Permanent and Infinite (The Risks the Auction Houses Take with Guarantees)
‘Permanent and Infinite" is the first of a series of monthly and possibly bi-monthly articles I will publish on Artnet News and, subsequently, post on my blog AsherEdelman.com. The writings will focus on art, the economics of art, art markets, art fraud, art crime, amongst other related topics. As I have tried to do in the past, taking seemingly complex topics and reducing them to their parts, which I will try to accomplish again. I welcome interaction and, when possible, will be responsive.
While we are frustrated by the lack of transparency and the implications for “level playing field” purchases in guaranteed sales, we neither focus on the extent of the problem nor the advantages to buyers.
How many guarantees for the Contemporary night sales?
Sotheby’s has guaranteed or arranged guarantees on 39 works of art out of a total of 81 pieces in the sale. The dollar amount of these guarantees we estimate to be in excess of $200,000,000.
Christie’s has guaranteed or arranged guarantees for 39 works as well out of a total of 72 total works for sale. We believe Christie’s guarantees to exceed $250,000,000 in value.
The public in this auction, other than the guarantors will not be informed of the most recent provenance (sometimes even past provenance), the terms of the guarantees (profit shares, commission shares, financing fees etc.), the edge the guarantor has over other bidders should he buy the work and many other salient issues, even, at times, whether the work sold or not. Clearly, the guarantor is participating on better terms than any other bidder for the art work. One would think that this glitch in a “level playing field” would deter bidders from trying to purchase guaranteed lots. But, in fact, guaranteed lots offer a huge advantage to non-guarantor bidders.
Guarantees Become Securities
As has always been evident in the last years, Guarantees are arranged through the auspices of the auction houses, often with the auction houses committing or financing the guarantee early on and then replacing or reselling the guarantee to an investor or collector. The auction houses act as underwriters of these transactions, often as principal before, during or after the sale is put together. Not all are passed on to third parties.
The auction house (underwriter) has mated an asset with a financial product (guarantee) and then offered that combination (by definition a security) to the public through the auction process. Presently, there has been little focus on the idea that the asset (a work of art) and the financial product (the guarantee) when lumped together constitute a security. If, indeed, these offerings are securities then there are disclosure rules which need to have been and need to be followed. You would not offer a preferred stock without telling the buyer the interest rate or the low allowable issue price. One would need to indicate who was selling, the company or shareholder, the distribution of funds and of commissions would have to be designated specifically etc etc etc. None of these rules have been followed in the case of offering guaranteed priced art. In fact even the actual sale prices are distorted by the nature of the guarantee.
If the package (guarantee plus artwork) constitutes a security and the concomitant level of disclosure is not offered to the buyers it is possible that the underwriter (auction house) could be permanently liable for any losses incurred by buyers of guaranteed lots whether the house, itself, was the continuing guarantor or it had laid off the bet on a third party.
Will this observation prompt additional disclosure in the auction process? Will it draw in buyers who will view it as a secondary guarantee against their future losses? Will the excessive speculative climate experienced in the evening sales subside? Will the regulators come knocking at the door? All is possible but the best result will be full disclosure and a return to a level playing field.