More on 3rd Party Guarnatees

The other day I ran a very good article on third party guarantees from the Economist.  As a matter of fact, I thought the article was so good I printed it out in order to keep a reference copy. 

Reuters now has a very good article which dissects 3rd party guarantees and easily points out the problems with them, especially if the party who makes the guarantee buys the lot above the minimum guaranteed amount.  If that happens, hammer prices are not always what they seem.

This Reuters article with examples and what ifs is the best article I have seen in breaking down 3rd party guarantees.  A must read for appraisers.  I have already read it several times and printed a copy as well.

Reuters reports
This is more complicated than it needs to be, and of course it’s all based on what “the market believes”, which might not be fully accurate. But in principle, there’s definitely the possibility that something fishy might be going on whenever a guarantor buys a painting at auction for more than its low estimate.

There’s a lot of opacity when it comes to fine-art auctions, but the one thing which is always fully transparent is the final sale price. Sellers can negotiate deals when it comes to the commission they pay the auction house; buyers can’t. The buyer’s premium is set, and is public, and can always be used to find out the total amount of money which was spent by the buyer on the work of art in question. That’s why art-price databases use auction results: they know exactly how much was spent, even if they don’t know who the buyer was.

But now, with the system of third-party guarantees, we no longer know for sure that the reported price was in fact the price actually paid by the buyer.

The reason is this: in return for providing an irrevocable bid for a certain artwork (normally, but not always, at the low estimate), the auction house agrees to split some of the upside with the guarantor. Take that Lichtenstein. Its low estimate was $35 million; let’s say that someone called Guy Guarantor provides an irrevocable bid at that price. In return, he gets a deal from Christie’s. If the painting sells for more than $35 million, he’ll get 15% of the increase in the hammer price over and above $35 million, and he’ll also get 50% of the total buyer’s premium.

As it happened, the Lichtenstein was hammered down for $38.5 million — that’s $3.5 million more than the low estimate at which Guy Guarantor was providing the irrevocable bid. The total reported price for the painting was $43,202,500, including a buyer’s premium of $4,702,500. So Christie’s takes 15% of $3.5 million, or $525,000, and adds it to 50% of $4,702,500, which is $2,351,250. The total — $2,876,250 — is the amount that’s owed to Guy Guarantor under the terms of their deal.

That’s all fine, as far as I’m concerned. The buyer pays a total of $43,202,500, and that money gets divvied up between various parties. Christie’s gets some, Guy Guarantor gets some, and the seller, of course, gets most of it. As long as we know the amount the buyer is willing to spend on the painting, the auction market remains as transparent as it’s ever been.

But what happens if Guy Guarantor is the buyer? According to Thornton, the agreement is still in effect — which means that as he’s handing over a check for $43,202,500 with one hand, he’s simultaneously receiving a check for $2,876,250 with the other. The total amount the buyer pays, in this instance, is not $43,202,500, but rather $40,326,250.

That makes a difference. For one thing, if the work actually sold for $40,326,250 rather than $43,202,500, it would no longer be an auction record for the artist: “Ohhh… Alright…”, a 1964 canvas, sold in the same sale last year for $42,642,500. Is “I can see the whole room” the most expensive Lichtenstein ever sold at auction? According to Christie’s it is. But given Thornton’s reporting, there has to be some doubt about this.
To read the full Reuters article, click HERE.

No comments: