'Sold for $43m!' Or perhaps not...?
November 21 2011
There's an excellent article in The Economist* on the practice of guaranteeing pictures at auction. This is the process whereby an auction house finds a third party, perhaps a wealthy collector, to give a guarantee on a picture, thus helping secure its consignment by the vendor. If the picture does not sell on the big night, the guarantor gets to keep the picture (usually at a price below the lower estimate) and the vendor gets the moolah.
So far so clear. Things get murky, though, when the guarantor then starts bidding on the picture - if he buys it, he will almost certainly then get a discount (or a 'financing fee') in return for having guaranteed it. The question then is - if a guaranteed picture 'sells' at auction for, say, $10 million, and the buyer actually pays just $9 million (the remainder being his discount in the form of a financing fee), then has the picture really 'sold' for $10m? Most people would say not. And in a business where everything revolves around percieved value, then isn't that a distortion of the market?
The recent sale at Christie's of Roy Lichtenstein's 'I can see the whole room... and there's nobody in it!', above, may be, according The Economist, a case in point:
It is strongly believed, for example, that Guy Bennett, an art advisor acting on behalf of the Qataris, negotiated third-party guarantees on the top lots at both Christie’s and Sotheby’s recent contemporary auctions in New York. During the prestigious evening sale at Christie’s on November 8th, Mr Bennett was seen to make the winning bid of $38.5m for Roy Lichtenstein’s 1961 painting, “I can see the whole room!... and There’s Nobody in it!”. Christie’s normal buyer’s premium (or commission) on this would bring the final price up to $43.2m, which was the price reported by Christie’s. However, high-powered guarantors often negotiate a 50-50 split with the auction house of as much as 30% of the overage (the amount generated above the guaranteed price) and an additional 50% of the buyer’s premium. The market believes the Lichtenstein was guaranteed at $35m. If Mr Bennett, who bought the picture, had negotiated such a deal, the real price he paid would have been $40.3m.
So if the above scenario actually happened, then the Christie's press release saying that 'I can see the whole room...' 'sold' for $43.2m is flat out wrong. Things get even murkier when the only bidder on the night is the guarantor. Because then you can't really be sure that the picture has sold for any value at all. It could be an exercise in setting 'value', perhaps to keep prices up for a certain artist. The Economist concludes that the guarantee system is too murky for its own good:
Good auctions are theatrical spectacles that create the illusion of deep markets. Historically a successful sale needs at least two bidders. But sometimes a guarantee leads to a “private sale in public” in which the guarantor is the only bidder. When the top prices for a particular artist are only reached via these kinds of behind-the-scenes, one-to-one transactions, it is reasonable to ask whether it is indicative of a market at all.
No one wants to ruin the entertainment value of a night out at the auctions, but contemporary art has enough credibility problems without unnecessary murkiness. “Industry practices need to catch up with the value of art today”, argue Michael Plummer and Jeff Rabin of Artvest Partners, a firm of art-investment advisors. “We need to require a higher standard of transparency and ethical behaviour because so much money is at stake.” Regardless of the money involved, the market would be considerably fairer and more open if the auction houses reported real prices, disclosed the reserve prices—and named the third-party guarantors as well.
*Thanks to Neil Bird for bringing it to my attention.