by Don Thompson
The risk to contemporary art (and to artists) has several components. Commercialization speeds the disappearance of the traditional standard of judging art by its quality and innovative aspect. This is replaced with a consumer culture norm—valuing art by its marketing and financial characteristics. Contemporary art becomes viewed in the same context as fashion footwear and watches. Fashion houses rather than dealers choose and promote artists, with the shock value of the art often being the criterion.
Fashion also wants to incorporate the motives attributed to purchasers of contemporary art. Acceptable motives in Western societies are evolving from “possessing” to “being,” from “owning” to “experiencing.” Fashion also seeks to be aspirational by adding a backstory to the product, ideally one that can transfer from art to fashion. Louis Vuitton’s LV handbags have no backstory except the prestige of the brand. LV handbags with Takashi Murakami’s characters and images may inherit a backstory. But does the handbag connection degrade the same backstory when it is later offered with Murakami’s wall art and sculptures?
Art appreciation is usually seen as a sign of cutting-edge taste. When an art lover purchases art it is called collecting. When a woman buys an expensive frock it is called shopping and may be considered frivolous. The fashion industry has now adopted some of the language of art. Fashion stores “curate” their frock collections.
There are examples from the past where commercial collaboration was not seen as selling out. Elsa Schiaparelli partnered with Salvador Dalí in 1937 to produce a silk organza lobster-print gown. In 1965, Yves Saint Laurent made shift dresses patterned on Piet Mondrian canvases. Both were huge successes for fashion, and produced greater recognition for the artist. But those were very different times for both fields.
Andy Warhol is an example of an artist whose work crossed to fashion. Warhol understood the importance of being selective in how and where his material was shown. In his book Popism: The Warhol Sixties, he detailed how careful he had to be about placement to maintain a blue-chip reputation.
Most commercialization of his work took place after his death, when the Andy Warhol Foundation began licensing his images. Snowboard manufacturer Burton produced a limited-edition collection of boards and boots featuring Warhol dollar signs, flower pictures and self-portraits. In 2006, Barney’s department store in New York offered limited-edition Warhol Campbell Tomato Soup cans, containing condensed soup and bearing replica labels in the colours of Warhol’s original art. In 2015, Converse partnered with the foundation to produce low-end sneakers with iconic Warhol images like his Campbell’s soup can (see photo insert).
Another difference from the time of Schiaparelli and Warhol is modern society’s concern with wealth inequality. This is a concern to fashion, because inequality is most visible through consumption. Wearing a $25,000 designer gown produces criticism; hanging a $25,000 painting reflects your status as a supporter of serious culture.
Fashion marketers enjoy great freedom in experimenting with art connections. Think of the Chanel example. This is possible because both fashion and the way it is promoted are controlled by a single creative director. The intent is that the fashion being marketed and the expanded meaning of the brand will shape the product preferences of elites, whom other consumers are expected to follow.
The publicity that results from art + fashion collaborations is intended to build the brand rather than just expand product sales. Chanel does not earn a profit from selling its catwalk pieces, and doesn’t make much selling retail versions. Its profit comes from brand spinoffs. For example, while Chanel is known as a high-fashion house, it earns 50 percent of its revenue and 80 percent of its profit from lipsticks, other cosmetics and perfumes. Dior prices a one-of-a-kind runway dress at $25,000, but makes far more profit selling Dior logo belts.
Some of the wildest collaborations of art + fashion have taken place in China, which accounts for a third of the world market for personal luxury goods and fashion and 20 percent of the world market for contemporary art. The risk to contemporary art there is higher because of tipping points; brands and artists can lose their appeal quickly. Artistic collaborations in China also fill different needs. Demand for fashion and luxury goods slowed after leader Xi Jinping’s anti-corruption campaign took off in 2014. Companies backed off from promoting fashion and luxury directly and instead emphasized their connections with art and artists.
Whether an association with fashion diminishes the perception and value of art remains to be seen. Collaboration with art may allow fashion to emphasize the artisanal features of rarity and uniqueness. In any case the marriage is a bit one-sided. Some customers may purchase a fashion label because of art. It is harder to imagine anyone desiring a work of art because of its association with a fashion label.
CHAPTER SIXTEEN
ART MARKET REGULATION
“[The art market] is a camouflage thing that is called the arts but it is money laundering. In the end it is just a business and a global currency.”
—Martin Roth, director of the Victoria and Albert Museum in London80
INTERNATIONAL BUSINESS AND POLITICAL LEADERS MEET AT THE WORLD Economic Forum in Davos, Switzerland, for four days each January to debate important issues. At the 2015 forum, New York University Professor Nouriel Roubini gave presentations in twelve panel discussions and dinner talks. Eleven were on macroeconomic policy topics like the European Central Bank’s quantitative easing program and the Swiss decision to allow the franc to rise in value. His twelfth talk received more press coverage than the other eleven combined; in it, he argued that the art market needed regulation, and he recited every criticism made of that market over a decade.
