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Cherchez “Les Femmes”: Mysterious Role of “Party with a Financial Interest” in the $179.37-Million Picasso

“A party with a financial interest may be bidding” on Picasso‘s “Les Femmes d’Alger (Version ‘O’),” 1955, Christie’s auctioneer Jussi Pylkkänen announced at the start of the May 11 auction where the flesh-flaunting “Femmes” attracted a $179.37-million sugar daddy.

Picasso, “Les Femmes d’Alger (Version ‘O’),” 1955

Picasso, “Les Femmes d’Alger (Version ‘O’),” 1955

But who was that mysterious “party with a financial interest” and did he/she/it help to pump up the price? In response to my query, a Christie’s spokesperson (who did not wish to be named) told me that the “party” consisted of “outside partners” to whom Christie’s had “syndicated a portion of its own risk” from offering a guarantee. The guarantee is an undisclosed amount to be paid to the consignor, whether or not the bidding reaches that amount. In the nine-figure stratosphere, that can be a formidable risk.

If the bidding hadn’t reached the level of the guarantee, Christie’s (not the outside partners) would have become the owner of the Picasso and would have owed the full guaranteed price to the seller.

What Christie’s wouldn’t say for publication is whether the outside partners actually bid on the Picasso, thereby boosting the bidding towards $160 million, against a presale estimate “in the region of $140 million.” The buyer’s premium, added to the hammer price, tacked on nearly $20 million to the amount owed by the successful bidder—the highest amount ever paid for an artwork at auction.

As I mentioned in my Bubble Alert post, many of those who (through a variety of arrangements) assume part or all of the auction houses’ guarantee risk are dealers or megacollectors who, through their interventions, are, in effect, protecting the market for their own holdings and keeping the bubble from bursting.

“The auctions are helping us. They are raising prices on everything,” said Swiss dealer, Robert Landau, quoted by Bloomberg‘s Katya Kazakina in her advance report on Art Basel, which opens tomorrow for invited visitors (and on Thursday for the general public). Landau, who (according to Kazakina’s report) is offering a Picasso painting at the fair for $30 million, has reason to hope that a rising auction tide floats all boats.

By law, the New York auction houses can bid only up to (but not including) the reserve price (the amount below which the consignor won’t sell). But outside parties who assume part of the houses’ guarantee risk can bid as much as they want—up to and beyond the amount of the guarantee.

Since there appeared to be robust interest in the Picasso, bidding by the outside partners may not have been needed to provide more sizzle. While not releasing information on how the arrangement for “Femmes” worked in practice, the Christie’s spokesperson, in a series of emailed responses to my queries, did provide deeper insight into the various mechanisms deployed by Christie’s to mitigate its guarantee risks.

I discovered that its arrangements with outside parties are more complex than indicated by the information provided in the catalogue and in the auctioneers’ announcements.

These side-deals suggest that auction prices may bear little relation to the classic IRS definition of “fair market value”—“the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act and both having reasonable knowledge of the relevant facts [emphasis added]”

My investigation gave me more “knowledge of the relevant facts,” but left me convinced that more simplicity (not to mention transparency) is needed in the interest of full disclosure to potential buyers of exactly what they’re up against.

The outside partners who to whom Christie’s syndicated a portion of its Picasso risk stood to lose money if the bidding fell short of the guarantee. But unless they were the buyers, they would have profited if the hammer price exceeded the guaranteed amount (as likely occurred with the Picasso) by sharing with Christie’s the profit due to the house (after accounting for shared costs). Included in that shared profit would be a portion of the amount by which the hammer price exceeded the guarantee. If the outside partners had bid on and bought the Picasso, they would have received no fee or financial benefit from sharing the auction house’s risk.

This is a different arrangement from what Christie’s calls a “third-party guarantee,” whereby the outside party agrees, before the auction, to place an irrevocable written bid on the lot. Unlike the “outside partners” on the Picasso guarantee, third-party guarantors at Christie’s receive a fee from the auction house even if they are the winning bidders (thereby lowering their net cost in buying the work).

If all of this seems convoluted, Christie’s not-so-helpfully provides (in the fine print at the back of its catalogue) a nonfunctional link——which purportedly provides “a more detailed explanation of minimum price guarantees and third-party financing arrangements.” (At this writing, if you try that link you’ll get: “PAGE NOT FOUND.”)

The Christie’s spokesperson gave me a functional link to Financial Arrangements Explained, but the only third-party financing arrangement elucidated therein is the “third-party guarantee” (involving an irrevocable bid), which was not the type of arrangement that pertained to the sale of the Picasso (the underwriting by an outside party of a portion of the auction house’s guarantee risk, without using an irrevocable bid).

Part of the confusion is linguistic: In Christie’s-speak, a third party’s underwriting of a portion of the guarantee risk is not the same thing as a “third-party guarantee” (involving an irrevocable bid). The method of determining compensation to the third party for assuming the risk in these different arrangements is different. (See the Financial Arrangements Explained for information about the fees paid to third-party guarantors.) What Christie’s calls a “third-party guarantee” is called an “irrevocable bid” at Sotheby’s.

Sotheby’s clearly designates in its catalogue (with a horseshoe-shaped symbol) the lots that bear irrevocable bids. In Sotheby’s lingo, a “third-party guarantee” is a risk-sharing arrangement with an outside party, without use of an irrevocable bid. If irrevocable bids on additional works are secured after the catalogue goes to press, Sotheby’s auctioneer announces those at the sale.

In what seems to me to be a major omission, Christie’s catalogue makes no mention of irrevocable bids: That term is absent from the catalogue’s “Important Notices and Explanation of Cataloguing Practices.” It appears only in the “Financial Arrangements” webpage (for which the catalogue provides an erroneous link).

Christie’s spokesperson stated that that its back-of-catalogue notices and explanations “correlate to New York City Administrative Code, which requires an auction house to notify the public if the auction house has guaranteed a lot offered at our auction….While not required by the law, we voluntarily provide notice whenever a party that may benefit financially from the sale of a lot may be bidding.”

At Sotheby’s, those third-party guarantors who have not provided an irrevocable bid cannot bid at the sale. “They share in the guarantee with us, so they share in the upside or the loss,” said Lauren Gioia, its worldwide director of communications. Irrevocable bidders “are only compensated when they don’t win the lot” (in contrast to the arrangement at Christie’s). When a work is guaranteed by the house but doesn’t have an irrevocable bid, Sotheby’s does not disclose whether the auction house bears the full risk or is sharing it with a third party.

If you’ve tried to follow me thus far, I suspect your eyes are glazing over. All of which raises the obvious question:

How many participants in today’s pre-engineered auctions actually have “reasonable knowledge” of the complex machinations underlying these sales, so that they possess the “relevant facts” in weighing how much they should bid?

It’s time to end the non-transparent side deals, which, as I wrote in the Wall Street Journal, can also include funneling a portion of the buyer’s premium to the seller. When Christie’s first introduced the then controversial buyer’s premium to New York in 1977 (adopted in the U.S. less than two years later by Sotheby’s), its stated purpose was to compensate the auction house for services provided to the buyer. Now the buyer’s premium has become another mechanism for compensating the seller, thereby helping to lure consignments.

Locked in an intense battle to snare consignments through guarantees and fee-sharing deals, the Big Two auction houses are unlikely to return to simpler buyer-seller relationships any time soon. Reform will happen only if regulators and/or lawmakers step in to stop the spiral.

In the meantime, if you happen to know who bought the Picasso, please be my tipster!

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