It’s been a big theme for Sotheby’s new management to claim they are going to be more ‘judicious’ in their use of guarantees and won’t play dice with shareholders money. The subtext of these statements is always in reference to Christie’s aggressive willingness over the past several years to guarantee works of art at prices that would seem to subsidize the market instead of adding to the auction house’s profits.

Daniel Loeb made Sotheby’s failure to keep pace with Christie’s in Contemporary art a key reason for the need to replace Sotheby’s CEO. It has been an open secret that a part of Christie’s dominance in Contemporary art came from its free use of guarantees. So, naturally, Sotheby’s new CEO has been consistently paying lip service to the idea of shunning the guarantee-to-gain-market-share strategy.

Unfortunately, when it comes to practice, the new Sotheby’s has been far more reckless with guarantees than previous management. This was demonstrated by the massive—and, in retrospect, probably unnecessary—$515m guarantee for the Taubman estate.

Sotheby’s recognized a small portion of the loss on Taubman but is holding $33m in works that did not sell on its books to avoid what will surely be a greater loss. Look for those write-downs to get taken in an unusually strong year or a big kitchen sink quarter.

Even with that record, Sotheby’s management continues to believe that if it says it is being more responsible than it must be true that it is being more responsible. The latest example of that was on this week’s earnings call when CEO Tad Smith re-iterated his stance in the context of his new Fine Art division team:

That team today is very focused on profitable deal making and more judicious use of guarantees, the benefits of which we are also starting to see in our financials.

If Smith is using Taubman as a comparative, the statement is strictly correct. And Sotheby’s has gotten the message out to art market participants who have been happily coining the idea:

“Sotheby’s has held the line,” said Guy Jennings, managing director of the Fine Art Fund Group in London. “They haven’t allowed consignors to eat into their margins.”

All of this provoked a bit of an outburst from one collector who emailed this comment out of frustration:

Basically, it is a seller’s market, as it has always been for the last 10 years. So what they did for Taubman, they would do it again. Look at that 100m$ guarantee they’re giving for the Ames collection. They are bogged down in the same dead-end: high estimates to catch up with the guarantee.

Despite Smith’s repeated assurances—and in the face of overall commission margins rising from 15.5% to 16.4% last quarter—anecdotal evidence of consignors getting “enhanced hammer” deals for this Fall’s auctions suggests that Sotheby’s definition of judicious includes continuing to make guarantees that will ensure a loss and offering terms on highly visible lots that will eat into commission margins.

Sotheby’s Fine Art division is clearly eager to buy market share. That ‘judicious use’ may be a defensible strategy but it is exactly the strategy that Christie’s used and Sotheby’s has long complained of. It also happens to be a strategy that Christie’s appears to be on the edge of abandoning.

In its May Evening sales, Sotheby’s aggressively covered guarantees with irrevocable bids that locked in a loss. That was a smart move and one that jibes with Smith’s repeated use of phrases like “hedging.”

A hedge does not mean protection against a loss; however, it means a mitigation of a potential loss.

Nowhere was that better demonstrated than in Smith’s response to an analyst’s direct question on guarantees and the meaning of “judicious use.” Smith’s response, which you can read below, amounts to saying that it’s all on the Fine Art Division’s Amy Cappellazzo and Adam Chinn.

Here’s the earnings call transcript:

Oliver Chen, Cowen & Company

Congrats on solid results. Tad, on your prepared remarks, we were curious about your statement about more judicial use of guarantees. What’s the incremental lens that you are using just to make sure that that is in the right place in terms of how those are taking place? Thank you.

Tad Smith, Sotheby’s – President and CEO

Okay. With respect to the first question on guarantees, my view is what is the profitability and risk balance on guarantees. I think we currently have approximately $100 million of net exposure to guarantees as of the end of the quarter, plus or minus. And I expect a good portion of that to be covered by hedges.

But the truth of the matter is I am thrilled with the team and the pricing excellence of the contemporary team. And frankly, the Modern Impressionists and many other teams, too. And so I feel very comfortable that a combination of understanding the value of the underlying works, having a clear sense of how they will sell in the auction room, gives me a higher degree of confidence that our guarantees are judicious. And frankly, we have a strong bias to hedging guarantees.

So the way to hear that is we are unafraid to make guarantees because we have a high degree of confidence in our team. And the conference [confidence] in that team is borne out by that team’s ability to both hedge where it makes sense or make — or get profitable returns from guarantees in the auction room. I feel quite good about it, and I expect you will see more of the same, which is that we are willing to use guarantees and we are also hedging them very aggressively and thoughtfully.

How Sotheby’s Found a Path to Higher Profits  (The New York Times)

Edited Transcript of BID earnings conference call or presentation 8-Aug-16 1:00pm GMT (Yahoo Finance)