While we're all familiar with reverse auctions, it's unlikely that many Spend Matters readers have ever participated in the rarefied air that surrounds the New York art auction season. And while we might all like to have the massive quantity of discretionary cash needed to bid, it appears that the air from which bids are taken in this high stakes commodity market is more than a bit polluted.
This week's New York Times published an extensive exposé revealing some rather shady practices that underlie Manhattan's art market theater. Imagine participating in an auction where there's an opening bid and the auctioneer commences to ostensibly respond to bids from the floor while also pulling some of those bids from thin air, or "the chandeliers" as it's referred to, as the bidding escalates. So as long as some bidders are willing to pay more, one might say 'what's the real harm in that.' But the fraud (my take) goes deeper.
It's a bit like puts and calls in the stock market, though clandestine. The Times reports:
"When you talk to dealers about what most needs policing in the art market, many mention third-party guarantees... When someone offers a piece for auction, the house will sometimes guarantee that the seller will make at least a minimum amount by arranging with a third party to purchase the work for a specific price, undisclosed to the public, should it fail to sell for more. In exchange for putting up the funds, the guarantor, whose name is also not revealed, gets a cut of any proceeds above the guarantee. So if a third party commits to a $10 million guarantee, and the bidding reaches $12 million, the third party receives a piece (often 30 percent to 50 percent) of the additional $2 million." tweet
But wait, the transactional process becomes even more opaque:
"At Christie’s and Phillips, both large auction houses, even if a guarantor ends up owning the work, he would still pay less for it than anyone else. For example, if a guarantor’s bid of $12 million turned out to be the winning bid, the guarantor would not pay the full $12 million because he or she still gets the cut — called a financing fee — of any amount above the $10 million guarantee." tweet
Incredibly, "Auction houses say guarantees create liquidity and give sellers the confidence to bring important works to market. If there are abuses, they say, it is the guarantors’ conduct that is the issue, not their own."
To wit, the market manipulation transcends individual auctions in that "The houses typically secure the guarantees from wealthy collectors and private dealers, some of whom agree to be guarantors because it can help maintain the value of an artist in whose work they have invested."
In what can only be viewed as humorous obfuscation, The Times states "Many in the art world insist there is no need for further scrutiny of a market that prompts few consumer complaints and is vital to the New York economy." Outrageous as this all sounds, why should we care about these shenanigans that impact investments among a mere .001% of the global population? Methinks it's a very revealing window upon the nature of human greed, the compulsion to manipulate and defraud, and an interesting example of why we should never trust financial markets to be self regulating... Okay, back to work until this evening, when I'll be attending a show of local artist's works at a small privately owned bookstore - to seek out a future Picasso.