How Do Guarantees Prop Up the Art Market?

The Art Newspaper’s Georgina Adam and Charlotte Burns have an interesting Tour d’Horizon of the issue of guarantees in the art market. Along with providing a neat murderer’s row of dealers and collectors who regularly back auction sales as third-party guarantors, they give voice to many of the complaints and some of the defenses of the system. They also offer this stunning reminder of just how money the auction houses were putting to work at the height of the boom to generate liquidity:

In 2007, Sotheby’s issued $902m-worth of guarantees, double the 2006 amount and up from $131m in 2005, according to Noah Horowitz’s book Art of the Deal (due to be launched on 3 March at Sotheby’s). He says this underscores “how the art market had been artificially propped up during the bubble by the generous financial arrangements orchestrated between the auctioneers and their marquee clients.”

Noah Horowitz is a smart guy. But it isn’t entirely clear from this article why guarantees can be said to have artificially propped up the art market.

The guarantees obviously provided liquidity by inducing sellers. Until the art boom came to a sudden halt in the Fall of 2008, the majority of works the auction houses guaranteed were bought for prices higher than the guarantees. Indeed, the success of the guarantees in both sales and profits for the auction houses is one reason numbers grew so high, so quickly.

The profits from the guarantees were great enough to entice both auction houses to continue the practice throughout 2008 even as executives from both firms began to warn against the impending risk.

If the auction houses had been artificially propping up prices, they would have lost money on the guarantees themselves and disposed of the works at a loss.

The importance of guarantees in creating liquidity has been demonstrated by the rapid rise of the third-party guarantee system. Adam and Burns devote most of their space to the problems that arise from having third-party guarantors who also bid on the works. Interestingly, they offer this quote:

“Most of our third parties do bid on the objects,” says Jennifer Zatorski, the international commercial director at Christie’s

Usually, when a bidder holds a floor in an auction it is a dis-incentive for other bidders participating in that sale. Once the existence of floor-holder has been revealed, it should be assumed by other bidders that the guarantor has an advantage. That advantage has been purchased in advance. It may not be fair to the other bidders but the opportunity to gain that advantage was given by the consignor, not the auction house.

It is the seller who is warping the market to his or her own disadvantage in exchange for lowering the risk of the sale. Which makes it hard to see where the guarantee system is propping up the market.

Guaranteed Outcome (The Art Newspaper)