Do Guarantees Mask Weakness In the Market?

Scott Reyburn’s excellent take on the New York sales that ran in the International New York Times over the weekend contains quote that suggests the use of guarantees somehow props up the art market.

The logic there just doesn’t hold together. Guarantees transfer risk from the seller to the auction house. But the risk remains that the market will not buy the works on offer. No guarantee can force a buyer to pay for the works. The use of third-guarantees in the form of a bid that must be made during the sale merely allows the work to be pre-sold. A work guaranteed directly by the auction house that fails to sell does not get recorded in the over all sales statistics.

The only place where the auction house can “inflate” the market is when it guarantees a lot for a price higher than it sells to the buyer. In those cases, the guarantor is subsidizing the sale. And it happens, as it did with Christie’s lead lot of Andy Warhol’s Four Marilyns.

The use of guarantees is meant to tap into the auction house’s superior knowledge of potential buyers. So when the houses pull back on their guarantee book, we can infer that the auction house sees weaker demand.

“We’ve seen a reduction in sales value correlated to the amount of guaranteed lots,” said Anders Petterson, the managing director of ArtTactic, a research company in London. “It looks as though May 2015 was the peak. Since then we’ve seen Sotheby’s and Christie’s trying to wind down their financial exposure. People are still prepared to pay huge prices for selected lots, but guarantees have created a perception that the market is stronger than it is.”

In May, 84 of 180 lots, or 47 percent, carried guarantees in Christie’s “Looking Forward to the Past” sale of 20th-century masterworks and in Christie’s and Sotheby’s evening contemporary auctions. But this time, just 37 of 154 lots, or 24 percent, had guarantees at the equivalent three evening auctions.

Those figures would seem to support the notion that wealthy sellers’ ability to make Christie’s and Sotheby’s compete for the privilege of guaranteeing them minimum prices — waiving fees and giving them a portion of the buyer’s premium — has artificially inflated the market. It has certainly made it more difficult for the auction houses to make money.

Hammered by Guarantees  (The New York Times)