The emperor has no clothes: the scams and swindles driving up art prices
17 Feb 2020

For many, the headline-making stunt Italian artist Maurizio Cattelan pulled at Art Basel Miami this year—Cattelan duct taped a banana to a blank white wall, called it “Comedian”, and sold it for $120,000—crystallized the problems with how art is valued. After Jeff Koons’s Balloon Dog shattered records in 2013 to sell over Christie’s auction block for $58.4 million—then the highest amount ever paid for a work by a living artist—even the auctioneer, Jussi Pylkkanen, was stunned and remarked “We are in a new era of the art market”.

The intervening years seem to have proven Pylkkanen right. How exactly did the art market come to the point where an installation composed of two ordinary lightbulbs strung up on two ordinary extension cords was dubbed “ephemerally beautiful and deeply profound” and sold for more than $500,000, while a white canvas by Robert Ryman fetched an obscene $15 million? A good amount of blame can be laid at the doors of the auction house officials secretly conferring with dealers to set prices, the galleries sending false bidders to drive up a piece’s value, the lack of transparency inherent in systems like third-party-guarantees, and a culture of speculation which sends prices yoyoing, with major ramifications for collectors and artists alike.

An army of ghost bidders and backers

Many common art market practices, though legal, are questionable from an ethical standpoint and have helped distort the market, putting some artists and collectors on the back foot. For one thing, galleries frequently plant fake bidders in auction rooms to bid up the artists they sponsor. What’s more, it’s an open secret—one which legislators have resoundingly failed to tackle—that the major auction houses engage in so-called “chandelier bidding”. In another industry, such behaviour might be considered fraudulent—but in the art world, auctioneers are allowed to call out non-existent bids in order to conceal a work’s undisclosed reserve and create the illusion of competition, thereby inciting genuine bidders to offer more than they would have otherwise.

Nor is chandelier bidding the only way auction houses are pulling the wool over unsuspecting buyers’ eyes: the practice of third-party guarantees has come under especial criticism. Following the 2008 financial crisis—in which Sotheby’s apparently lost $52 million in a single season on works it had guaranteed itself— auction houses have been increasingly wary of taking on the financial risk entailed with big-ticket items.

Guarantees nobody can see

To limit their exposure and to compete with the most desirable lots, auction houses dig up a third-party guarantor. Both the identity of this person and the sum for which they agree to buy a work if it doesn’t sell at auction remain secret. In exchange for their pledge to underwrite the auction, guarantors receive an—equally undisclosed—financing fee.

Adding to this lack of transparency, two of the major auction houses, Christie’s and Phillips allow guarantors to recoup their financing fee as long as the work sells above the agreed-upon price—even if the guarantor themselves ends up purchasing the work! In practice, this amounts to handing the guarantor the artwork at a steep discount—one which is concealed from the general public. As retired New York University professor Michael Moses emphasized, “If the price is not the price because the guarantor has bought it and gotten a discount, there is no longer any transparency in the market”.

Paradoxically, in other cases sellers and auction houses may exploit the very absence of a guarantee to drive prices up. As one concrete example, David Hockney’s 1972 painting Portrait of an Artist (Pool with Two Figures) became the most expensive painting by a living artist ever sold at auction when Christie’s sold it for $90.3 million in 2018. The sale garnered significant interest not only because of its unusually hefty price tag—previous Hockney works had generally sold for less than $10 million—but because the painting’s unnamed owner, believed to be British billionaire and Tottenham Hotspur owner Joe Lewis—offered the work without a guarantee and without a reserve.

The fact that the Hockney sold for exactly the price which Lewis apparently expected only increased suspicions that the entire auction had been staged. Art collector Kenny Schachter raised the possibility that Lewis had secretly bought back the painting himself, orchestrating the high-profile sale to establish an inflated market value for the Hockney in view of a future sale.

Christie’s, Schachter suspected, may have been in on the deal—the auctioneers seemed unusually relaxed at the prospect of selling a painting for nearly $100 million, and the auction house came out ahead—regardless of who bought the artwork—thanks to its commission and the notoriety which came from the widely-reported sale. Christie’s has denied the Hockney sale was anything other than “a matter of the market finding its real level”, emphasized that the seller turned down a number of third-party irrevocable bids, and that “no financial promises of any kind, including non-traditional risk-sharing or risk-mitigating arrangements” were established for the Hockney painting. Rumours nevertheless persist, especially given the fact that, as a privately held company, Christie’s is able to “construct creative financial arrangements” that play in the grey zones of the art world.

The idea of a billionaire and one of the world’s most prestigious auction houses conspiring to stage a sham auction to inflate an artwork’s value—and their own bank accounts—might once have seemed farfetched. Recently released correspondence which appears to show exactly that type of coordination between Swiss art dealer Yves Bouvier and auction house rival Sotheby’s, however, lends credence to Schachter’s theory.

Sotheby’s, Yves Bouvier and Samuel Valette: a case study in apparent price coordination

 By its very nature, the wheeling and dealing which frequently establishes the value of fine art usually remains behind the scenes—but the massive feud termed the Bouvier Affair has offered an unexpected insight into the manoeuvring by which artworks’ prices are set.

Swiss art dealer and freeport magnate Yves Bouvier has faced legal challenges around the world from his former client, Russian billionaire Dmitry Rybolovlev, who alleges that Bouvier overcharged him by $1 billion for 38 paintings. Bouvier consistently denies all charges, arguing that he was an independent seller free to sell Rybolovlev paintings at whatever price the art collector was willing to pay.

Read more at Art Critique

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