Wednesday, November 23, 2011

Observations on the Art Market

We had an interesting running conversation at the gallery yesterday. With the world's economy a wreck why is the art market still thriving? At their big sales earlier this month the three major auction houses, Christie’s, Sotheby’s, and Phillips de Pury, sold a combined $633 million worth of art. Evidently that top 1% of the population with all the wealth has some cash to spare.

One thing we came up with was the popularity of a shadowy practice called 'third party guarantee' in which the auction house sells the work before the sale begins. This guarantee becomes the what eBay calls the reserve price, the price below which an item will not sell. There was a time auction houses guaranteed a minimum price themselves but after losing $200 million during their fall 2008 sales they increasingly looked to third parties for their guarantee. The first third party guarantee is thought to have occurred in 1999 when Sotheby’s found an investor who pledged $40 million for Pablo Picasso’s “Seated Woman in a Garden.” Guarantors also can make millions in financing fees so in effect they get the works at discounted prices.

With some looking I came up with a few names of dealers who provide guarantees. The list includes Acquavella Galleries owner Bill Acquavella, former Goldman Sachs partner Bob Mnuchin, and billionaire art dealers David Nahmad and Adam Lindemann. More ominous guarantors to those who would rather major works stay in public view are the Taiwanese Yageo Corporation and the Qatari royal family.

Very little is publicly known about these agreements other than the symbols Sotheby’s and Christie’s publish in their catalogues to distinguish between the lots guaranteed by themselves and those backed by third parties. The identity of the guarantors and the level of the amount of the guarantee remain a secret. Less well connected bidders have none of this information so start their bidding at a total disadvantage. Because of this many dealers think the guarantees simply distort the market and keep prices artificially and dangerously high. Also there is no clear way to tell what any given work is actually worth.  

With all the money involved I think the market would be much fairer and open if the auction houses just reported the real prices, disclosed the reserve prices, and named the third party guarantors as well. A level playing field would be better for everybody involved.

Maybe I'll just sit back and wait for the bubble to burst.

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