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The New York Times ran a column on the art market over the holiday weekend that is a muddle of ideas about how guarantees affect prices. According to the column, Sotheby’s and Christie’s have diverged in their approach to guarantees. The basis for this judgment seems to be the results of the November sales.
Because Christie’s saw two of its highest-priced works sold without guarantees but after rounds of intense bidding—and the lead lots at Sotheby’s and Phillips had third-party guarantees but sold without much competition—the author concludes on the basis of this small sample that third-party guarantees suppress bidding while works without guarantees result in “competitive bidding.”
Here’s how the Times puts it and if someone can explain what a “‘true’ market price” is they get extra points):
But the auction houses’ reliance on third-party guarantees to source and sell big-ticket artworks, particularly at Phillips and Sotheby’s, does raise the question of how much that $25.6 million for the Richter represented a “true” market price. Values can be inflated when auction houses offer competitive guarantees to secure major consignments. These guarantee can then be transferred to a third party, who will either buy a work at a sale, or be rewarded for their unsuccessful bidding. More recently, some third-party guarantors — called “irrevocable bidders” at Sotheby’s — have also been paid fees if they are the purchaser. These confidential arrangements, denoted by symbols in the catalog, can have the effect of deterring bidding in the salesroom.
Do third-party guarantees deter bidding? Logic suggests that knowing a party has agreed to buy the work at a certain price but is willing to let the owner entertain higher bids would send a signal that the third-party guarantor has done their homework and offered a fair price. Anyone else bidding would have to hold some greater knowledge or risk becoming the greater fool.
But that’s just a supposition. Bidding behavior his governed by too many variables to easily say that a third-party guarantee is always the fair price. During the Ames sale at Sotheby’s, Gerhard Richter’s AB Still had a $19.5m irrevocable bid. That works attracted eager competition and sold for $34m. A similar Richter abstract with the same irrevocable bid did not. The taste of the bidders—and the perceived quality of the works—had much more to do with the divergent results than guarantee structure.
We have ample evidence too that guaranteed works—like the two stunning lots offered last year that made more than $170m at Christie’s—can end up in bidding wars. Last November, while the guaranteed Modigliani shot through the roof, the so-called naked Giacometti pointing man also did extremely well.
The difference in whether the work was guaranteed or not came down to the sellers, not the market. A confident seller willing to absorb the risk would happily sell without a guarantee. Others want to lock in the price.
That isn’t to say that there is nothing worth noticing about the new use of third-party guarantees. The Times is right. Many more works are being sold with what in investment bankers would call a “go shop” clause. That is, a buyer and a seller make a deal but the seller then has a period of time to see if there is anyone who wants to pay more.
The current state of the art market probably has more to do with the prevalence of these “go shop” deals than anything inherent to guarantees or third-party guarantees. Art prices rose steadily from 2009-2014. Since that time, the market has reached a plateau, though a rather elevated plateau. Direct guarantees make sense for an auction house when prices are rising rapidly and the auction house has better market information than the seller. Third-party guarantees, which came into prominence after the global credit crisis, work better for an auction house looking to keep up their volume of transactions.
From 2014-2016, we’ve seen a variety of guarantee strategies to produce different market outcomes in support of different auction house strategies. The third-party guarantee strategy (with the added benefit of being able to compromise on the buyer’s premium) seems to be useful for landing works to expand market share. Both Sotheby’s and Phillips are intent on increasing their market share which may be why we’re seeing them be more aggressive in the use of these deals.
The Times quotes one commentator who seems oddly concerned with the profits of the auction houses when the role of an art advisor is to get the client the best possible deal:
“The air has got quite thin at the top,” said Wendy Cromwell, an art adviser based in New York. “There used to be at least two bidders on most of the lots, but now there is usually only one. Guarantees do provide cover for the lots and give a sense of security. But what do the totals mean in terms of profit? We’re blind.”