Secrets of the auction room
Georgina Adam | Jan-05-2009
. The art market is often described as the last unregulated financial market in the world. It has remained stubbornly resistant to almost all efforts to bring transparency to its operations, which still mainly function on the basis of highly personal relations and often secretive transactions. The problem is that these transactions can today be worth tens of millions, and that art was – at least until the recent global financial crisis – increasingly touted as a “safe” alternative asset class and was even put into investment funds.
The advantage to auctions is that they have a certain democratic, or rather meritocratic, element: for new collectors, buying at auction is easier than braving the haughty froideur of some top art galleries. At auction, if you have the money you can simply bid for a work, thereby avoiding the machinations of dealers who have waiting lists for some artists and select those to whom they will sell. The auction room is also often seen as the only place where “hard” figures can be obtained, with recorded transactions visible and available to all. But even this apparently transparent process is not all that it appears. Much of what is going on is secret, one way or another.
Let’s start with the sales catalogue. The first secret is the reserve for each work, the price below which it cannot be sold. Disclosing this, argue the auction houses, would disadvantage the seller by letting bidders know what is the lowest possible price, and discouraging them from bidding any higher. What is open is the printed estimate, the price range that most newcomers would imagine represents the auction house specialists’ considered valuation of the work. Buy it for less than the low estimate, and you’re getting a bargain; above the high estimate, you’ve overpaid, right?
Actually, no. Estimates can be meaningless. Vendors’ expectations can be too high; the auction house may have agreed to an inflated estimate on one work in order to bag others. Alternatively, the estimate can be unrealistically low, to attract potential buyers. Proving the point, Christie’s buries this disclaimer in its conditions of sale: “Estimates of the selling price should not be relied on as a statement of the price at which the item will sell or its value for any other purpose.”
The salerooms’ conditions of sale also detail the commission they take from buyers and sellers on each sale. The buyer’s premium is on a sliding scale from 25 per cent to 12 per cent, but here again, there is a backstory going on. Until this autumn, competition between the two main auction houses was so intense to get the best property for sale, that in some cases there was virtually an auction before the auction, each firm vying to outbid the other with more generous inducements for sellers. In some cases the whole of the buyer’s premium was given to the seller, as well as the vendor’s premium being waived entirely. This is believed to be the arrangement David Rockefeller made with Sotheby’s when he sold Mark Rothko’s 1950 “White Center (Yellow, Pink and Lavender on Rose)” for $72.8m (£36.7m) in May last year.
Further secret financial arrangements are flagged up in saleroom catalogues with a series of tiny symbols. Some of these symbols indicate that the work in question may have been guaranteed for an undisclosed sum, meaning that the auction house has promised this to the vendor, even if the work doesn’t sell. A “third-party guarantee” is when the saleroom farms out the risk to an outsider, who agrees to underwrite the risk if the work doesn’t sell – and benefits financially if it does. Another symbol indicates that the firm itself owns or part-owns the work – again, there is no detail as to what percentage it owns.
Much head-scratching has resulted from Sotheby’s newly introduced symbol, the “irrevocable bid”, by which someone agrees to leave a – yes – secret bid on a work. This was first used in November’s New York sales for Kasimir Malevich’s “Suprematist Composition” (1916), which sold for $60m, to whomever had agreed to leave the irrevocable bid. If another person had come in over that sum, then the irrevocable bidder would have taken a cut in the difference between his price and the price actually made. Another newcomer – the “interested party symbol” – indicates that someone who has a financial interest in the lot may bid, and sometimes even “may have knowledge of the reserve”.
All these arrangements were just dandy when the market was rising, but guarantees have come back to haunt the auction rooms in the financial meltdown of the last few months. Sotheby’s has admitted it lost $42m in guarantees in its third-quarter SEC filing; Christie’s as a private company does not have to disclose them, but certainly has taken a hit: a dozen guaranteed works failed to sell in its November 12 sale of contemporary art in New York. Sotheby’s CEO Bill Ruprecht has stated that for the foreseeable future the firm is “sitting on the sidelines” as far as guarantees are concerned.
So let’s actually watch the sale get under way. The auctioneer starts off each lot a few increments under the low estimate (each increment is usually a rise of about 10 per cent). It’s a treat watching him orchestrate the bids, arms waving, nodding to someone here, picking up a bid there ... except that he may have no bids at all. He is doing what is called “taking them off the chandelier”, inventing bids up to the reserve, after which he has to find a real bidder. If he hasn’t got one, then the giveaway is the omission of the word “selling” before the hammer comes down, and a quick “passed” or “unsold” blurred into “next lot!” Chandelier bidding is not illegal; it would only be so if the auctioneer continued to take fictitious bids over the reserve. It adds to the theatre of the event, but it is hardly transparent.
As for the real bidders, they too can be shrouded in secrecy. At the major sales, the most important potential buyers are hidden in windowed “sky boxes” above the room, where they can observe the action and bid by telephone. In the room, auction house staffers pass on bids from the banks of telephones; sometimes, to retain anonymity, a staffer holding an unconnected telephone will be relaying bids from someone who is actually in the room.
This anonymity – which is justifiable in many ways, including for reasons of security – is carefully protected. To this day we don’t know who bought many of the world’s most expensive works at auction, even though they were sold openly.
Until a few years ago, auctioneers generally knew in advance who would be bidding on the most expensive art, and where they would be sitting. So scratching your nose is unlikely to land you with a Picasso. But with the arrival of many new buyers from countries such as Russia or China, the salerooms have had some big surprises. The best known is the 2006 sale of Picasso’s 1941 “Dora Maar au Chat”, for which a buyer buried half way down Sotheby’s saleroom put in an unexpected and winning bid of $95.2m. The painting’s owner is believed to be Russian or Ukrainian, but nobody, even most of the people at Sotheby’s, knows for sure. Which just shows that, in the smoke-and-mirrors world of the saleroom, even the auctioneers themselves don’t always know what’s going on.
Source:The Financial Times Limited 2009