Felix Salmon fears that the significant number of recently-purchased works in the Contemporary sales next week are the harbinger of the “the contemporary-art bubble is entering its final stages.” He posits for reasons for this focusing on Steven Cohen’s sales as evidence that the smart traders are selling out to dumb money. Salmon may be right.
It is worth adding another significant reason that Sotheby’s is selling a substantial number of Cohen’s works. The auction house guaranteed them. Sotheby’s went to Cohen to bulk up its Contemporary offerings (another sore point for Daniel Loeb.) The terms of the guarantee aren’t known but they usually include the opportunity for Sotheby’s to share in any profits above the guarantee at a rate greater than the normal auction commission. Cohen is selling because the overall guarantee achieves whatever his financial aims are for the works (which may include simply unloading them at decent price.)
Having said that, here are Salmon’s four possibilities for what the public flipping means:
Firstly, galleries don’t have faith in their own prices. If Cohen is auctioning off works he bought from galleries, it’s fair to assume that he gave all of those galleries the opportunity to buy back the pieces first — and that they declined. On top of that, one of the notable things about Cohen’s Richter is that it is coming to auction with an estimate of $15 million to $20 million, which is below the $20 million he’s reported to have paid for it in 2012. Cohen is a trader, who marks to market: of all people, he’s going to worry the least about taking a loss. But he also wouldn’t sell now if he thought there was serious potential for price appreciation.
Secondly, we might be seeing the smart money rushing to the exits. They could make more money selling privately — but that takes time, and maybe they don’t think that they have time.
Thirdly, it’s possible that the auction houses are doing something which Dan Loeb accusedSotheby’s of in his recent letter:
“Based on discussions with market participants, it is our understanding that it has been Sotheby’s who has most aggressively competed on margin, often by rebating all of the seller’s commission and, in certain instances, much of the buyer’s premium to consignors of contested works.”
While it’s relatively commonplace for auction houses to charge big sellers no commission on their works, it’s very uncommon for the auction house to share any of the buyer’s premium with the seller. But if that’s happening, that might explain why the sellers are suddenly more willing to use the auction houses as a place to sell their works.
It is also worth commenting on these points in particular.
On the first, there’s no reason to believe that galleries were given the option to buy the works back. Cohen has enough clout as a collector that he would be hard to blacklist for selling at auction. The Richter is also part of a group of works. So the overall guarantee may make Cohen whole while allowing Sotheby’s to set an attractive estimate rather than an off-putting one.
On the second, there’s no indication here that the smart money is rushing to the exits. The smart money in the art market buys early and sells long after prices have risen. Sotheby’s sale has a number of works that have been in the consignor’s hands for decades. That’s the smart money. The reluctance to sell by owners of top-quality works is what forced Sotheby’s to offer Cohen a guarantee. Cohen trades a lot but he’s also known to be a late buyer in the sense that he buys the best works for top dollar rather than trying to acquire many early works for little money.
On the third, guarantees are indeed a way for auction houses to cut their fees. If they bet wrong on the guarantees their fees go out the window. But if they are right, the house shares in the upside which has been the only real way for either firm to see strong financial performance in the last decade. Direct guarantees are a high-risk business but they’re also high reward.
Finally, Felix Salmon has been calling the buyers at the very top end of the art market chumps for many years. So it hardly makes sense for him to claim this is a sign of a qualitative change in the composition of buyers.