Down market strategies

I wonder if anyone is getting guarantees out of the auction houses these days? In a financial market turning south it is a common strategy to buy “put options” before everyone else notices; i.e. contracts to lock in now, a right to sell something in the future, to someone else at a price fixed now, when you think the market as a whole is falling. An Art market equivalent would be to agree with an auction house now to sell a collection later in the year, on condition of sale price guarantees, set now, at current pricing. Always a risk for the auction house (ask Phillips de Pury), in a real down market it can be a disaster. The smart auction houses understand this, of course. If they are nervous about market values, they stop giving guarantees. Perhaps only in some markets. Perhaps in all.

So I repeat my question: does anyone know if auction houses are still offering sales guarantees this year?

12 thoughts on “Down market strategies”

  1. Hi, Ian, savvy issue.

    According to Sotheby’s “conference call” meeting with analystis last week, and its SEC filings, the company is guaranteeing pretty aggressively.

    As of Aug. 7, 2007, Sotheby’s had outstanding auction guarantees totaling $274.9 million; the majority of them related to property being sold this fall. Surprisingly, the “mid-estimate” value of those lots is a $292.7 million — even though guarantees traditionally (and safely) are at about 50% of the low estimate. Keep in mind this is before the traditional contract signings later in September for the fall sales, which could boost the total further.

    Company president Bill Ruprecht seemed pretty bullish in the call, terming the last six months both the company’s and the art world’s best ever.

    But there’s some evidence, looking at the documents, that consignors (and their attorneys) are asking for guarantees more often instead of simple cash advances or loans in advance of a sale. Advances and loans against property are down from a year ago.

    Should be a suspenseful fall.

  2. I don’t have lots of facts, however, I do have some personal experience.

    Short version: My humble yet cynical opinion is that these auction house guarantees don’t have so much to do with the current market as they have to do with who is selling it and who wants to buy it/or who wants to “burn it”. Politics plays a big role in this art world. I think there have to be more reasons for a guarantee than just the market. (Feel free to stop reading)

    (If you are still reading:) Two first-hand reasons for this opinion:

    I knew a very prominent collector who put up a painting or two that had impeccable provenance. This collector did not so much care for “The Art World” and many were not fond of this person (and vice-versa) but even so, the pieces offered were known to only be in this collector’s possession since their creation. This collector did get guarantees from the auction houses on these pieces. Most of the works sold for more than their guarantees, but not all. (Remember, the House always wins.)

    A couple years later I became close to another collector who had a major painting that this collector was sadly offering at auction to fund a project close to this collector’s heart. The auction house produced a small catalog only for this piece (on top of the regular night auction catalog) and this house shipped the work to the major auction cities abroad and in the US to incite interest. Mind you, this is all on the auction house’s dollar. The collector’s major piece not only failed to sell in this highly promoted sale but it barely, if memory serves, got even close to its low estimate. After the sale the collector told me that someone had “burned the piece”. In other words, someone told the auction house and/or potential bidders that this piece was undesirable for some reason. This was an important painting and it astounded me that the auction house would promote it so heavily but didn’t guarantee it or even buy it beforehand for their private sales.

    My long-winded point is that in my silly opinion even the auction houses won’t guarantee works if there is a bit of politicking and/or backstabbing which has nothing to do with the market.

    In the spirit of the grand Artworld Salon……thoughts?

  3. Welcome Sara Jo! The western edge of Chelsea’s 27th Street is now doubly represented.

    It’s good to be reminded that the art marketplace is somewhat different than other financial markets, and not just due to issues of taste and connoisseurship, but also for its unique applications of Schadenfreude. To be sure, equity investors often rate their portfolio performance not just in absolute returns, but in relation to how the guy across the street is doing. But the art world is smaller and less liquid than the big, bad world of business, and the players possibly better known to each other. So the potential for “burning” might not just be an effective (if underhanded) tactic, but a good way of settling scores.

    Art is one of the last unregulated marketplaces, where personal reputation, insider knowledge and whispered innuendo (into the right ears) can go far in setting valuations. What would the art world equivalent of the Securities and Exchange Commission look like?

  4. Another complicating factor is the extent to which the auction houses mitigate their exposure on guarantees by enlisting third-party investors in the guarantee process.

