The Art of Bailouts
Another asset class in deep doodoo.
Feb 9, 2009, Vol. 14, No. 19 • By SAM SCHULMAN
For years, financial leaders, advised by highly paid experts, have bought and borrowed to acquire a portfolio of world-class assets, the intrinsic value of which has never been in question. A few bears jeered, but were quickly priced out of the market. Those days--so recent--are no more. Asset prices haven't just declined--sometimes there's no sale at all. Clever managers in London and New York are setting up vulture funds to acquire troubled assets on the cheap, but what is cheap today may be only the beginning. What if the assets have no real value? What if they are actually toxic--not merely worthless in themselves, but tend to pull other, still valuable assets into a black hole of complete illiquidity?
I describe, of course, the current market for contemporary art. "High returns for high art are swept away," proclaimed the Times of London. "Nobody's going to be selling a Jeff Koons or a Bacon or a Lichtenstein any time soon," Tobias Meyer, the head of Sotheby's contemporary art department, told the New York Times in December. "Why would they, since they missed the boat?" Take a well-known name like Damien Hirst, the only living artist whose work is as instantly visualized as Picasso's was to our grandparents. Hirst's dead animals float in a sea of formaldehyde reminiscent of the serene azure of the old Wachovia logo. For over a decade, sales of his product have made collectors and dealers as happy as the tellers at my local Washington Mutual branch. Eager buyers devoured about $200 million worth of his product at a Sotheby's London auction last September. On November 5, disaster struck. In New York auctions characterized as "brutal," 11 out of 17 lots of Hirst masterpieces remained unsold.
Hirst and other blue-chips like Jeff Koons and Lucien Freud are only the best-known victims. There are dozens of other artists whose prices had previously risen every year, and now may have no market at all. The names of these artists--such as Jan De Cock, Cecily Brown, Peter Doig, Marlene Dumas, Elizabeth Peyton, Richard Prince, Anselm Reyle, Marcus Ruff, Rudolf Stingel--are well known to people like Penny Pritzker, the noted Chicago art collector, finance chairperson of the Obama campaign, and major-domo of the inaugural festivities. On the other hand, I hope that you are only vaguely familiar with these names, because their works are the vital market-entry points for the struggling young collectors who have helped to make our country what it is. Their dreary but selfless lives the Art Newspaper described movingly last fall, "buying a work one year for, say, $150,000 (from a primary dealer) and turning it around within a year to resell the same work for, say, $500,000."
Flipping an installation for a 200 percent profit may not sound like much to you, me, and the folks who designed John Thain's Merrill Lynch office (Michael S. Smith Design, in case you're in the market). But these small transactions are important to the art market. The artists whom these collectors accumulate are the stalwart IndyMacs and OneUnited Banks of the art world. They are essential to the free movement of capital from the pockets of socially ambitious auction-house buyers into the lofts of Bushwick and the organic gardens of the Hudson Valley. Until the credit crunch, the work produced by such artists was regarded as a solid investment that could only rise in value. Collectors wondered only how long they would have to hold them and how high they would go. But in the present crisis, a passing remark by Rob Storr or Chuck Schumer can send the value of artworks reeling into the world of the pink sheets. While Sotheby's and Christie's have fired scores of the most talented art-market professionals in the last two months--creating a lost generation of art-market professionals--Elizabeth Peyton just paints and paints, swelling inventory to dangerous levels.
I have the solution to this problem. I call it the "Bad Museum." The Bad Museum is a device that will save the art market; make collectors, gallerists, art consultants, and auctioneers whole again; and restore the unique power of art to generate jobs and absorb capital. The establishment of a Bad Museum will stabilize prices in much the same way that the Resolution Trust Corporation saved the credit markets in the 1980s.
Here's how it works. Created by our new administration, the Bad Museum will buy what can only be called Bad Art--artworks that either have not sold at a gallery or an art fair or have not met their pre-auction estimate. The Bad Museum may be set up in Washington, but I think it would be more appropriate if it were to be located in one of the soon-to-be-abandoned sites that symbolize the false ideals of the Bush administration: the Yucca, Nevada, nuclear fuel storage area; the National Petroleum Strategic Reserve; or the climate-controlled buildings of the Guantánamo Detention Center.
