Art auctions look pretty simple, on their surface: usually a buyer consigns a painting, and then all people who want the work bid against each other until the highest bidder wins. That’s certainly what an auction seems like, whether you attend in person or just watch online.
But it’s not the reality, especially at the very top end of the market, art auctions are more and more complex and opaque.
For instance, we can consider the case of the three paintings Steve Wynn had up for auction at this month’s sales, with a combined estimate of some $135 million. So weird what happened : one of those works, the so highly expected Picasso, Le Marin, was withdrawn after being damaged by mistake; another was hammered down at $33.5 million, so almost $38 million after fees, but eventually sold for only $37 million; and another of them, Picasso’s 1964 portrait of a woman with a cat, “Femme au chat assise dans un fauteuil,” was also pulled from the auction as it was covered by the same third-party guarantee that also included the damaged work.
If we cannot entirely understand what’s going on, we’re just having a proof of how today art market is increasingly complex and built on opacity.
After all that’s simple: the less people know about what’s going on, the more opportunities there are for profit and arbitrage.
When you take a closer look at this season’s big auction sales, one trend seems to be emerging: Auctions are looking less and less like anonymized price-discovery mechanisms and more and more like gussied-up private sales.
Of course, a certain amount of this auction activity can be easy to understand: If Christie’s damages a painting, then it makes sense that they would withdraw it from auction.
But what happened to Wynn’s other two paintings? According to what Artnet news reported, one of them, Double Elvis Ferus Type (1963) by Andy Warhol, received a series of bids, and after an underbidder put in a bid of $33 million, the work was finally hammered down to the high bidder for $33.5 million.
The hammer price, however, is never the final price paid: as we know, Christie’s has a significant buyer’s premium, so when the underbidder put in that $33 million bid,he knew that the final price would have been $37,437,500, after fees.
This is the hammer price plus the premium the factual price reported by Christie’s and the press. But that’s not the final price listed by Christie’s on its website, because the bidding didn’t stop at $33 million. The final purchaser bid $33.5 million, or $500,000 more than the underbidder. According to the preset formula, that means the winning bidder would ordinarily pay a total purchase price of $38 million.
An auction is meant to be a level playing field: You bid more, you pay more. Except, in this instance, the buyer didn’t pay $38 million as according to Christie’s, they paid just $37 million. It’s a nice trick if you can get away with it: bid more, pay less.
Evidently there was a Side Deal: The reason why the final bidder managed to get a $1 million discount is a side deal that she had made with Christie’s.
Very likely Christie’s had guaranteed Wynn a certain amount for the painting, in order to persuade him to consign the piece. But that created risk for the auction house: If it couldn’t sell the painting, it risked ending up out $30 million or so. In order to avoid that outcome, Christie’s found a bidder willing to guarantee the work by placing something known as an “irrevocable bid” before the sale began, which meant that Christie’s knew that the painting was guaranteed to sell.
Why would a bidder show their hand to Christie’s by entering an irrevocable bid weeks before the auction? The answer, simply, is money. In return for receiving the irrevocable bid, Christie’s promised to share with the bidder some of its profits on the painting, namely some of the buyer’s premium. So that’s how the guarantor bid $33.5 million, which would typically result in a final price, including premium, of $38 million but the final price actually listed was $37 million.
>> So, the art market is now just nothing more than a opaque Rigged System?
From the point of view of everybody else at the auction, such agreements might make the whole system seem rigged.
In such a context, bidding on the work becomes less attractive: It’s irrational to get into a fight where your opponent has you informationally and financially outgunned. And so while third-party guarantees are good for minimizing the auction house’s downside risk, they also depress the amount of bidding from everybody else.
After all, while the existence of the guarantee is revealed by the presence of º ♦ hieroglyphics in the auction catalogue (but not on the website, annoyingly), the identity of the guarantor is a closely-held secret, as is the amount of money that has been guaranteed to the seller.
The results can be seen in the two most expensive paintings sold at auction this season: Modigliani’s Nu couche (sur le cote gauche) (1917), which sold at Sotheby’s for $157.2 million, and Picasso’s Fillette à la corbeille fleurie (1905), which sold for $115.1 million. Both of them ended up selling to their respective guarantors, and there were no other bids.
When that happens, the consignor can be forgiven for wondering whether it was really worth sending the piece to auction at all: The Modigliani hammered for $139 million, which means that Sotheby’s and the guarantor, between them, split a buyer’s premium of more than $18 million.
Namely, we have already seen how Sotheby’s has a private-sales department which specializes in connecting buyers and sellers, and which brought an increasing amount of money to the auction house business. They are just for this: finding buyers willing to buy pieces they’re offering. And that what they can do also for works coming to auction.
Auction houses have a fiduciary responsibility to the sellers of works, but at some point the interests of the two parties are not entirely aligned.
A world where paintings regularly and predictably end up selling to their guarantors is a world where if you can get a guarantee for $X, then you can just as easily sell the work privately for the same amount, without the rigamarole, extra costs, and extra fees involved in taking it to auction. The seller loses out on potential upside, in the event of an auction-room bidding war, but gains in terms of lower commissions paid to intermediaries. At the same time, it’s clear where the auction houses want trophy art to appear: Auction sales have been very strong for the past few years, while the houses’ private-sales are not at the same levels anymore.
So, as we already noticed from Sotheby’s result last released, what seems to be happening, then, is that guarantees are the new private sales.
In practice, however, third-party guarantees nearly always come from professional or semi-professional art dealers themselves, who sell art just as frequently as they buy it, and who treat third-party guarantees more as true profit opportunity. At the same time, they prefer Auction houses as they now have a unique ability to reach a large number of deep-pocketed art collectors,
In a sense, then, the real purpose of going to auction is increasingly just rip-off insurance. You could sell your Picasso directly to a dealer for $115 million, but how do you know the dealer isn’t lowballing you? Answer: by making that dealer buy it at auction, via a third-party guarantee. If the real value of the painting is much higher than $115 million, then someone is very likely to pop up in the auction and pay more. If it isn’t, then the dealer will go home with the work.
So, if we still wonder if Auction Guarantees are now the new successful private sales.. the answer till now seems to be just, yes, especially for all for art sellers (and art dealers) who don’t want to get ripped off.