When Roubini demands market reform, media and governments take note. Roubini has a Harvard doctorate and has worked for the Federal Reserve, the International Monetary Fund, the World Bank and the Bank of Israel. He has advised Bill Clinton and Timothy Geithner. In both 2011 and 2012, Foreign Policy magazine named him as one of the Top 100 Global Thinkers. He is most famous—and earned the media designation “Dr Doom”—for predicting the collapse of the US subprime housing market that led to the financial crisis of 2008.
The Roubini talk that received so much media attention was at an event organized by the Financial Times and Julius Baer bank. Roubini said that, based on the size of the art market and because art is used as a portfolio investment, it must be considered an asset class and regulated as one. He continued with the obvious: that when people invest in art, some of their profit expectation comes from favourable capital gains taxation and some from the ease of tax avoidance when artwork is transferred across borders or across generations.
He cited the Mei-Moses index data on art price trends and concluded that returns on art are comparable to long-term returns on stocks. He ignored, as other commentators have, the high transaction costs and carrying costs of insurance, conservation, transportation and storage for art. He did not mention that Mei-Moses and other art indexes suffer from what economists call selection bias; they record only prices on artworks that are accepted for auction. Out-of-favour works rejected for auction are not counted. The best estimate for long-time returns on an art portfolio is about 3.2 percent a year, about equal to the predicted annual inflation rate, and well below the long-term return on stocks. However, this does not invalidate the “asset class” argument.
Roubini said that guarantees offered by dealers on auctioned work might lead to price manipulation. His concern was that a dealer would guarantee a record price, “purchase” the work for that price and thus establish a new price record for a gallery artist. Auction specialists say that no auction house would permit a dealer to offer a third-party guarantee for his or her own artist—although dealers do regularly bid on their own artists’ work at auction. I have been unable to find anyone in the art world who admits knowing of such an abuse of the guarantee system, except perhaps in the Chinese market.
Roubini also cited the proliferation of art investment funds (b
y his estimate more than seventy) and attempts to combat the lack of liquidity for artworks by creating derivatives that track the underlying value of art market funds.
As an aside, he emphasized the lack of any fundamental pricing model for art. Art produces no income stream, just a potential capital gain. In this sense art is more like gold than like stocks, bonds or real estate. The lack of a pricing model means that art is subject to fads, fashions and price bubbles—as occurred rather dramatically after 1990 and in 2008. It also means that an art investor must cover both capital and financing costs of art from some other funding source, while hoping that the asset appreciates enough to justify the expense. If the other source (stocks, real estate) is no longer available, the art asset may have to be liquidated.
Roubini ended with an obvious conclusion, that while online indexes and auction prices offer some price information, the art market is still opaque. “Inside information is considered standard … In other markets, it is thought of as being illegal.”81 The market has to be subject to outside regulation “because it will not self-regulate, and its flaws would not be permitted in other financial markets such as equities.” He concluded that regulation would be a net positive even for dealers, auction houses and other industry insiders that now oppose it.
A long list of questions arises from Roubini’s catalogue of possible abuses. If the art market needs to be further regulated, what should be covered, and how? Roubini suggested an administrative agency to provide regulatory oversight and oversee ownership transfers. But would any government deem the art market important enough to justify further regulation above what currently exists in fraud statutes, or in tort or contract laws?
Melanie Gerlis is the art market editor of The Art Newspaper and columnist for the Financial Times. In her book Art as an Investment? she estimates the total amount of tradable art in circulation at any one point in time at $400 billion. As a comparison, the market capitalization of hightech multinational Apple in July 2016 was $570 billion. More than half the value of tradable art is made up of the expensive works purchased, stored and sold by a small group of wealthy collectors. Would a government devote resources to protecting rich collectors who have ready access to expert advice from consultants, dealers, auction houses and each other? Recall the story of Ronald Perelman (Chapter 11).
How about Roubini’s concern with the role of art in money laundering? The two largest art markets, New York and London, already have strict money-laundering laws. Their banks are not supposed to clear large-value transactions unless they are satisfied as to the source of the funds. Similar laundering protocols exist throughout much of the developed world. If there is a money-laundering problem, it arises with transactions negotiated in Western centres but finalized in jurisdictions like Luxembourg or Monaco, with electronic funds transferred from offshore banking centres. No art market regulation will change that.
Securitization of art—selling derivatives against the value of an art collection—would be an area attracting regulators’ attention if the market for such art-backed securities were anything but minuscule. The only provider I know of is Pi-eX, based in London, which offers “Contracts on Future Sales.” The contracts are derivative securities based on individual artworks being offered at upcoming auctions, when the value of the contract will be the hammer price of the work. Art owners can hedge their risk against the value achieved at the sale, while future art buyers can hedge against increased prices. Institutional investors can buy the contracts to build a portfolio of synthetic artworks as part of an asset diversification strategy. If this sounds like something written in Klingon, ignore it. The derivatives market for art, such as it is, comes within the purview of existing securities regulators who, I assume, will treat Pi-eX art securities no differently than any other derivative.
