Saturday, March 15, 2014

Insider trading in the art market: "That's fun."

Steve Cohen (left), the US hedge fund manager, über-collector and owner of Damien Hirst's pickled shark, is renaming his SAC Capital Advisors hedge fund. In future the company will be called 'Point72', referring to the firm's long-standing headquarters at 72 Cummings Point Road, in Stamford, Connecticut. However, as the Wall Street Journal has noted, "The switch is part of an effort by Mr Cohen to distance himself and the firm from their connection to the biggest insider-trading investigation in Wall Street history."

But now take a look at the world of blue-chip fine art auctions (a realm in which Mr Cohen is a major player) and focus on the efforts by another New York-based vulture capitalist — Daniel Loeb — to force Sotheby's into generating greater shareholder value.

Loeb has noticed the extraordinary spikes in value for certain contemporary artists and believes Sotheby's could be doing more to challenge Christie's performance in that sector.

So what's the difference between the insider-trading activities that hedge funds practice in the conventional financial markets and the mechanisms currently pumping the top end of the art market to ever higher prices? We will never know to any precise degree, because one thing hedge fund  collectors like Daniel Loeb are NOT calling for is greater transparency in the art market. What he and the other Masters of the Universe want is to control the art world in the way that they control global finance and government.

The way to achieve that is to capitalise on the art market's lack of regulation. As New York Magazine put it:
"...the hedge-fund guys tend to treat artists like growth stocks, preferring those not yet judged by posterity, because that’s where there’s room for major price appreciation.  [...] The rewards can be enormous for those who have an edge. It’s an opaque market, where secret side deals, price manipulation, kickbacks, and collusion are an everyday facet of business. It rewards inside information, and since the market is largely unregulated, players can trade on it without any fear of legal consequences. That’s fun."
This is the surely a credible explanation for the unprecedented rise in prices at the top of the art market. If it is true that hedge fund collectors operate in the art market in the manner that they operate in the stock market — then we need to adjust our sense of what prices mean in the art market today.

They no longer reflect aesthetic appreciation, but instead are a function of the financial muscle that can be brought to bear on an artist's output. It's a self-fulfilling cycle. Pity the poor artist who assumes a connection between price and the quality of her work. It is nothing of the sort; more often it is a case of "taking positions, using leverage, and weighing risk and reward more aggressively," as one art world insider interpreted Daniel Loeb's plan for holding Sotheby's feet to the fire.

Seeking the source of the now prevalent culture of unashamed speculation, most commentators point to the famous Robert and Ethel Scull sale held at Sotheby's in New York in 1973. It was at that sale that the artist Robert Rauschenberg took exception to what he saw as the exploitation of his creativity by Scull's speculative approach to contemporary art.

Poussin Adoration, London National Gallery
I'd go back further than 1973. In 1956, Sotheby's were trying to persuade a retired naval officer to consign Poussin's Adoration of the Shepherds (right) to its London auction block. The vendor, the Norfolk-based aristocrat Jocelyn Beauchamp, eventually allowed Sotheby's director Vere Pilkington to take the rolled-up canvas back to London.

Shortly afterwards, Beauchamp was approached by a London dealer who offered him £10,000 cash for the picture (the offer was raised to £15,000 a few days later). Furious at the trade's attempt to scupper their instructions, Sotheby's chairman Peter Wilson offered Beauchamp a guaranteed sum. That was the first time a guarantee had ever been offered by an auctioneer to a vendor.

The painting, which had once been in the collection of Sir Joshua Reynolds, was eventually sold for £29,000 to London and New York dealer David Koetser. Guarantees (and more recently so-called 'irrevocable bids') are now a fixture of Sotheby's and Christie's high-ticket auctions but the precise details of the cake-cutting are never divulged. Sotheby's chairman Bill Ruprecht told me in an interview in 2000: "I have never lost money on a principal position." In 2008, they lost $80 million on guaranteed transactions.

It was the aggressive marketing tactics of Peter Wilson in the 1950s and early 1960s that dragged Sotheby's kicking and screaming into the modern world to finally challenge Christie's. Today, such is the power of Wall Street and the financial markets that the pressure for auctioneers to compete ever more aggressively comes not from within for reasons to do with art and the cultures of collecting. Instead it comes from hedge fund manipulators like Cohen and Loeb who are fixated on shareholder value and maximising their own opportunities for ever greater wealth generation.

If the art market is eventually forced to succumb to external regulation, it will be because the hedge funds have been permitted to do to the art market what they did to the mortgage markets that eventually brought on the global economic crisis.

Meanwhile, what is the impact on art and artists?

1 comment:

Anonymous said...

It's telling the rest of the village that art is important. Not a bad deal.