No one saw this coming #2/50
Bored Apes Yacht Club at Sotheby's, new money problems, price fixing scandals in art, and NFT wash sales
On September 10th, the Bored Ape Yacht Club (BAYC) collection sold at Sotheby’s auction house for $24.5m – an astonishing figure for a project only six months old.
In a short time, BAYC is a blue chip non-fungible token (NFT), often trading in the top 5 most popular NFTs on any given day.
Here’s a sample of the 101 apes in the auction lot, including some “super-rare” gold fur apes:
Sotheby’s Bored Ape Yacht Club (BAYC) lot
At $24.5m, the average price per ape works out to $150k+, plus what is known as the buyer’s premium.
In these auctions, the buyer pays the majority of fees; for handling the sale, Sotheby’s received ~$3.8m or $38k per ape.
This was a highly public sale, for a lot of money, which generated serious bidding interest, including from BAYC members who pooled their crypto to make sure the “floor” of the auctions stayed high. (The winner was a private art collector.)
But, and I mean this in the most serious of tones, why?
Why would a leading NFT project, whose apes already trade regularly for over $125k, bother with a direct listing at Sotheby’s, especially since active trading of BAYC on the open market generates so much money for project through royalties?
And why choose of all places Sotheby’s - a musty auction house, famous for selling impressionist art to Japanese bankers in the 1980’s? Especially since one of the chief promises of any crypto asset is the ability to sell for whatever price, at whatever time?
Sotheby’s IRL Auctions: that’s a Cezanne
While not the first major NFT sale, this auction represented an intersection between the bubbly world of NFTs and the often bubbly world of contemporary art sales.
Maybe it’s helpful to talk about the purpose of an art auction in the first place.
Why Auction at All
Sure - the main purpose of the auction is to sell a piece of art, but the benefits of going to auction, instead of a direct sale, are all about how the art is sold.
When an auction house like Sotheby’s gets involved in selling a major work, it signals three important things about the transaction:
Collectability – hey Sotheby’s buyers, this is cool/new/rare and worthy of attention
Authenticity – hey Sotheby’s buyers, this is real/legitimate/verified
Marketability – hey Sotheby’s buyers, the auction is happening at this time/place/date and you should be there because this sale will happen whether you participate or not, you can’t wait it out
But think for a second at how utterly useless these benefits are for NFTs.
BAYC is a top ranked NFT project whose assets well recognized in the NFT world and any serious collector would know about them. The blockchain verifies each BAYC, there’s literally no way to fake them. Moreover, anyone can purchase any BAYC for sale, anytime; you don’t need an auction to sell these apes at all.
So I had to wonder, what is the purpose of Sotheby’s in this transaction?
Let me back up a bit and tell you some things about Sotheby’s you may not know, how they work, how they get paid, and ultimately, how the entire market almost collapsed with the Chairman of Sotheby’s ending up in jail as a 78 year old man.
Let me introduce you to Alfred Taubman.
New Money Buys Sotheby’s
Last time, we talked about the distinction between old money, generational wealth with rules and defined social regulations, and new money, riches that come upon a person or family within a generation.
If you want a picture of what new vs old money looks like, here’s a good one:
What Ill Payne gets right here is the discomfort of old money towards new money crashing the party. Old money tends to be quiet about wealth; new money tends to be loud about riches.
For the first hundred years or so, Sotheby’s was decidedly old money. Founded in 1744 in Britain, Sotheby’s became the chief auction houses of rare coins, objects, and paintings. Art became serious investments in the 1960’s and 1970’s until, by the 1980s, the market overheated and took a sudden downturn.
By 1982, Sotheby’s found itself in a precarious position, losing $5m on $90m of revenue, with clients fleeing for the much smaller, but seemingly stable Christie’s.
Their savior came in the unlikely form of Al Taubman. A cigar chomping, foul-mouthed real estate developer from Detroit, Taubman had amassed a personal fortune of over $500m from shopping malls. He liked art enough, but he liked having his name on things even more — remember, he was one of the six patrons who helped buy Jasper Johns' Three Flags for the Whitney (see last issue).
Al & Judy Taubman. SIDENOTE: Judy is always referred to as a “former Miss Israel” so I am guessing she had a great publicist; I felt obliged to include this fact. Go Judy, go.
Sotheby’s did not want to be bought by a “vulgar man” such as Taubman, but its losses were mounting. Faced with the prospect of a hostile takeover bid, in 1983, Sotheby’s sold to Taubman for $125m, a purchase he made reportedly as a present to his wife, Judy.
Judy had been a receptionist at Christie's auction house and thought the art business was “cute.”
The year before? Taubman bought something for himself, the A&W diner franchise.
“Selling art has much in common with selling root beer,” he once said. “People don’t need root beer, and they don’t need to buy a painting, either. We provide them a sense that it will give them a happier experience.”
Suddenly, Alfred Taubman was a real-estate, auction-house, root-beer float magnate - the very definition of new money.
New Money Hits Different
I don’t know another way to put this – under Taubman, Sotheby’s did some crazy sh!t. I suppose when you have a wealthy client base, with sought after but illiquid assets, you get creative.
