I just finished reading Alan Greenspan’s book, “Age of Turbulence”, and thought that in the scheme of international economics and world issues, the art and antiques industry is pretty much a speck of dust. But Ben Bernanke’s latest orchestration of the Bear Stearns purchase reveals how the auction process works best. He simply created a floor price of $2.00/share, and then let Adam Smith’s “invisible hand” do its magic ($10.00 latest offer).
In a way, Mr. Bernanke has created a new confidence in the ability of the marketplace to regain its balance. When a market is created, it should draw participants, if by no other mechanism than a price point. While I do acknowledge that the marketplace for all financial and real assets can seize up, there is nothing like a low ball offer to get the attention of any potential market player.
The unexpected connection to the events creating this investment headline and the art and antiques industry is how the auction process that dominates the trade is so corrupted by secrecy, conflict of interest, and deception. I don’t think Bernanke or Chase was deceptive or secretive in publicly backing a $2.00 reserve price for all of Bear’s shares. As far as a conflict of interest is concerned, both Chase and the Federal Reserve were motivated buyers, the Fed to create market confidence and liquidity and Chase for a great bargain. By creating an almost absurdly low price the marketplace recognized opportunity.
Sotheby’s and Christie’s have rarely operated in an open manner when it come to allowing Adam Smith’s invisible hand to set prices but would rather use secret reserves and sham bidding to deceive buyers. The question remains, what would the market price for Bear Stearns have been if it had informed the public is was for sale after it disclosed it was going to face a liquidity crisis? Were shareholder’s deceived, or was a fair auction process initiated by the Fed to prevent a run on the bank? The fact remains that Bear Stearns will now be a changed entity, but its value will now be openly settled by an auction process that was based on a disclosed reserve price.
This process reminds me of some situations I have witnessed at some local auctions, where the auctioneer will start the bidding at an absurdly low price. Hands pop up like rocket ships to gain the auctioneer’s attention. While the secret reserve might not be disclosed, the thought of a potential bargain is to compelling to ignore. When a low reserve is disclosed too, it is even more compelling to ignore and the bidding can be frenzied.
So why do auctioneers operate in this manner? Are their clients afraid that complaining might jeopardize their relationship with them, or maybe deception is in everybody’s interest?
I don’t think so.
Habits are hard to break, and the addiction of sham bidding and secret reserves on the buyer by auctioneers has become a bad habit that must be shattered. The mechanisms that foster a market price can be volatile and unpredictable; supply, condition, rarity, knowledge. But can you imagine what Adam Smith would think of a market based on not on the invisible hand, but on deception?