by Don Thompson
Both now reconsider. Michael knows Neil is a smart guy. Why is he selling? He does not appear to need the money. What inside information might he have? Neil thinks the same about Michael; if he is anxious to pay $4 million, it must be worth more.
Michael decides not to bid. It doesn’t matter, because Neil withdraws the West from the auction a few minutes before it begins.
***
One final note: Currency throughout the book is expressed in the original selling currency of the artwork, which means US dollars except where otherwise noted.
IS VALUE THE LAST PADDLE RAISED?
CHAPTER TWO
THE ORANGE BALLOON DOG
“It’s really the quality of his work, interlocking with economic and social trends, that make him the signal artist of today’s world. If you don’t like that, take it up with the world.”
—Peter Schjeldahl, art critic, on Jeff Koons4
“I want to play with the balloon,” says John. “Only venture capitalists can play with that balloon,” says Mummy.
—Miriam Ella, We Go to the Gallery5
FOR EVERY EVENING AUCTION SEASON IN NEW YORK OR LONDON THERE IS A work that becomes the symbol of the sales. Its image appears in advertisements and newspaper articles, and on an auction catalogue cover. For the November 2013 contemporary sales in New York, that work was Jeff Koons’ Balloon Dog (Orange) (see photo insert), offered at Christie’s.
The sculpture is a 10-foot-tall (3.1-metre) scale representation of what results when a clown twists a balloon into a dog-like form. Balloon Dog was produced in an edition of five. One version had been exhibited on the rooftop of the Metropolitan Museum in New York, beside the Grand Canal in Venice and at the Palace of Versailles outside Paris. It was promoted as being potentially the most expensive work of art by a living artist ever sold at auction. Christie’s estimate was $35 million to $55 million. The upper end of that range was 50-percent higher than the previous living-artist-at-auction record of $37 million set in May 2013 by a Gerhard Richter painting.
Balloon Dog (Orange) is constructed of tinted, high-chromium stainless steel. It has deep colour and a flawless reflective surface. Koons said the meaning of the sculpture was that it recreates and celebrates the experiences that evoke a child’s enjoyment of the world. It has also been described as a postmodern fertility symbol. It is part of a contemporary art tradition of enlarging something and re-imaging it in different materials—think of Claes Oldenburg’s Floor Burger (1962) or Roy Lichtenstein’s giant comic-book panels. Christie’s displayed the Koons sculpture outside its Manhattan auction rooms in Rockefeller Center. It drew attentive crowds and lineups for iPhone selfies twenty-four hours a day.
Jeff Koons is the most successful American artist since Andy Warhol. As with Warhol, Koons’ works are produced by technicians. Koons contributes the concept. His art “factory,” which employs more than a hundred technicians, is near the Hudson Yards in the West Chelsea area of New York City. New work evolves on computer terminals running 3-D imaging programs. Software-driven lasers do the stone carving. The fabrication involves a lot of experimentation, and a long production cycle.
Koons had on two previous occasions held the title “most expensive living artist.” His stainless steel Hanging Heart (1994–2006) brought $25.8 million at Sotheby’s New York in 2007. That record improved in 2008 when his sculpture Balloon Flower (Magenta) (1995–99) sold for $25.7 million at Christie’s London, and again when his sculpture Tulips (1995–2004) brought $33.7 million at Christie’s New York in 2012. Each work came in a series of five.
Gerhard Richter regained the “most expensive living artist” title in May 2013, when his painting Domplatz, Mailand (1968) of Milan’s Piazza del Duomo (Cathedral Square) brought $37 million. Six months later, Balloon Dog reclaimed the title.
Christie’s was not reticent in emphasizing the status that would accrue to the collector who acquired the statue. The auction house sent out thousands of emails to announce to its clients “The stage is set to make history.” Brett Gorvy, then chairman and international head of postwar and contemporary art at the auction house, said in a mass emailing:
The Balloon Dog is the Holy Grail for collectors and foundations. In private hands, the work has always communicated the prominence and stature of its owner. To own this work immediately positions the buyer alongside the very top collectors in the world and transforms a collection to an unparalleled level of greatness.6
The Christie’s promotion was well received: 10,000 people attended the auction preview and 1,400 attended the auction, hundreds of them standing. For those requiring discretion, Christie’s built an extra ground-level “skybox” with one-way glass. Journalist Kelly Crow described it in the Wall Street Journal as a duck blind.