Given Roubini’s list of trading on inside information, price manipulation through guarantees and tax avoidance on purchase and transfer of art, what would a newly regulated art market look like? Museum board members would no longer be comfortable purchasing artists who were scheduled for future retrospectives, but might continue to leak information about forthcoming shows to dealers and friends. The list of acceptable third-party guarantors for auctioned work would shrink, and probably exclude dealers and perhaps agents and major collectors. And dealers purchasing at auction for a client and required to identify that client would be more likely to cite a Swiss lawyer or a numbered company.
That leaves more focused concerns, for example dealing with information asymmetry by making figures available about reserves or guarantees. So far, every art market regulatory review that has looked at those problems has opted for the status quo. Regulators apparently conclude that the art market is a place for consenting adults to indulge in whatever irrational acts they choose, so long as no fraud or abuse of innocent third parties is involved—as, for example, was the case with Christie’s and Sotheby’s commission price-fixing arrangements in the 1990s.
The concerns Roubini expressed and the size and complexity of the art market will at some point attract the attention of some federal or state regulator wanting to be seen as protecting the gullible. If the experience of other markets is any guide, this will trigger further interest among art market participants to self-regulate so as to forestall government involvement.
So what would a defensive self-regulatory framework look like? One answer, if art is to be treated as an asset class, is that art advisers should be licensed the way investment advisers are—although what form the qualifying exam might take is not obvious. Another answer would be to deal with information asymmetry by making available data now controlled by dealers and auction houses that affects the value of art. One example is the volume of an artist’s work that is available. Control of that information by market insiders produces a distinct advantage.
Market observers (myself included) were astonished to learn in 2010 that artist Damien Hirst and his technicians had produced 1,700 spot paintings (and some still argue that number is low). The price of his spots at auction dropped by about a third following release of this information, even though Hirst stated he had stopped producing the work. Other factors were certainly involved—one being that his spokeswoman said he might change his mind one day and produce more. As of late 2016 the prices for his spot paintings made after 1984 had not recovered; those made from 1978 to 1984 had held their value.
A more controversial answer would be to reveal what many insiders know, or think they know, about works in high-end evening auctions. In order of most to least likely, these include: First, how were the price estimates made? Did the auction house provide guarantees (in which case the house may be amenable to a lower offer after the auction)? Were guarantees offered by a third-party collector of an artist’s work, or by a consortium of investors in partnership with the auction house? Has a work been offered for sale elsewhere (by a dealer or by private dealer) over the past year? In the “would never happen” category are questions such as: What is the reserve price below which the consignor will not sell? What is the guaranteed price? Who is the consignor?
The most commonly suggested reform is that secondary-market resellers reveal their costs, their commissions and the names of whoever received any part of the commissions. Many dealers already do this. London dealer Pilar Ordovas tells buyers the amount of the selling price that is her commission. The standard objection to this is that no other retailer outside the financial sector is required to disclose markups.
When a dealer or auction house offers a work, should the seller be obligated to reveal whether specialists have ever expressed doubts about its authenticity or provenance? Think of the Knoedler fakes (Chapter 12), where the opinions of specialists who doubted the authenticity of individual works were disclosed only during litigation, in some cases a decade after they might have been of use to potential buyers. Should a repository of all authenticity reports be available, perhaps online, with the qualifications of those giving each report also available? Experts m
ight not want to be identified as declaring a work fake for fear of being sued, but the lack of availability of their reports permits fakes to be sold and resold. Legislation recently proposed in New York to protect experts from suits would help.
Other activities affect auction prices. Museums play a complex role in the market. When a museum offers a major retrospective for an artist, how was that artist chosen? Did the artist’s dealer contribute to the cost of the retrospective? Did that dealer play any role in choosing which works were borrowed or displayed? Was there a contractual undertaking that the works shown would not be auctioned or sold privately for a period of time following the retrospective?
Two examples of museum shows being used as selling exhibits are the exhibitions of Charles Saatchi’s collection at the Royal Academy of Art in London. The first was Sensation in 1997, which later showed at the Brooklyn Museum. The second was USA Today in 2007. In each case Saatchi contributed to the cost of the show and chose the work to be displayed, much of which he owned. The circumstances around these shows were widely reported and understood by the market. What came later were market transactions, with consenting buyers and Saatchi doing their thing.
A less persuasive but very real counter-argument to disclosure is that the existence of insider roles contributes to the aura and attraction of the contemporary art market. The arcane rules of auctions, fairs and dealer openings may be as important to art market success as what is offered and then reported in the New York Times. To bring total transparency would make art more of a commodity and lessen the glamour of the market process. If your friends knew exactly how much you paid for your new painting and how little of the backstory was true, they might be less interested in viewing, and you might be less interested in purchasing.
Would any of the suggested rules serve to forestall the bursting of the art bubble? Not likely. That is based on buyer optimism and a wilful ignoring of negative market signals. Neither of those human attributes can be legislated.