Are Warhol auctions being gamed?

By Felix Salmon
May 24, 2011
Sarah Thornton's post on the Warhol market, especially as I recently had drinks with someone expressing a very similar view.

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I’ve been puzzling over Sarah Thornton’s post on the Warhol market, especially as I recently had drinks with someone expressing a very similar view. There’s something here, but I’m having difficulty putting my finger on exactly what it is:

“These sales are no longer auctions,” says Allan Schwartzman, an art advisor. “To attract material at the top end, auction houses pre-sell the material to ‘irrevocable bidders’. They are deliberate, orchestrated events.” Indeed, Christie’s evening sale featured 11 irrevocable bids, Phillips had ten, whereas Sotheby’s had only two. These deals spare the work the ignominy of being “bought in”, but they can create misleading benchmark prices that tend to flout ordinary rules of supply and demand. Guarantees can help auction houses by securing an important artwork around which an entire sale can be promoted. They may also appeal to a collector’s gambling instincts. If he chooses to be the guarantor, he can either win the work or win a financing fee or both. Whatever the case, when the work sells on one bid, a guaranteed lot is effectively a private sale done in public.

My first reaction to this was incomprehension. At an auction, all bids are irrevocable. If a painting has an irrevocable bid, that just means that a favored collector has managed to get his bid in first, before anybody else. That kind of deal makes a lot of sense for all concerned: the seller and the auction house are guaranteed a sale, while the bidder either gets the painting they want at a price they like, or else gets a percentage of the upside over and above their bid.

There are differences between this kind of thing and a normal auction. For one, there’s no underbidder, in a world where the existence of an underbidder has historically helped to ratify auction sale prices in the eyes of the art world. But that’s a minor point, I think: the main value of auction prices is simply that they’re a very public indication of how much someone was willing to pay, on a certain day, for a certain work of art. And that is unchanged in this context.

And I’m still unclear on what Thornton means when she says that these deals “flout ordinary rules of supply and demand”. The supply of any given painting is always fixed at exactly 1, and the auction house is still a place of competitive bidding: the higher the number of bidders, and the more aggressive those bidders are, the higher the final hammer price will be. The only time the rules of supply and demand are flouted is when the number of bidders is exactly 1 as well, and then, yes, as Thornton says, the final price does look rather like a negotiated private sale.

But what’s Thornton’s beef with private sales, especially when the final price is public? A $50 million Warhol is a $50 million Warhol, whether the sale takes place in public, in private, or somewhere in between — and whether the sale is deliberate and orchestrated or whether it’s chaotic and unpredictable. I can see how someone who thrills to the theater of the auction house might feel a bit cheated if many lots end up selling on a single bid. But the theater is really just a mechanism to get juices flowing and prices rising: it’s not the point of the auction.

Thornton does hint at something more nefarious going on, although she doesn’t quite come out and say it:

In any given contemporary auction week, a fair number of the Warhols will have been either consigned, underbid or bought by the Mugrabi family, sometimes in partnership with Larry Gagosian (who sits across the narrow aisle from Mr Mugrabi at Christie’s and one row ahead of him at Sotheby’s)…

Interestingly, the Warhol players often find themselves coming together…

The lots that are underbid by dealers or go from dealer-collector to dealer-collector inflate prices and create the appearance of trading volume in a way that is hard to track. And irrevocable bids often lead to public performances of private deals that are far more opaque than auction houses let on.

Here’s what would seriously undermine the validity of the auction prices. Let’s say the private deal was indeed far more opaque than auction houses let on, and included some kind of embedded put.

Here’s a hypothetical: Mugrabi wants to increase the value of his vast Warhol collection, using Sotheby’s as his vehicle. So he puts a painting up for sale, and Gagosian guarantees to the auction house that he’ll buy it for $50 million. Because it’s an irrevocable bid, Gagosian pays no buyer’s commission on that bid — and Mugrabi is a favored client of Sotheby’s, so he pays no seller’s commission. No one else is willing to pay anything like $50 million for the painting. So it comes up for auction, it’s sold to Gagosian with a single bid, and $50 million is transferred from Gagosian to Mugrabi via Sotheby’s. And then, a couple of weeks later, Gagosian exercises his put, and sells the painting back to Mugrabi in a quiet private transaction for the same $50 million.

What has all of this theater achieved? Mugrabi and Gagosian are back where they started: Mugrabi has his painting, and Gagosian has his $50 million. But now there’s a big $50 million public auction benchmark making Warhol look really hot. As Thornton puts it, “collectors and dealers with an affinity for Warhol have a clear sense of the auction room as a marketing platform”.

Now I don’t believe that anything quite that explicit and egregious is actually going on behind these irrevocable bids — although nothing would really shock me, in the art world. But maybe nothing that explicit and egregious needs to go on, if the number of clued-in dealers and collectors is small enough, and they all simply act in their own long-term best interest by bidding up each others’ work and attracting an ever-increasing number of ignorant plutocrats to the high end of the Warhol market.

Dealers have been buying paintings at auction for enormous sums for many years, because they know that in doing so they raise the value and desirability of the rest of their artists’ work. You don’t need an irrevocable bid to do that, although it helps if there’s an eager underbidder somewhere. Is Thornton implying that something much less ethical might be going on in the Warhol market? I’m not sure. But if she’s not implying that, then I don’t really understand what she’s saying.

Update: Thanks to absinthe, in the comments, who points out that irrevocable bidders do pay buyer’s commission if they win. So the cost of setting the benchmark is the buyer’s commission, which, on a $50 million hammer price, is just over $6 million. Even split two ways, that’s a lot of money.

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