One example: Sotheby’s made a habit to loan its clients money.
If you owned a 19th century Degas – the kind of painting that someday your ex might sell in a divorce or bereaved children would dump after your death* – well, Sotheby’s wanted a close relationship with you (and thus your assets). This system had been setup using public stocks, which were reasonably liquid, and this innovation had an unique advantage for art.
Debt obligated the owner to Sotheby’s, since they had a right to artwork securing the debt, and ensured Sotheby’s had to be notified about any future sale.
But like any financial innovation, it got more interesting and weird. By approaching art as an asset class, Sotheby’s began to allowing clients to borrow cash to not just to fund their liquidity but to fund more acquisitions; Sotheby’s began to loan money to client to purchase new art.
That’s a very different premise from an asset backed security and Sotheby’s came under scrutiny for it. Here’s a good example of why:
When Vincent van Gogh's ''Irises'' was sold at auction for $53.9 million in 1987 at Sotheby's in New York, it became the world's most expensive painting… A major element of concern is a recent confirmation by Sotheby's that it lent the buyer of the painting, the Australian financier Alan Bond, about half of the purchase price - approximately $27 million. Sotheby's also stirred disquiet when it said it was still in control of ''Irises'' and was storing the painting in an undisclosed place until Mr. Bond finishes repaying the remainder of the purchase price.
New York Times, Oct. 18, 1989
The proper term for this is “layaway,” which makes sense for department store Christmas presents but not so much for multi-million dollar art secreted away in a neutral location. (Switzerland? I’m just guessing.)
Moreover, since Sotheby’s was the selling auction house, this loan created a conflict of interest: Sotheby’s had fronted a specific client a large amount of money that he used to pay top dollar for the painting, knocking out other bidders who did not benefit from a loan.
Others began to wonder if this was an entirely manipulated sale, engineered by Sotheby’s to increase the overall market to make all future sales seem more valuable.
That’s happening right now with NFTs and it’s perfectly legal.
The Dirty Secret of Wash Sales
NFT transactions are public; in theory, we can know who is buying and selling NFTs to each other and track them.
But lets say I have a NFT I want to sell. Perhaps it’s recently minted and its rarity is not clear. One way I can increase the perceived price is by selling it to myself.
The process is simple; I setup a second wallet and trade the NFT back and forth until the last transaction price is high, then offer it for a discount.
Here’s an example where the price on an NFT slowly moves upward as it passes back and forth between two accounts:
Wash trading example, credit NonFungible.com
If I can trade this NFT enough times, and drive the price from 1 ETH to 4 ETH, then I can discount to 2 ETH. Suddenly, a buyer might think they’re getting a great deal because I have paper hands.
If I coordinate with other holders, I can move the entire floor on a collection up, increasing the value of every NFT I might hold.
Another name for this is collusion.
Prison, the Very Worst Real Estate
I mentioned Alfred Taubman went to jail, now let me tell you why.
Under Taubman leadership, the Sotheby’s CEO worked in secret with the CEO of Christie’s, the other major international auction house. The two CEOs discussed coordinating their buyer premiums, changing their listing fee structures at the same time, informally agreeing to avoid poaching each other’s talent, and divvying up specifically named, large customers, so each auction house could get a defined piece of the pie.
This was ruled anti-competitive behavior, and thus, illegal.
For his role, Taubman paid millions in fines and went to jail for 9 months as a 78 year-old man. He was further forced to pay restitution and sell his position in Sotheby’s, a company he had grown 10x over, to a publicly traded, multi-billion dollar enterprise.
Taubman was worth $3B personally when he died; for fun, he kept a blog extolling the virtues of brick and mortar retail
Right now, NFTs are so unregulated, it is impossible to tell how many of these wash sales are happening. For certain, in a collection that doesn’t have a lot of assets at the floor, it is entirely possible to coordinate bidding pieces to a level that’s highly profitable.
And it’s perfectly legal.
This is also, I suspect, some of the reason that Bored Ape Yacht Club signed with Sotheby’s. While it did bring in $20m, BAYC will make that in a month based on current trading volume.
What BAYC needs to do as it establishes itself as a brand is to create a “creative moat,” that secures and cements the value of its artifacts.
Sotheby’s, to stay relevant in the market, has turned to more contemporary luxury goods, like rare drop sneakers. BAYC x Sotheby’s is a way to secure a market floor. All future sales, like van Gogh’s “Irises,” will be measured against this purchase.
Of course, there’s one problem with being a leading brand.
Knock-offs.
Next time:
Solana Apes: art or cash grab?
The $80m art world forgery
Flipping NFTs for fun and profit
The new risks of NFTs
Tweet of the Moment
I know, I didn’t get through everything I promised last week.
I have so much more to tell you,
Paul
* P.S. When Taubman passed away, he left behind $500m worth of art. His kids, none of whom were descended from Judy, locked her out of the London flat she once shared with her late husband over two paintings. The kids wanted to liquidate a good portion of Taubman’s art.
Do I even need to tell you who handled the sale?
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