Word: auction
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...ruthless habitat of the '80s. It is not true either, as anyone knows who has followed the fortunes of the two houses, that Sotheby's is all hustle and Christie's all starch. In fact, it was Christie's that got into trouble with the law over falsifying an auction. In 1985 David Bathurst admitted that four years earlier, when he was president of Christie's New York branch, he had reported selling two paintings that had not, in fact, found buyers at auction in New York: a Van Gogh at a supposed price of $2.1 million and a Gauguin...
...auction practice that has attracted the most criticism lately -- and goes to the heart of the nature of auctions themselves and the ethics of the trade -- is giving guarantees to the seller of a work of art and loans to the buyer. If X has a work of art that auctioneer Y wants to sell, Y can issue a "guarantee" that X will get, say, $5 million from the sale. If the work does not make $5 million, X still gets his check, but the work remains with the auction house for later sale. Guarantees are a strong inducement...
Loans to the buyer are made before the auction, and completed after it, at an interest rate that may go as high as 4% over prime. A common amount is 50% of the hammer price -- whatever the work reaches...
...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...
...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...