The Art Newspaper calls guarantees the next big art market scandal; Philbrick's guarantee math; Is guarantee use a market tell that we've peaked?; Amy Cappellazzo defends the art market; Cosby sells Thomas Hart Benton

This commentary by Marion Maneker is available to AMMpro subscribers. (The first month of AMMpro is free and subscribers are welcome to sign up for the first month and cancel before they are billed.)

It’s All But Guaranteed

If you’re looking for something interesting to read about the use of guarantees in the auction market, skip the first half of The Art Newspaper’s story and read the points made by Nick Maclean and Adam Chinn.

The quotes up top about guarantees being conflicts of interest or inflating prices are presented wholly without evidence. Third-party guarantees are private transactions that give the seller the opportunity to look for a better offer publicly. The mergers and acquisitions market has adopted a similar mechanism called a “Go Shop” clause that allows the seller to make a deal and then see if there’s more value achievable elsewhere. No one claims that go-shop clauses are inflating the M & A market or a scandal waiting to happen.

Deeper in the story we get the opposite view that guarantees take all of the drama out of an auction. Yet just last night the most dramatic lot sold had a third-party guarantee announced at the beginning of the sale. Nonetheless, the Monet snow scene attracted a flurry bids and made a final price three times the low estimate. Everyone was surprised. There’s no way of knowing what the guarantor offered. Christie’s wasn’t shy about signaling pre-sale interest in the painting from Post-War collectors. So there’s always a chance that the seller locked in a high price but the bidding went even higher.

The problem with the third-party guarantee system is that it is effectively an auction before the auction. Except, the third-party guarantee auction is not publicly announced nor conducted with any sort of rules. This is what Kenny Schachter is alluding to when he is quoted saying,

• “What’s pretty unregulated is what these idiots are doing in the room among themselves.”

That’s part of what Sotheby’s guarantee book runner Adam Chinn means when he says this:

• “You may make the argument that there’s an inequality of information [between bidders], but I don’t think there’s a conflict of interest,” he says.

A real area of concern is how the bidding is conducted with third party guarantees. After a sale, there’s often discussion of whether the work sold to the guarantor or not. That ought not be a secret (there’s more information asymmetry for you.) And the article has dealer Nick Maclean making an excellent case for more disclosure. Surely an article headlined, Irrevocable Bids Ought to be More Visible, would not have gotten the attention The Art Newspaper is looking for.

• bidders have no idea who is bidding on behalf of the third party—a bone of contention for Maclean, who suggests that “the auctioneer should be the one carrying out the bid for the guarantor, or it should be announced which member of staff is bidding on their behalf. It would be more transparent, particularly to new buyers unaware of the intricacies.”