Adventures in art-market commodification, enhanced hammer edition
Back in 2012, I wrote a post with the headline “How Larry Gagosian is like Goldman Sachs”. The general idea was that both of them use their relationships and their balance sheet to make money off and/or with their clients. Since then, as Christian Viveros-Fauné says, the art world has become even more coterminous with the art market:
“Business art” has arguably come to be the dominant form of art in our time. Today, this juggernaut of commodity-based art drives not only the way art is made, but also the way it’s promoted, marketed, sold, and, ultimately, understood both by experts and the vast public.
This explains why the NYT, when it recently decided to beef up its art-reporting team, turned to Graham Bowley, whose knowledge of art was rather slimmer than his knowledge of high-frequency trading. Bowley’s fresh eye on the market has proved illuminating: thanks to him, a lot of what used to be art-world rumor and gossip is now public knowledge. It was Bowley, for instance, who revealed that the official numbers coming out of China’s auction houses simply cannot be trusted: it is commonplace, in China, for the high bidder on an item to simply refuse to pay for it. And now, Bowley is naming names (and numbers) when it comes to the shadowy practice known as “enhanced hammer“.
Officially, if you consign an artwork to Christie’s, and it is hammered down for millions of dollars, then you owe the auction house a piece of the action — known as “seller’s commission”. In practice, however, the art world’s biggest rollers never pay seller’s commission. For big-ticket items, the auction house is entirely reliant, for its revenues, on the buyer’s premium — the difference between the hammer price and the actual price paid.
Increasingly, however, the hammer price has become completely meaningless. It used to give a pretty good indication of how much money the seller took home; no longer. Top clients, it turns out, aren’t just paying zero seller’s commission: they’re now paying a negative seller’s commission, and earning much if not all of buyer’s premium on top of the hammer price.
Bowley has persuaded art collector Peter Brant to go on the record about enhanced hammer. This was surely no mean feat, and it’s a big deal: it’s important that these practices come out into the open. In November, Brant sold a Jeff Koons sculpture for a hammer price of $52 million, towards the high end of Christies’ presale estimate of $33 million to $55 million. With buyer’s premium, the total amount paid for the shiny object was $58.4 million. (Don’t ask whether the presale estimate is a guide to hammer prices or to final price: the auction houses always try to have it both ways, encouraging bidders to treat the estimate as a guide to where they should bid, while then happily including the buyer’s premium when they say that the final price beat the estimate.) And of that $58.4 million, it turns out, Christies’ take was approximately zero.
I’d heard the rumor — but only a rumor — that Brant had negotiated an enhanced hammer of 112%: that Christies had promised him 112% of the hammer price. The reality is probably a little bit more complicated than that, since Bowley says there was a third-party guarantor. But Brant clearly told Bowley that he got to keep all of the buyer’s premium: Christie’s had the ability to make some money on the sale, but only if the sculpture sold for even more than the final $58.4 million price. Given the astonishing marketing push that Christie’s put behind the piece, it’s probably safe to say that the auction house ended up losing money on this particular work.
More invidiously, if Brant got to keep all of the buyer’s premium, then that opens up the possibility that he bought his own work — that the official sale price wasn’t a real sale price at all. The sculpture that Christie’s sold for Brant set a new record for Jeff Koons (and, indeed, for any living artist); it was sold aggressively to buyers around the world; and it elevated both Koons and Brant himself as art brands in the eyes of the market. If Brant was the high bidder, the total cost to him of selling the work would have been tiny, compared to the benefit he got in terms of personal reputation and the increased value of other works in his collection.
Now I’m not saying that Brant did buy his own piece. But it’s possible; and in general, the more common the practice of enhanced hammer, the more likely that such shenanigans are going on, and that US auction results might not be all that much more trustworthy than their Chinese counterparts.
Auction skeptics have been complaining for years that auction prices can’t really be trusted: that certain artists are being artificially bid up by small groups of dealers and collectors with large holdings of the artist in question, in an attempt to increase the value of their holdings as a whole. In a world where the buyer and seller between them pay commissions of as much as 25%, that’s a very expensive strategy. But in a world of 112% enhanced hammer, it’s almost a no-brainer. Even if Brant didn’t actually buy his own sculpture, there’s no way that Christie’s would know if he had a side deal of his own to rebate some of the ultimate sale price to the eventual buyer. After all, if they’re both big collectors, it’s in the interest of both buyer and seller for the piece to be seen to have sold for the maximum possible amount.
That said, the enhanced-hammer system was probably inevitable given the commodification of the art market. As the market becomes deeper and more liquid, it’s only natural that bid-offer spreads — the difference between what the buyer pays and what the seller receives — are going to narrow, and that we’re going to see more high-frequency trading in the art market. Even if that means commissions going down, it’s ultimately good news for Christie’s and Sotheby’s, which are essentially the art world equivalent of the NYSE and Nasdaq.
Both of the two big houses are moving aggressively into private dealing; Christie’s has a stated ambition to be larger even than Gagosian in that market. And while they don’t represent artists directly, yet, that too might change: indeed, some might say that it already has.
There’s a credible bull case for this strategy: as the art market becomes increasingly liquid, investors are willing to pay more for art: an asset class which used to be very hard to sell is now much easier to turn into cash. That makes it more valuable. Of course, there will still be volatility, but there’s a game afoot now. On Wall Street, it used to be called “pump and dump”: find a cheap stock, talk it up, sell it at a massive profit. That’s illegal, on the stock market. But in the art market, people put out press releases boasting of their prowess in such matters:
The Hort Family Collection, of which Peter Hort is a part, invested early in each of these artists. The Hort Family has a reputation for creating more value for works they collect.
In regular finance, if you have insider information about a stock, it is illegal to invest in that stock. In the art world, it is not only legal, it is done regularly. Peter Hort, along with his wife and family, are the people who create the insider information.
The trends in the art world are clear: newer money is gravitating towards newer art, which is considered a store of financial value and even possibly a source of significant profit. In order to make money in this world, connoisseurship doesn’t particularly help: what you need is “insider information” and the ability to hype certain artists to the type of collector who doesn’t know whether he’s buying a painting or a photograph. The only barrier to entry is money — which means that lots of rich people have decided to play. Most of them will end up losing, but all markets need losers, and — most importantly — all markets need a marketplace. If Christie’s can become that marketplace, then it will effectively have become the platform responsible for turning the informed appreciation of beauty into a greater-fool game where it doesn’t matter how much you pay, just so long as Christie’s can persuade someone else to pay even more in the future.
I hope it fails.