Even if they never sell, the owners will be more than happy to watch the "value" of their cars go to the moon, ensuring that they remain off the clearance rack for now. But the more cars the syndicate owns, the greater number of transactions they can make to drive the price up. In fact, the syndicate doesn't even need to corner the market for a particular model. This can be done with several cars of higher production. We've all seen examples of some particular car setting a new record price at auction, and subsequently every owner of a clapped-out example of the same model thinks the worth of his car has increased to just under that record price. Ever wonder why some untouchable models of a few years ago seem affordable today?

When you get right down to it, a car, not unlike a paper stock certificate, has almost no intrinsic value. It's only worth what someone thinks it's worth. If the company behind the stock goes belly-up, you can use your 100 shares to line the bird cage. If carbon-based fuels were outlawed tomorrow, I bet you could get a screamin' deal on a Ferrari.

One final thought on rapid price increases -- A friend once commented about how the prices of a certain type of car had doubled every year for the past 5 years. I commented that it could not possibly continue at that pace. He was a bit indignant and said it could do so indefinitely. I asked if it could keep up that pace for another 25 years. He said it absolutely could. So to illustrate my point, I told him I'd like to make a financial proposition: I would give him $10,000 cash if he would pay me back in installments over 30 days. The first day's payment is 1 cent. Day two, 2 cents. Day three, 4 cents. And so on, doubling the payment for each of the thirty payments. It sounded like a great deal until I showed him how his last payment would be $5,368,709.12 and the total payments equaled $10,737,418.23 (table below).

Beware the unusual price increases.

Payment Schedule, doubling daily
DayDay's PaymentTotal Payments
1$0.01 $0.01
2$0.02 $0.03
3$0.04 $0.07
4$0.08 $0.15
5$0.16 $0.31
6$0.32 $0.63
7$0.64 $1.27
8$1.28 $2.55
9$2.56 $5.11
10$5.12 $10.23
11$10.24$20.47
12$20.48$40.95
13$40.96$81.91
14$81.92$163.83
15$163.84$327.67
16$327.68$655.35
17$655.36$1,310.71
18$1,310.72$2,621.43
19$2,621.44$5,242.87
20$5,242.88$10,485.75
21$10,485.76$20,971.51
22$20,971.52$41,943.03
23$41,943.04$83,886.07
24$83,886.08$167,772.15
25$167,772.16$335,544.31
26$335,544.32$671,088.63
27$671,088.64$1,342,177.27
28$1,342,177.28 $2,684,354.55
29$2,684,354.56 $5,368,709.11
30$5,368,709.12 $10,737,418.23
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