Sotheby's High-Flying Market Wager: $475 Million in Possible Guarantees to Consigors

To attract consignors who might be leery of selling in a climate of economic uncertainty, Sotheby's has boldly (if not rashly) upped the ante on its bet that art prices will stay firm this fall:

Just two weeks ago, Sotheby's had filed a 10-Q financial report with the SEC stating that as of Aug. 7, it had outstanding guarantees totaling $274.9 million. (Guarantees are the amounts promised by the auction house to consignors, whether or not the bidding actually achieves those amounts.)

Today it has filed an 8-K (click on Aug. 23) stating that its guarantees now total $378.1 million on property whose mid-range presale estimates total $400.2 million. What's more, the auction house 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. In the first half of this year, the largest amount of total guarantees outstanding at any one time was $326 million.

The report further states:

The current limit was established after assessing the performance of the Company's auction guarantees in the first six months of 2007 and further reviewing the last 14 years of auction guarantee experience. In each year during that 14-year period, as well as the first six months of 2007, the Company has realized a profit on its auction guarantee portfolio. For the year ended 2006 and for the six months ended June 30, 2007, approximately 16% of Net Auction Sales have consisted of property subject to auction guarantees.

But past performance is no guarantee of future results in these economically dicey times and (as I reported in my above-linked post about the 10-Q) Sotheby's return from guarantees declined $9.2 million in the first half of 2007, compared to the first half of 2006. (The house pockets a big chunk of any excess above the guaranteed amount.) The auction house has thus far advanced $53.7 million to consignors who took the guarantee bait for upcoming sales.

In less surprising news, Sotheby's has just followed Christie's lead in increasing to 25% (from 20%) the commission charged to buyers on hammer prices up to $20,000.

Privately held Christie's does not report the amount of its guarantees to consignors, but on July 3, before the credit crisis hit, Bloomberg quoted an assertion by CEO Edward Dolman that "we have never had as much consigned by this time of year before. Everybody realizes the market is very strong and they want to sell into it''...

...or cash out of it?

CORRECTION: I previously (and erroneously) reported that Bloomberg had reported Sotheby's buyers premium hike but not its gargantuan guarantees. I stand corrected (and chastened).