What's more, the Bad Museum would morally undo the mistakes of the Bush-era art market, in which buyers and sellers determined an object's worth. Instead, there would be strict scientific standards of judgment to justify its purchases, in keeping with the Obama administration's resolve to place science first in policy-making, replacing mere politics in importance. To define these new standards for art, we can do no better than to do what Penny Pritzker, the Soros family, and many others have done: hire Thea Westreich, art adviser.
Like a 21st-century Cassandra, Westreich foresaw the present crisis long ago. In 2006, she told New York magazine exactly what was wrong with collectors of contemporary art: "Today's art market is by and large misinformed." Collectors are "buying based on market trends rather than art-historical standards." Ignoring art-historical standards is a common mistake, but easy to avoid with the proper advice. When Westreich advised George Soros's son to buy a Christopher Wool piece for six times more than anyone had ever paid for one before, it seemed expensive--imagine Westreich's fee on top of the $600,000 for the piece--but allowed young Soros to align himself with history. When Westreich advised Penny Pritzker which among 25 artists she should hire to adorn the Pritzker family's new Hyatt Center office complex in Chicago, she didn't focus on cost, but certainty. Keith Tyson, the British artist who won the test, now hangs in the atrium--not just décor but Turner Prize-winning décor (and just imagine what kind of cartoonish art an uncultivated kitsch-frau like Sarah Palin might choose for a major federal building site!). As Westreich has said, "what is great in the history of art stays expensive." The taxpayers can't lose.
The naïve art-lover-in-the-street may raise objections to my scheme. The artists whose works aren't selling are the very same artists whose prices have risen so high for the past 15 years, and their works are in major collections worldwide. Would it not tend to devalue the investment that museum curators and still-solvent hedge fund operators have made? And would it not therefore shake the collateral value of a whole class of Good Art in Good Museums, Good Galleries, and Good Collections?
It would be a fair objection, had it been raised before November 5, 2008. But we now can see it is based on a complete misunderstanding of the fact that the Bush-era art market must be done away with. The Bad Art acquired by the Bad Museum would not in fact be what used to be called aesthetically bad--not part of art history. It would merely have a scientifically determined floor put under its impartially determined art-historical value. The art market as a whole will soon recover, as the survivors of the financial crash (which, in a curious coincidence, took place at the very same time as the art-market crash) start to spend again. At this point, the buyers will turn to the Bad Museum to make discreet purchases of Bad Art at an advantageous discount. Best of all, upon delivery, this Bad Art will immediately become great art--the kind of art that collectors may buy to own, but really, as Westreich says, they are "just caring for works that really belong to art history."
We do live in the real world, and so for public consumption, my conception of the Bad Museum must of course be rebranded. I suggest that the actual Bad Museum be named the Joan Mondale Museum, in honor of the ceramicist/Second Lady whom ArtNews dubbed "Joan of Art" in 1977 for her work in bringing the arts under the protective wing of government where they belong.
There is little time to waste in the present crisis. I'm still a young man, but I'm old enough to weary my friends with memories of Julian Schna-bel clearing my table at Max's Kansas City in 1972. That I could use some fresh anecdotes I won't deny, but I don't want them to be tales of disaster. Spare me from telling my grandchildren about how the once-fashionable painter Cecily Brown was reduced to bringing me my Old-Fashioneds at Whiskey Park--just the way I like them--simply because the art collecting quants couldn't determine the NPV of her luscious, ripe canvasses.
And who knows--perhaps my notion may have other applications. We might see a proposal for a Bad Bank that would acquire Bad Assets now held by institutions that are perfectly sound--were it not for the existence of the Bad Assets. Remind me to drop a note to Tim and Larry when I get back from the Brandeis protest meeting. Those philistines want to sell off their art just to save their university. And at the bottom of the market!
Sam Schulman, a writer in Virginia, is publishing director of the American.