Lindsay Pollock looks into the practice of third-party guarantees in The Art Newspaper. She estimates that a whopping $700 million was spent on guarantees by the auction houses in the Spring of 2008 alone. Those guarantees have mostly disappeared–though they’re likely to return. Pollock says the pool of third-party guarantors is very small and populated by dealers and collector/dealers who are simply establishing a floor price for the works based on their own collecting/inventory needs:

While the houses declined to identify their partners, sources involved with the transactions say there is a pool of around ten collectors and dealers who regularly get involved in IB bids, including hedge fund manager Steve Cohen, and dealers Robert Mnuchin, William Acquavella and the Nahmads. “We are very careful [about the process of selecting a third-party],” said Zuckerman. “Our optimal candidate is a client who would be happy to buy the item for the hammer price plus premium at auction.” […]

Irrevocable bids were developed about 15 years ago by Sotheby’s as a way of passing on its exposure to an outside party. Christie’s began to do similar deals in the last five years. What was new in November 2008 was Sotheby’s decision to identify which lots were guaranteed by the house (a small circle is used), versus lots guaranteed by anonymous third parties (a circle plus a horse shoe). Christie’s only indicates which lots are guaranteed, with no special marker for third-party guarantees.

Following the money trail out of Pollock’s story, it’s worth wondering how necessary guarantees are in providing liquidity to the art market. We’ve been told repeatedly that plenty of buyers remain in the art market but sellers have been hard to come by. If it took $700 million to generate the necessary liquidity in Spring 2008–by the way, it isn’t clear whether Pollock is combining New York and London Sales, global sales or just US sales from that period–when the art market had already begun to stutter and catch, what’s the the dollar volume of third-party guarantees necessary to provide sufficient supply on the market today? $70m? $350m?

Rise of the Outside Guarantor (The Art Newspaper)