The street outside Christie’s headquarters at Rockefeller Center on auction night was described as curb-to-curb parked black, tinted-window Escalades with sacks of gold bars in their trunks. The attendees were variously described as bidders, obligatory fashion-draped appearances, hungry press, and chancers looking to bag a husband.
Unlike most expensive contemporary art, the value of Balloon Dog (Orange) does not flow from the backstory to the work—unless the bidder thinks that celebration of childhood is gripping. Rather, and as Gorvy emphasized, much of the value reflects the buyer’s ability to join the short list of celebrated collectors who own other sculptures in the series.
The five versions of the sculpture each have a different colour. Hedge fund owner Steven Cohen has the yellow one. Los Angeles financier Eli Broad has the blue and Greek industrialist Dakis Joannou has the red. Christie’s owner François Pinault has the magenta version. These are the “top collectors” Gorvy alluded to.
At the invitation-only Sunday preview brunch two days before the auction, waiters carried long poles hung with trays of champagne flutes. There was a buffet table with bagels and lox. One commentator described the preview crowd as “plastic surgery Expressionism.”7 A former Christie’s vice-president (since departed) named Capucine Milliot coordinated the brunch.
On the day before the sale, Gorvy sent out another mass email on “Final Thoughts on Tomorrow’s Sale,” offering bidding advice and his version of “loser’s regret”:
It is the next morning, and you wake up, and you do not own the object that you had so desired to acquire. How much does that hurt? That is how much you need to bid. Otherwise the memory of the work and the hurt of the loss will be all that remain.8
Regret is a feeling that auctioneers understand and exploit; their “no regrets” comment when a bidder drops out is not just a figure of speech. During the auction process, a bidder’s previously held values change. Bidders value a work more when they think they can own it. A more familiar example is an investor who holds onto a stock well past the point where fundamentals suggest he or she should sell.
Auction underbidders feel regret at losing an artwork they could have possessed. This reference point of “almost having the sculpture and losing it” is different from having the money and preparing to bid. This is what cognitive psychologists call an endowment effect. The bidder will go higher not to lose the prize.
When the bidder momentarily holds the high bid, the endowment effect cuts in. The bidder will pay more not to give it up and experience regret. Christie’s auctioneer Jussi Pylkkänen plays to this: “Last bid … are you sure … no regrets … are you back in … not yours, sir … don’t let him have it.” This is accompanied by gestures with extended arms, as Pylkkänen leans in the direction of the reluctant underbidder to elicit a response.
What the auctioneer does not want to hear is a jump bid. This occurs when the auctioneer has established a cadence, “I have a million three on the left side of the room, a million four on the phone, can I have a million five …” and a bidder calls “Two million.” The result may be other bidders concluding, “This guy will pay anything for the work, more than anyone else and more than it is worth. I will never have it. I will drop out.�
� It spoils the cadence, but more important it erases any endowment effect that previous high bidders felt. It is a good strategy for the jump bidder.
A half-increment bid, made with the bidder holding one hand horizontally, is almost as unwelcome to the auctioneer. Whether or not the half bid is accepted, it signals that bidding is considered close to its limit.
Balloon Dog (Orange) had a guarantee in the range of $35 to $40 million. There had to be a guarantee. After all the promotion, the sculpture was too important to the auction house’s reputation to be allowed to fail.
The sculpture came up as lot 12. Bids first rose in increments of $3 million, then $2 million. The first identifiable bidder was dealer David Zwirner. He raised his bidding paddle at $39 million, then through $2-mil-lion jumps to $51 million. Then his paddle stayed down.
