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Gloom at the Top: Why Megabucks Auctions Are Broken (and how to fix them)

The thrill is gone.

For several of the highest-estimated properties in the recent series of Impressionist, modern and contemporary sales at Sotheby’s and Christie’s, the “auction fever” of yesteryear has given way to single-bid transfers of artworks (after a few feigned “chandelier” bids, lobbed by the auctioneers).

Bargains are struck in advance with third-party guarantors who ensure (for a fee and/or a share of the proceeds) that high-priced works will sell, either to them or to someone who steps in at a level where the guarantor can step aside. These are not public auctions, as traditionally understood; they’re private arrangements, in which the public consummation is often a foregone conclusion.

Modigliani’s $157.2-million “Nu Couché (sur le côté gauche),” 1917, reportedly sold without competing bids at Sotheby’s
Photo by Lee Rosenbaum

Aware of this situation (assuming that they’ve deciphered the catalogue symbols regarding third-party guarantors and/or irrevocable bids), the auction-going public seems increasingly reluctant to play along. That helps to explain the phenomenon reported by Kelly Crow in her auction analysis published in Monday’s Wall Street Journal (posted online earlier).

Kelly Crow on a recent panel with dealer Larry Gagosian and Phillips CEO Ed Dolman
Image from Kelly Crow’s Twitter feed

Crow wrote:

Rather than fueling bidding wars, many of the priciest pieces garnered the thinnest competition, sometimes selling on a single bid or to an investor who had prearranged to buy the work if no else stepped up….Now, the very pieces that aim to dazzle prospective bidders are proving to be the auction houses’ biggest liabilities.

She identified the $157.2-million Modigliani (pictured above), as well as Picasso’s $115-million “Young Girl with a Flower Basket” at Christie’s (the Rockefeller sales) and Monet‘s $20.6-million “Morning on the Seine” at Sotheby’s, as one-bid wonders.

The Picasso episode was particularly cringe-worthy: Those of us who watched the sale online heard auctioneer Jussi Pylkkänen open the bidding at $90 million and haltingly announce “bids” up to $102 million. After that, he labored painfully for two and a half minutes (timed on my digital recorder), vainly imploring the crowd for an advance. To those in the room (including Crow), the initial “bids” appeared to be inventions, intended to induce someone from the crowd to bid above the prearranged third-party guarantor.

Jussi finally threw up his hands and brought down his hammer at $102 million.

Picasso, “Fillette a la Corbeille Fleurie,” 1905,  $102 million hammer price ($115 million with buyer’s premium)
Photo by Lee Rosenbaum

Calling these works “liabilities” (as Crow did at the end of the passage quoted above), is a bit of a misnomer: The prearrangements may have been competition-killers, but lining up third parties to hedge the auction houses’ own guarantee risks reduces the financial liabilities that the firms might otherwise incur if the bidding falls short of the amount that the auction house has guaranteed to owners of coveted consignments.

In its most recent 10-Q quarterly report, filed May 3 with the SEC, Sotheby’s disclosed (on p. 37) the amount of risk it had offloaded to third-party guarantors in advance of the big May auctions:

As of May 2, 2018, we had outstanding auction guarantees totaling $399 million and, as of that date, our financial exposure was reduced by risk-sharing arrangements totaling $237 million.

Many commentators have noted that that both the $832.57-million series of Rockefeller auctions at Christie’s and the $107.8-million auction of the Mandel Collection at Sotheby’s were “white glove” sales, meaning that they were 100% sold. What hasn’t been revealed (I’ve asked) is whether these sales were prearranged to achieve that result—organized so that all the works would sell, regardless of whether some hammered considerably below estimate (as, in fact, occurred).

The absence of unsold works in those two large consignments may have been the result of setting a collection-wide “global reserve,” allowing the auctioneer considerable flexibility on individual lots, provided that the overall result is acceptable. Since the Rockefeller series was an estate sale, with all proceeds going to charity, the heirs might have preferred a clean sweep, rather than having to seek other means of disposal later. The Mandels’ proceeds were intended to benefit their charitable foundation.

Barbara & Morton Mandel
Screenshot from a video shown at Sotheby’s

Some potential megabucks bidders may be justifiably put off by the auction houses’ practice of paying fees to all third-party guarantors—even those who are successful bidders. (Christie’s originated this practice in New York; Sotheby’s later followed.) Those fees make the net price paid by the guarantors less than what would be paid by anyone else at the same hammer price—an un-level playing field, as I’ve previously discussed. (New York City auction regulations require that any fees paid to third-party guarantors who are successful bidders be deducted from the price that is publicly reported.)

My takeaway from all this is that auction-house practices have become too arcane, convoluted and counterproductive for the market’s (and the auction houses’) good. Single-bid knockdowns on star lots that should be hotly contested are signs of a faltering business model.

No auction firm can unilaterally revert to simpler, healthier practices. If one house were to cut back on side deals for sellers (including “enhanced hammer,” which I previously wrote about in the Wall Street Journal) or to stop offering advantages to certain buyers (as discussed above), clients would be lured to accept the inducements at the other house. Nor can the rivals collude to change practices jointly for their common benefit. We’ve seen what an antitrust red-flag can lead to.

The only way to curtail the pernicious dealmaking is through government regulation, so that auction prices can again be relied upon as a indicators of “fair market value,” in accordance with the classic IRS definition—”the price that property would sell for on the open market…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].”

Today, “fair market value” is a fiction. What we have is murky market machinations.

an ArtsJournal blog