Who Are the Third Party Guarantors?

The Economist believes that auction guarantees represent a warping of the art market. The latest story on the recent sales in New York. “[T]he market would be considerably fairer and more open if the auction houses reported real prices, disclosed the reserve prices,” the magazine intones, “—and named the third-party guarantors as well.”

(The real prices referred to here is the price paid by a third-party guarantor who subsequently buys the work at Christie’s and receives their share of the financing fee thus creating a discount for having guaranteed the work.)

But what the magazine doesn’t say is fairer to whom? Knowing the seller’s reserve price or the identity of third-party guarantor might make it easier for a buyer to decide whether their next bid will win the auction or merely increase to the cost to a competitor. Thus this information is “fairer” to buyers.

But what about sellers? The auction house is their agent charged with maximizing the value and minimizing the risk of turning their property into cash. Guarantees, undisclosed reserves and financial incentives all serve the seller and make the act of selling “fairer” to the vendor.

The Economist doesn’t make it clear why buyers are to be given preference over sellers. Nonetheless, the latest story does contain some value in this quick run-down of known guarantors:

The first guarantee funded by a third party is believed to date back to November 1999, when Sotheby’s found a backer to pledge $40m for Pablo Picasso’s “Seated Woman in a Garden”, which had been consigned by Eleanore Saidenberg, Picasso’s long-time American dealer, and her husband, Daniel. From 2000 onward, both houses have been working with outside financiers—often cash-rich dealers such as Bill Acquavella, Bob Mnuchin, David Nahmad and Adam Lindemann, who know a lot about the distinct markets of individual artists. There are also an estimated 30-40 collectors who provide guarantees, such as Si Newhouse of Conde Nast magazines, Steve Cohen, founder of SAC Capital, Pierre Chen, owner of the high-tech Taiwanese Yageo Corporation, and the Qatari royal family.

Financial Machinations at Auctions (The Economist)