There were no jump bids. Balloon Dog (Orange) was hammered down at $52 million; with auction house premium added, the invoice was $58.4 million. The successful bidder was New York collector Jose Mugrabi, who placed the sculpture in storage in a New Jersey warehouse, anticipating future resale at a profit. To put the winning bid in context, it was almost exactly the US budget—across all health agencies—to develop an Ebola vaccine.
This brings into play another economic concept: the winner’s curse. When many bidders compete for the same object, the winner is the person who most overvalues it. The bidder soon realizes that he or she just bid more than anyone else in the room or on the phone thought the object was worth. One manifestation is that about 5 percent of successful auction bidders later approach auction officials with some version of “Look, I got carried away, is there anything we can do?” The usual suggestion is that the auction house would be glad to re-offer the item after an eighteen-month period. The winner’s curse probably does not apply to Mugrabi, who buys (and sells) so many artworks that he doesn’t spend much time agonizing over any one. It certainly would apply to me.
It was assumed that Christie’s must have made a lot of money on Balloon Dog (Orange). It turns out that the auction house lost money, an example of the paradox that often the more expensive the artwork, particularly with contemporary art, the lower the profit the house earns.
Auction houses typically charge a commission to the seller and a buyer’s premium to the successful bidder. For lower-priced works, the consignor’s commission might be 10 percent and the buyer’s premium 25 percent. For works of art above $1 million, sellers usually have the seller’s commission reduced. Above $5 million, the commission is usually waived.
Without the seller’s commission, the auction house is reliant on the buyer’s premium for revenue. The buyer’s premium above a paddle price of $2 million is about 12 percent. A consignor of a featured work might negotiate to receive a rebate of 4 to 7 percent of this buyer’s premium, so would be said to receive “104 percent of hammer” or “107 percent,” also referred to as “paddle-plus” or “enhanced hammer.” A portion of the buyer’s premium may go to a third-party guarantor, who has committed to a minimum price.
Reports by Graham Bowley of the New York Times on the consignment suggested that Peter Brant, the art collector who was selling Balloon Dog (Orange), negotiated to receive the entire buyer’s premium. Brant was quoted as saying that Christie’s “certainly made no money” from him.9 To obtain the consignment, Brant told Bowley, Christie’s waived the seller’s commission and rebated to him 112 percent of the hammer price. Christie’s apparently would have received a portion of the buyer’s premium only if the hammer price had been higher. Recall that the sculpture did sell for a world-record price for a living artist.
Christie’s incurred substantial costs to promote Balloon Dog (Orange), certainly in the millions of dollars. It transported the sculpture from Brant’s Connecticut estate to display outside its Rockefeller Center headquarters. It insured the sculpture and put a huge marketing push behind it, with full-page magazine and newspaper ads.
If the auction house were almost certain to incur a loss on the transaction, why would it seek the consignment? The primary reason is to prevent a top work (and market share) from going to a competitor. Christie’s earned bragging rights, and the expectation that the presence of the work in the evening auction would help attract other consignors and raise the overall bidding level. World-record prices make other art on offer seem inexpensive. Christie’s Gorvy has suggested another reason: “‘We take a calculated risk’ … a high-value work with a guarantee, such as Koons’s ‘Balloon Dog,’ may not generate a profit on its own, but it brings in buyers for other works who make the overall auction profitable.”10
It was understood that at the Christie’s auction and at the Sotheby’s contemporary auction the following day, a lot of the art offered was being flipped. Usually art is sold because of “the three D’s”: death, divorce or debt, or because collectors’ tastes have changed. Flipped means it has been held for a relatively short time and is being resold in the hope of a quick profit.
Thirty of the works at the two auctions were known to be on offer from investors. These thirty made up a substantial portion of the estimated value of all the works offered. A single collector, Steven Cohen (owner of the yellow Balloon Dog), offered twelve works—all purchased at auction or at art fairs within the previous three years. These had a combined pre-auction estimate of $80 million. When insiders in any market start selling off holdings in bulk, other investors became concerned about price bubbles and the future of that market.
