Some editor at Bloomberg is trying to have fun. But describing Sotheby’s quite sensible decision to start offering 3rd party guarantors fees for their assumption of risk (even if they are the ultimate buyer on subsequent bids) as paying investors to bid is laughable nonsense.
Here’s the not-so-new news that Bloomberg is reporting:
The new perk in Sotheby’s arsenal of incentives, disclosed in catalogs in April, sweetens the deal for investors who agree to step in as buyers of last resort. In the past, so-called irrevocable bidders were compensated with a part of the auction house’s sales commission only if another buyer purchased the artwork that they had backed. Now, by opting for a fixed fee, they are guaranteed a payout and can get the artwork effectively at discount.
That’s fine. But dressing that up as ” some investors paid to bid” is just wrong. Guarantors are not paid to bid at all. If they buy the work of art on their guarantee, they don’t get “paid” anything. There’s no discount. There’s no distortion of a market. A 3rd party guarantee is no different from the “Buy Now” button on eBay.
The fees Bloomberg wants to turn into skullduggery are paid to the guarantor only if other bidders participate. If another bidder wins the lot, the guarantor is paid a fee for assuming the initial risk. The guarantee is a kind of loan and the guarantor deserves to be paid interest for making it.
If the 3rd party guarantor must fight off other bidders to win the lot, two separate transactions take place. The bidder buys the lot, paying the hammer price and the auction house fees. The auction house then pays the guarantor a separate fee—even if the guarantor happens to be the same person as the buyer.
In practice, these two transactions take place simultaneously and the auction house subtracts the fee from the final payment giving the appearance of a discount. This is what has some people upset/confused.
David Nash, a co-owner of Mitchell-Innes & Nash gallery in New York, says irrevocable bids are part of financial machinations that distort the art market. When highly valued works with prearranged bids come up for auction, in many cases there is no genuine bidding and they are bought by the guarantors, he said. […]
“It’s a sale agreed in private to take place in public and pretend it’s an auction,” said Nash.
Remember that every work of art that fails to find a buyer on the auction block is open to negotiation, even an informal auction, after the sale. Those sale prices are not usually reported (though in some places they can be published as part of the sale.)
A 3rd party guarantee simply prevents the work from going to that post-sale negotiation, a type of event Nash has surely participated in many times. Getting lots that have been bought in can be a source of great profits to dealers like Nash.
It’s easy to see why Nash might find guarantees frustrating, they seem to block his access to “distressed” works he can acquire at a discount. Nash’s consternation, however, is the consignor’s gain. Sotheby’s is helping the the seller realize more value by preventing a middleman from capturing that value. The middleman complains, naturally.
But let’s get back to the auction room and the question of what’s real and what’s pretend. When the 3rd party bid is announced, the other potential bidders are put on notice that there will be no post-sale negotiation. They make an informed decision whether to bid now knowing the post-sale route to acquisition has been closed.
Fearing a lost opportunity, the bidders might counter the guarantee. Or, feeling someone else has paid a price too dear, the bidders may sit on their paddles. They make a choice. Those who do not bid are still taking an action, they are NOT bidding. That is an affirmative event in an auction context. (An auctioneer will sometimes even try to heighten this by singling out a person in the audience who had previously shown interest in a work and ask them directly from the “box” whether they intend to bid. It’s not uncommon to see them reconfirm their intention NOT to bid.)
If an auction participant is shown a work; told there is a buyer at a price; told the price in a public setting; and chooses not to bid, that’s a very real exchange of information (which is what an auction is at bottom.)
Finally, as if this post hasn’t gone on long enough, the Bloomberg story inadvertently brings up anther question. Bloomberg offers Roy Lichtenstein’s Nurse which was sold in November of 2015 with a last-minute third-party guarantee announced before the auction begain, as an example of the distortions created by a 3rd party guarantee.
That’s what happened with Roy Lichtenstein’s “Nurse,” which was purchased in November at Christie’s for $95.4 million — an auction record for the artist that was 70 percent higher than the previous high two years earlier.
What is Bloomberg trying to say here? They seem to be saying the guarantee was an intentional attempt to distort Lichtenstein prices. But, for many, the questions surrounding that sale go much deeper than that.