The Magazine

The Art of Bailouts

Another asset class in deep doodoo.

Feb 9, 2009, Vol. 14, No. 19 • By SAM SCHULMAN
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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.