Cohen’s multiple consignments reflect the difficulty in understanding exactly why a collector might be selling. Newspaper accounts suggest he was facing high legal bills and possibly substantial financial penalties related to alleged stock-trading irregularities by his hedge fund. There was another likely explanation. Less than a year earlier he had purchased Picasso’s Le Rêve from casino owner Steve Wynn for $150 million. Owners who sell fine art at a profit can defer tax liability on the profit if they purchase art of equivalent value within a year. Cohen might have been selling to defer taxes.
The next chapter describes another lot in the same Christie’s auction as Balloon Dog. This one, a Francis Bacon triptych, attained the highest price achieved for a work of art at auction to that date, when not factoring in inflation.
CHAPTER THREE
THREE STUDIES OF LUCIAN FREUD
“A painting is not a picture of an experience; it is an experience.”
—Mark Rothko, artist11
IN THE NOVEMBER 2013 NEW YORK AUCTIONS DURING WHICH BALLOON DOG (Orange) was sold, the offering with the highest estimate was Francis Bacon’s Three Studies of Lucian Freud (1969) at Christie’s (see photo insert). The triptych shows three images of Freud—a sometimes-rival painter of Bacon and the grandson of Sigmund Freud, the founder of psychoanalysis. It was offered with an estimate of $85 million. That amount was thought to be justified; Bacon has been called the greatest portrait painter of the second half of the twentieth century. Three Studies may have been the last major Bacon triptych from the 1960s in private hands.
Bacon painted the work as three panels intended to be displayed together. The triptych was first consigned to Galleria Galatea in Turin, which sold the panels separately without Freud’s consent. The panels were reunited in 1989 by an Italian collector, identified in the Wall Street Journal as lawyer Francesco De Simone Niquesa. One panel came from Paris, one from Japan. De Simone Niquesa already owned the third.
The owner received many offers for purchase or consignment in the intervening years. In early 2013 the triptych was purchased by an unidentified art investor, thought to be Mexican-born financier David Martínez Guzmán. It was consigned to auction with a guarantee of $85 million, which limited the risk to Martínez (he may have purchased the work for a higher amount). The guarantee allowed Christie’s to both share in the possible upside profit and reap a huge publicity coup.
Several media reported that the panels had been reassembled in response to Christie’s offer of a guarantee if the panels could be off
ered together. That would add to the rarity and appeal of the work. This is a more interesting backstory than the actual one; it may have been planted.
The triptych was originally listed as catalogue lot 32. Hours before the auction, Christie’s alerted clients that the triptych would be moved up to lot 8A. That was unprecedented; catalogue positions never change once the catalogue is printed. Apparently an Asian client of the auction house indicated he was willing to bid above the estimate, but only if it carried a lucky number. It was repositioned with just such a number.
Auctioneer Jussi Pylkkänen opened the bidding at $80 million. Compare that to the former Bacon auction record of $83.6 million. Both the level of the starting bid and the increments asked by an auctioneer serve as nudges, an anchor point for bidders. If the auctioneer says “I would like five-million increments,” you know that he has some serious bids in his “book,” bids left with him in advance. He wants to get to the level of the highest bid quickly, and establish how highly the lot is valued and how much bidder enthusiasm exists.
Hong Gyu Shin, twenty-three-year-old director of the Shin Gallery in New York, bid the painting up to $100 million. “I’m out at $100 million,” Pylkkänen said, referring to bids left with him. Dealer Larry Gagosian raised his paddle and offered $101 million. “Give me five, sir,” Pylkkänen responded. Gagosian nodded yes to $105 million. Shin went to $110 million. Gagosian nodded “no.” “Thank you for your attempt at bidding,” Pylkkänen said to Gagosian.12
Shin was out at $124 million asked, producing no acknowledgement from Pylkkänen. A Mandarin-speaking auction house specialist on the phone with a client—perhaps the one who wanted a lucky number—bid $120 million, then $124 million. When Pylkkänen said “Give me 26,” a bidder held out his hand horizontally, offering a half-increment advance to $125 million. Pylkkänen responded, “Of course, a million dollars is a lot of money.”