    In the last couple of years, I’ve heard several fascinating [to an MBA, anyway] accounts of auctioneers shopping around guarantees to potentially interested collectors, who agree to buy a work if bidding doesn’t exceed the guarantee. If a piece does sell ‘at auction,’ the guarantor shares a hefty chunk of the difference, essentially getting paid six- and seven-figure sums for not buying the work.

    If there isn’t sufficient bidding interest, though, the piece isn’t bought in; it’s bid up until the guarantee is reached, and it’s “sold” to the guarantor.

    While I can see the rationale for auction houses offloading their own financial risk, giving the seller and the buyer assurance of a work that’s not ‘tainted’ by going publicly discounted or unsold, there are other problems.

    By guaranteeing out-of-house, auctioneers essentially take a potential bidder out of the market, thus limiting the seller’s potential upside [or spurring inflated guarantees to make up for it]. It’s almost secondary market activity posing as open market liquidity.

    Phillips, at least, has occasionally/recently made note of third-party involvement in a lot, but it’s not something I’ve seen widely noted or discussed.

    The point? The degree to which Sotheby’s or other auction houses are guaranteeing lots themselves could reveal how much they are trying to prop up/make the market. The extent and enthusiasm for third-party financing, on the other hand, would reveal the sentiments of the financiers and collectors who are most active in the auction market–or at least tightest with the auction houses.

  5. All of these points raise the question of missing infrastructure. Late to the game of modern commerce, the art world is trying to run a multibillion dollar global industry on financial and institutional underpinnings that aren’t exactly suited to cope with this scale and complexity. It all happened too fast.

    Steve asks what would a Securities and Exchange Commission for the art world look like. But that assumes there is something resembling a functioning securities market, i.e. a transperant mechanism for aggregating funds and trading assets. Because many of the organizations and procedures that are standard to other industries are missing, the way these deals are transacted often appears secretive and suspect, even when the activity — as with the prior example of third-party guarantees, or other means of mitigating risk — are routine in other sectors of the economy.

    A question worth asking is what are the most urgently needed mechanisms that would ensure the fluid and transparent functioning of the art market, now that it has scaled to this level?

    The broader question is what are the trade-offs involved in building up the art world to a point where it is no longer appreciably different in its organizational structure and operating principles from any other domain of commerce?

  6. The biggest problem in the Art market, as far as SEC style regulation is concerned, is lack of transparency. In a public financial market one quickly notices a drop in supply or demand for a product through the resulting price movements. In the Art market a work can simply be quietly withdrawn or sold away from market eyes. The financial markets equivalent of insider trading is rife in the Art world.

    The multitude of sales channels (private or public) and the lack of any universal public register of prices for all transactions for a given artist or work, make any serious financial markets style regulation of the Art market improbable.

    One should also, perhaps, consider whether such regulation would be desirable. I am not sure that treating these objects of passion or desire more as financial investments necessarily helps the Art world.

  7. You can look at trends for the prices in an artist’s work, but that necessitates treating each piece that artist makes as equal, which is often not the case. It is not even worth investigating too far. I do think it is possible to demand more transparency in how the sales function and in how their business structure works including their private sales. Can the auction situation be fairer for those who want to participate? Can you imagine a sale where the bidders were all anonymous to the seller? It does not necessarily prevent the provincial word of mouth ‘burning’ of perfectly good works and sellers, but maybe it would, if it would entice more people to participate.

    I think that the single most important thing though is that there is a regulation to prevent some kind of monopoly from settling in to a point of no return. From what I understand, this is the situation in North America with concert tours of a certain level. And with sales of cd’s dropping too, who would have thought that it would ever be more attractive and lucrative to be an artist than a rock star?

    The collaborations between auction houses, galleries and other such middle-men will either become a stronger vehicle or will become something so bulky and obvious that it is really simple for artists and collectors to sidestep. I am concerned that when there is some kind of market shift, that kind of monopoly is all that will be left.

  8. Ian. Allow me to admit that my suggesting an art world equivalent of the SEC was mere conjecture, which was why I wondered what form it, or any other regulatory arm, might take. The founding vocabulary of this thread — how auction house guarantees could function as “put options” in a “down market” — led me to carry the argument to its logical conclusion. If we are examining art in terms of the equity market, then perhaps we should also consider applying regulations that govern this larger market. Since my background is not financial, I wanted to throw the question out for feedback.

