The quarterly results for the world’s two largest auction houses, released this month, trumpeted an art market in perpetual boom. Christie’s, the biggest clearing house for ultra-expensive pictures and baubles, posted .4bn in sales, up 17% year on year. Sotheby’s, its arch-rival (and former collaborator in a price-fixing scandal), saw its sales rise by a similar percentage, to bn. Just like in the mega-galleries of New York and London or at the art fairs in Miami and Basel, Switzerland, the appetite to buy in the world’s high-end salerooms grows ever more ravenous.
Yet inside the corporate offices of Sotheby’s and Christie’s, the mood has been much grimmer. On 20 November, Sotheby’s CEO William Ruprecht announced he would step down after 30 years at the auction house. His resignation was the final act in a years-long showdown with Daniel Loeb, founder of the hedge fund Third Point Capital, who sits on Sotheby’s board and has been pressuring the company to grow more profitable. Then, on 2 December, just as the international art world converged on Miami Beach, came a more surprising announcement: Steven Murphy, CEO of Christie’s, was resigning too.
Ruprecht remains interim head of Sotheby’s, which is a public corporation, while it searches for his replacement. Christie’s, a privately held company, already has a new CEO in Patricia Barbizet: a longtime loyalist of majority owner François Pinault, a French billionaire who founded the holding company which controls Gucci, Saint Laurent, Balenciaga and a host of other luxury firms.
Swing low, sweet Chariot
You might think that the ever-increasing prices for contemporary art – 2m for a Francis Bacon triptych, 1m for a sculpture by Alberto Giacometti, or m for a Cy Twombly painting of loop-de-loops – would trickle down into the auction houses’ coffers. In fact, Sotheby’s and Christie’s are only moderately profitable. While Christie’s does not disclose its profits, at Sotheby’s, profits fell 15% in the first half of 2014, despite increasing sales. The accelerating concentration of wealth in the hands of the ultra-rich, and the brutal competition the two houses have waged to win their business, have left Christie’s and Sotheby’s far less than flush.
Take that Giacometti. At 1m, the Swiss artist’s Chariot (1950) was by far the priciest lot at Sotheby’s impressionist and modern art sale of November 2014. Yet it failed to break the record for Giacometti at auction – and in the saleroom on York Avenue, the action was noticeably thin.
Bidding started at m, and increased to m, m … But these were not actual bids. They were so-called “chandelier bids”, called out by the auctioneer himself in a theatrical attempt to get things moving. It’s a practice that’s entirely legal, and common. In 2013, the New York Times reported that for the past two decades, lawmakers have tried to outlaw it, but without success.
Only at m did a single bidder, represented by a Christie’s agent, place a bid for the Giacometti. And that was that: down came the gavel, and the one-bidder auction was over. The remainder of the final price of 1m constitutes the buyer’s premium – that is, an additional charge paid to the house. (The bidder, we now know, was Steven Cohen: the billionaire financier whose erstwhile hedge fund, SAC Capital Partners, pleaded guilty last year in the largest insider-trading case in American history.)
Then begin the discounts. At the lower end of the market, consignors to Christie’s and Sotheby’s pay a 10% and 15% fee to sell their work – but to win bigger consignments, the houses often waive the fee entirely. Beyond that, the houses sometimes offer consignors a percentage of the hefty buyer’s premium (known as “enhanced hammer”), thus allowing certain ultra-wealthy collectors to take home more than 100% of the sale price. Loeb, the activist board member, specifically cited that practice when he lashed out at the auction house and called on Ruprecht to step down.
The houses also have gargantuan marketing costs. The Giacometti was splashed across the pages of newspapers and magazines ahead of the sale, and promoted with a lavish catalogue. It would have been presented to prospective bidders in the best possible light; the auction houses are known to ship works to collectors’ houses before the sale to let them “live with the art” for an hour or two. At Christie’s, premium clients from China were flown to New York and wined and dined for days.
Finally, Sotheby’s offered the seller of the Giacometti a guaranteed payment, regardless of the final price of the work at auction. The houses refuse to disclose the values of these guarantees, but the more prestigious the lot, the more generous the house will be. To secure the Giacometti for auction, Sotheby’s auctioneers would have ensured the seller a payment almost as high, if not higher, than the price Cohen paid. Publicly, Sotheby’s had announced before the sale that the Giacometti would sell for “in excess of 0m”. The guarantee would not have been for much less.
All of this raises the very real possibility that Sotheby’s lost money selling a 1m sculpture. The real margins, it turns out, are to be made on the wine and the tchotchkes at the bottom of the market. At the tippy top, the air is much thinner.
Money in, money out
One of the principal issues at play in the upheaval at the auction houses concerns the use of guarantees – baseline payments to consignors made whether or not a lot sells. Most objects at auction, from watches to wine to your grandmother’s china, are placed on the block with no guarantees: if the lot fails to sell, that’s your bad luck. But the scarcity of first-rate contemporary art (or what collectors think is first-rate contemporary art) gives ultra-high-net-worth sellers distinct leverage to avert risk and maximise profit. Playing one house against the other, they began in the last decade to lock in guaranteed million-dollar payments before their art went under the gavel.
At first, Christie’s and Sotheby’s financed these guarantees themselves. But in late 2008, in the wake of the collapse of Lehman Brothers and the near-collapse of the entire global financial system, the two houses presided over painfully weak sales of contemporary art – and were forced to pay out tens of millions in guarantees to consignors. Since then, the houses have pioneered the so-called “third-party guarantee”, a little-understood but critically important shift in art finance. These third-party guarantees decreased risk for the houses, but cut into their profits and may also have had market-distorting effects.
Just as with a regular guarantee, with a third-party guarantee consignors receive an assured payment regardless of a work’s fate at auction. But now, that payment is staked not by the house but by an outside investor. If the work’s price fails to exceed the guarantee, then the third-party guarantor acquires the work and has a new decoration for his fifth house in St Moritz. If bidding is more robust, then the guarantor receives a financing fee (calculated, usually, as some fraction of the difference between the guarantee and the final price, plus half the buyer’s premium).
The guarantor is still permitted to bid on the art he or she has guaranteed, which raises sticky questions about fairness and transparency. He or she may also receive undisclosed information about the artwork and its potential market, which is common practice and entirely legal in the unregulated art world – but would get you sent directly to prison in the world of stocks and bonds.
Nevertheless, in 2015, Sotheby’s and Christie’s have returned to guaranteeing artworks on their own accounts ahead of modern and contemporary sales in London. This lets the houses take home all the upside if things go well. It also leaves them holding the baby if the market crashes.
Art in the age of Piketty
Will it crash? It’s worth remembering that the boom in the contemporary art market has taken place at a moment of global economic stagnation, and that the rise in art prices parallels the increasing concentration of wealth in the hands of the super-rich. Visitors to fairs such as Art Basel, with their booths for private jets and tax-free storage facilities, have seen how the rise of the one-per-cent-of-the-one-per-cent has transformed the art world into a plutocratic bacchanal. If this unequal distribution of wealth endures, then the art market may continue to boom for many years to come.
That does not necessarily mean that Christie’s and Sotheby’s will reap the benefits. Under new leadership, the auction houses may reorient their businesses to favour more profitable enterprises, such as less expensive art, collectibles, and real estate. But for the high-priced contemporary art that the media love to hype, they will probably continue to serve as just another set of underpaid servants to the international super-rich.
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