With the recent discussion about low start prices -- and their inability to
generate bids for some sellers that will lead to sales closer to what THEY
consider to be "retail," today's WSJ features an interesting article about the
true value of art and auction house "secrets" -- including the practice of
"chandelier bidding," which sounds like a more complicated method of shill
bidding.
The piece below has, in my view, a mix of opinion which keeps it from being
objective. However, it's still "buyer beware instructive" in that it can be
applied to many things won in an auction. The notion of cartel-like rings,
made up of pals manipulating prices, are apparently still a concern for some
buyers.
-koose in San Diego.
=====
Secrets of the Auction HousesBy DANIEL GRANT for the WALL STREET JOURNALOctober
31, 2007
Loose lips sink art sales.
Well, that won't ever appear on a poster, but the art trade seems convinced
that secrecy is vital to making deals.
Take the auction houses, which keep a lot of secrets.
There is a "reserve" price -- the unstated amount below which the consignor
will not sell the lot -- for many of the more expensive objects in a sale, and
phantom (or "chandelier") bids that the auctioneer announces and records to get
the bidding up to that reserve.
The auction house may have advanced or lent money to a bidder to help that
person acquire an artwork or brought in a third party (usually a private dealer
or collector) to guarantee a certain price required by a consignor.
None of the other bidders will be told.
And, of course, the auction houses hardly ever reveal the identities of buyers.
Early next month, Christie's and Sotheby's hold their signature Impressionist
and Modern sales -- Nov. 6-7 at Christie's and Nov. 7-8 at Sotheby's, both full
of paintings and sculpture with multimillion-dollar estimates set by the
auction houses -- which give collectors another opportunity to bid in the dark.
Secrecy certainly has its defenders.
"Chandelier bids get the momentum going and build excitement in an auction,"
said Debra Force, former head of the American Art Department at Christie's and
currently a Manhattan gallery owner.
"The public doesn't need to know what the reserve is," Chicago auctioneer
Leslie Hindman stated, and disclosing it "would prohibit competition."
But the lack of transparency raises the question of whether prices are
artificially high.
To what degree is the art market, reaching new heights in the volume of sales
and prices, particularly for modern and contemporary art, buoyed on factors
that make it noncompetitive?
"It's hard to build momentum and activity, and the so-called chandelier bidding
is a way of doing that," said Alan Fausel, director of the American Paintings
and Sculpture department at San Francisco-based Bonham & Butterfield's. "I
don't know if anyone is fooled by it."
Additionally, he and other auction house staffers claim that publicly revealing
the reserve "would drive a substantial amount of business to London," according
to a Sotheby's prepared statement, and that bidding up to the reserve wards off
organized bidders, often groups of dealers called "rings" that converge at a
sale with the idea of jointly keeping the prices low.
Sotheby's spokeswoman Diana Phillips stated in an email that consumer
protection rules governing auctioneering have "created a fair and rational
marketplace, which has kept New York City the leading market center in the
world."
Still, Mr. Fausel noted that his auction house generally does not make loans to
bidders (only to consignors in the form of an advance) and avoids making
guarantees.
"Our general philosophy is to try to keep more of an arm's length and not to
have a financial interest in the artworks up for sale, because that can get
ethically sticky."
Economists who have studied the art market find little to like about secrecy,
or "information asymmetry."
"The loans and guarantees and overall secrecy are a form of manipulation by the
auction houses to increase their profits," said William Baumol, a professor of
economics at New York University.
"Secrecy keeps you from knowing you're paying too much," said Rachel Campbell,
an economics professor at the University of Maastricht (Holland) and an adviser
to London's Fine Art Fund, the premier hedge fund in the art investment field.
George Akerlof, who won the Nobel Prize for economics in 2001 for his research
into asymmetric information, called the buying and selling of art "a rather
open market."
But for those unaware of available information and where to obtain reliable
advice, the art market may be "bad capitalism," he said. "Capitalism is great
at producing what people want. However, many buyers may not know what they
want or are willing to pay for something. If buyers are willing to pay more
than a picture is worth, then capitalism will create institutions that take
advantage of them."
