Why Sotheby’s Borrowers Aren’t Speculators

Floyd Norris, meet Nouriel Roubini. Both of you are worried about consumer credit in non-housing parts of the economy: Nouriel is concerned about auto loans, while Floyd is looking at art loans, and specifically the $835 million that Sotheby’s lent to buyers last year:

Buying art on credit is, in essense, a bet that the price will appreciate at a faster rate than the interest is accumulating. That sounds like speculation to me.

Both Floyd and Nouriel have, I think, been spending too much time in the world of high finance. What we’re talking about here, in both cases, is essentially very simple: vendor finance which enables an individual to buy an item he wants.

If you’re buying a big-ticket item like a car or a painting, there’s a good chance that you don’t have the cash to pay for it just lying around. So you end up choosing one of two alternatives: either you sell other assets in order to raise the money, or else you pay for it out of future earnings. Car loans are a way of financing the latter; Sotheby’s loans to buyers are a way of financing the former.

This is emphatically not speculation. If an individual buys a painting using Sotheby’s credit, he’s not betting that he’ll be able to flip it before he has to pay the auction house back. If he is, he’s being stupid, because of the auction-house fees involved: he has to cover not only the interest that Sotheby’s is charging him, but also the large buyer’s premium he paid on top of the hamer price.

Rather, he might have a lot of money tied up in hedge funds, in his own company, or in other illiquid investments, and Sotheby’s is giving him time to raise cash either by selling or by borrowing against those investments.

If I own a large stake in a multi-billion-dollar corporation, I’m a good credit, and Sotheby’s is going to be perfectly comfortable lending me money to buy a painting, even if I don’t have a few million dollars in ready cash. Such a transaction might "sound like speculation" to Floyd Norris, but it isn’t even close to that.

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