Thursday, 1 November 2007

Risking the Lot - Subprime Stupidity and Art Auction Arrogance

Interesting post from an Australian art market analyst and blogger:

Risking the Lot - Subprime Stupidity and Art Auction Arrogance

The US subprime housing crisis is one of those things that makes you wonder what the people involved were thinking. The lenders had to have known the risks involved in lending money to people to buy a house who couldn’t get finance through the more main stream, traditional lenders yet these lenders let these people borrow money anyway driven by what could only be described as blatant greed. Lending money to people who have the highest probability of not being able to pay the money back is risky enough but when you add the possibility of property values dropping below the value of the mortgages which would result in the lender not being able to recoup the money that they lent, the risk goes through the roof.

It would seem that the art auction houses are taking the same risks as the mortgage lenders by giving minimum price guarantees to their clients which means that they are gambling on their ability to achieve the sale prices they have promised their vendors. As an indicator of how much risk some of the art auction houses are taking, Sotheby’s have given minimum price guarantees for a massive 78% of the value of one of their contemporary art auctions to be held in March which equates to approximately US$200 million.

Regardless of whether or not the artworks reach the minimum guaranteed price that the auction houses have given, the auction houses have to pay the vendor the promised amount of money. The reason that the auction houses give guarantees is to entice the sellers with the most valuable artworks to sell through their auction house. By having the most valuable artworks to sell, auction houses get more publicity, more bidders and potentially greater profits but by giving minimum price guarantees they are also risking their reputation and business. Just like the subprime mortgage lenders it would seem that greed is motivating the art auction houses and just like the subprime mortgage lenders the auction houses are creating a time bomb which could explode at any time.

Not only are the auction houses risking their own businesses but they are also creating false expectations of the art market and presenting a manipulated view of the art market by promising minimum sale prices just to secure the sale of particular artworks which may not reflect the true market value of the artwork. If there were to be a situation where the auction houses were not able to sell the artworks for the prices that they had guaranteed the sellers then there would not only be significant repercussions for the auction house but it would also be likely to cause a general panic in the art market which would effect many people. As far as I am concerned the auction houses are taking far too many risks and not considering the consequences for themselves and others but greed can unfortunately cause people to make significant errors of judgment.

Nicholas Forrest is an art market analyst, art critic and journalist based in Sydney, Australia. He is the founder of, writes the art column for the magazine Antiques and Collectibles for Pleasure and Profit and contributes to many other publications.

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