(4 of 10)
Sotheby's says its guarantee system is "traditional": it goes back 20 years. This is true, if only in the sense that the firm tried it in the '70s but it flopped, because the market was slow and pictures failed to sell. Loans, of course, have risks too. Christie's gives neither guarantees nor loans. "The practice of offering guarantees," argues a Christie's spokesman, "means that in effect you've bought the picture yourself. And loans by the auction house tend to create an inflationary situation, a false market."
The beauty of the loan system, from the point of view of the auctioneer, is twofold. It inflates prices whether the borrower wins the painting or not: like a gambler with chips on house credit, he will bid it up. Prefinancing by the auction house artificially creates a floor, whereas a dealer who states a price sets a ceiling. And then, if the borrower defaults, the lender gets back the painting, writes off the unpaid part of the loan against tax, and can resell the work at its new inflated price.
Most top private dealers dislike the system of guarantees and loans. "It creates an immediate conflict of interest," says Julian Agnew, managing director of the London firm of Agnew's. "If the auction house has a financial involvement with both seller and buyer, its status as an agent is compromised. Lending to the buyer is like margin trading on the stock market. It creates inflation. It causes instability."
Criticism of auction-house guarantees and loans has been particularly widespread in the past few weeks, ever since it was disclosed that Sotheby's had lent Australian entrepreneur Alan Bond $27 million in 1987 to buy what became the most expensive painting of all time, Van Gogh's Irises. But Sotheby's defends its policy as right, proper and indeed inevitable. Guarantees are given "very sparingly," CEO Ainslie said last week. "It is unusual for more than one or two paintings in a sale to be guaranteed." Ainslie rejects any comparison to margin trading. "We do not make it a standard policy to loan 50% against anything. We are not just lending against the object, but to an individual. At the time we loaned to Mr. Bond, he was viewed very differently from the way he is today."
As for the propriety of Sotheby's practices, Ainslie says, "Our procedures follow every regulation required of us. We proudly market our financial services. There is a suggestion that financing is immoral or wrong. That is an elitist view that we frankly find ridiculous."
Sotheby's feels it is being arraigned for the crime of high success. David Nash, head of its Fine Arts division, told the Washington Post that critics, far from being elitist, have "a hostile proletarian attitude toward our business." (Let 'em eat Braque.) But auction-house pretensions to be self- regulating have collided with the skepticism of Angelo Aponte, New York City commissioner of consumer affairs.
In 1985 Aponte decided to review the consumer affairs guidelines on auctions. For more than a year his team pored over Sotheby's and Christie's records, wrestling with such exotic-sounding practices as "bidding off the chandelier" (announcing fictitious bids to drive up the price) and "buying in" (leaving a work unsold because it does not reach the seller's reserve price). By Sotheby's account, the investigators came up with nothing after sifting through thousands of documents.