    My gut feeling is that creating a standardized governing authority for the art market is impossible (due to issues of transparency advanced by both you and András), undesirable (due to the special passions associated with the art commodity), and ultimately doomed to failure. Who would cede unquestioned authority to one ruling body? Look at all the problems experienced by the Warhol Authentication Board. Imagine if this extended not just to authentication of work by one artist, but to valuations over an entire marketplace. We would be awash in lawsuits.

    Perhaps part of the problem rests with the elusive and shifting position of the art work, from its creation (in private) to its exhibition (decidedly public) to its sale (both public and private). Many sales are still made behind closed doors. So when the market does become visible, at auctions and art fairs, we tend to seek a basis of standardization, even if it pertains to only a portion of sales. Does this offer any true basis for valuation or differentiation? And not just between the work of different artists, but even (as Lisa astutely observes) within the varying oeuvre of a single artist?

    Collectors often make their money in highly regulated arenas. Perhaps one of their joys of collecting, aside from a love of art and other purely aesthetic concerns, is precisely that feeling of freedom which seems promised by an unregulated marketplace. If an art world SEC made collecting feel too much like work, would some capital be inclined to wander off, looking to play in a more bohemian sandbox?

  9. “Joy of collecting” is one way to put it; “easily manipulated market with no substantive legal sanctions” is another.

    I sincerely doubt that collusion, cartels, group bidding, and market manipulation are any more prevalent today than they were when Rembrandt bid up his own work at auction, but there is an awful lot of behavior in the art market that is specifically criminalized and tightly regulated and scrutinized in financial markets.

    Maybe that’s why people with experience in the art world contemplate the idea of SEC-like oversight. [Personally, I think it’s the wrong solution, and I’d be more interested in the art world that wriggles out from under such a smothering, commodifying blanket.]

    The growing pains Andras mentioned are real, though; everyone can spot the transformative effect the auction results databases have had on the way people buy and sell. But as I found while researching for a newspaper article on art market biases and trends, the data is nearly useless for anything besides discovering “artist’s previous price results.” The databases as they exist now are intended solely to facilitate the next transaction.

    I wonder what would be the impact of much more robust, detailed data–say, from a Bloomberg Terminal for the art market, which allows us to see just how many damn Rauschenberg prints there are out there, for example, and to plot their churn rate compared to Murakami’s, based on year-since-first-museum-show? Would it make things better? Would it reveal systemic underpricing of women’s art? Or would it be just one more distraction, the way writers constantly check their Amazon Sales Rank?

  10. This conversation went pretty fair afield – in a very good way. But permit me to come back to Ian’s original question: Is anyone getting guarantees these days? The answer seems to be an unequivocal yes, based upon both hard facts and anecdotal evidence.

    As CultureGrrl noted last week after valiantly scouring SEC reports, Sotheby’s “has made additional offers of guarantees to potential consignors that, if contractually finalized, would up its guarantees to a total of about $475 miillion — just $25 million shy of its ‘outstanding auction guarantee limit’ of $500 million, which was set by its board earlier this month.”

    Likewise, in conversations with auction-house contacts, and those consigning heavily with them recently, I found no evidence of the guarantees suddenly being choked off, post subprime-loan crisis. In some highly competitive fields, I even hear of consignors getting 105-percent, meaning they pay no consignment fee and get 5 percent of the buyer’s premium.

    Finally, I buttonholed one expert and asked for an explanation. Eyes wide and shoulders high, the expert said, “If we don’t give them the guarantees, we’re not getting the work. So we have no choice, really.” The implication seems pretty clear: Auction houses are apparently far more afraid of getting beaten to great work than they are of getting left holding it. Depending on how you look at it, that’s either hearty optimism or total fatalism.

  11. Marc wrote: “I found no evidence of the guarantees suddenly being choked off” and “the expert said, ‘If we don’t give them the guarantees, we’re not getting the work. So we have no choice, really.’”

    All of which suggests that collectors still feel highly empowered in this market, which, I hope (is my bias showing?), is a good thing.

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