Artificially high prices also make artworks less accessible. "Many of my
clients have watched the prices go up and up, to the point that they are unable
to compete for a number of works," said Neil Meltzer, an art dealer and private
art adviser in Manhattan.
For example, loans by auction houses to prospective bidders buoy prices at high
levels and generally elevate sales for other, similar lots.
This famously happened in 1987, when Sotheby's sold Vincent van Gogh's "Irises"
to Alan Bond for $53.9 million, based on a $27 million loan it secretly made to
the Australian tycoon that he was ultimately unable to repay. The sale set a
benchmark for Post-Impressionist works.
Guarantees are another price-maintenance system, helpful in reducing a
consignor's risk and potentially increasing profits for the guarantor of the
final sales price, which takes a percentage of the earnings over the guaranteed
price.
Robert Mnuchin, owner of New York's L&M Arts, says that he has been a partner
with auction houses in guaranteeing artworks and that "on balance, it's been
successful." He added that such partnerships take place all the time in other
investment realms -- "think of underwriters and mortgage bankers."
Third-party participation in a sale is not revealed to bidders.
"A dealer who has an interest in a certain lot might promote it to another
dealer or a collector, 'Hey, you should go after this work; it's really a great
piece,' " said Roland Augustine, director of Manhattan's Luhring Augustine
gallery and president of the Art Dealers Association of America.
Because of that potential for manipulation, Mr. Augustine advocated making any
third-party guarantor's identity public.
Mr. Mnuchin, however, objected strongly to that suggestion, claiming that he
did not know of any dealers who have been third-party guarantors and have
promoted to potential buyers an auction lot in which they had a financial
interest.
In classical economic theory, the efficiency of the market requires all
rational consumers to have full knowledge of the products they are looking to
buy and what others in the market are doing. Consumers presumably will reward
the sellers of better merchandise with higher prices. Economists often theorize
that more information leads to higher prices overall, as consumers will pay
more when they have greater confidence borne of more knowledge.
The auction process is also supposed to work with a strong measure of
transparency, so that the middlemen are seen as disinterested brokers rather
than self-interested stakeholders.
Theoretically, one doesn't need middlemen, and auction houses justify their
commissions on the basis of expertise, research and ability to attract those
willing to buy and sell. Artificially pushing up prices (and commissions)
through secretive measures should undercut consumer trust and the auction
houses' reason to be.
The art market may not respond to traditional economic theory because many
buyers do not see artwork primarily as a financial investment.
Collectors retain art for an average of 30 years, far longer than their other
assets, according to several studies, and the main reasons for selling are what
auctioneers call the "Three D's" -- death, debt and divorce -- not pure
profit-taking.
Anders Petterson, a former investment banker and now managing director of the
London-based ArtTactic art market research and advisory firm, stated that "a
better theoretical framework . . . would be to look at the theories around
behavioral finance, such as herd behavior, market anchors, greater fools
theory, overconfidence, etc."
Secrecy and the preferential treatment of certain consignors and buyers help
create "something exclusive, something which makes even the most wealthy beg
for it, particularly in times when people have a lot of disposable income."
Of course, the very wealthy usually think of themselves as very smart, and
studies and indexes indicate that art, over the long-term, is a good
investment.
Karl Schweizer, head of art banking at the Swiss-based financial services firm
UBS, says the correlation between burgeoning global wealth creation and the
expanding art market has also led to a growing number of art advisory services
for wealthy collectors.
"No one wants to be the stupid one, being seen as spending too much money for
nothing."
Twenty years ago, the New York Department of Consumer Affairs promulgated rules
about art galleries revealing their prices in a public manner, which it
promptly chose not to enforce.
Now, a bill requiring auction houses to reveal their reserve prices is awaiting
action in the State Legislature.
A more transparent landscape is one picture the art trade doesn't want to see.
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