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The $12 Million Stuffed Shark

Don Thompson

Art collectors don't buy what they like best, they defer to the galleries. The reatest value works come from Christie's or Sotherby's. If MOMA or a Guggenheim or Tate buy an artists's work, it automatically increases its value. And so dealers or collectors will lend a gallery one of their trophy paintings on condition that they also show a few other paintings that the owner wants to promote.

Rule about pricing - can't hang a painting in a place less valuable than the painting. So a $25 million painting is ok in a $30 million apartment, but if you buy a $40 painting, it's time to find a new home.

If you look at Sotherbys or Christies catalogues from a decade ago you'll find half the artists listed are no longer being offered in the (more prestigious) evening auctions. Stats show that 80% of works bought direct from the artist, and at least 50% of works bought at auction, will never resell at their purchase price.

Branded dealers manage the careers of established artists. These dealers are the gatekeepers who permit artists to access the serious collectors, and being with a branded dealer allows the artist to hang out with the other artists at the top of the food chain.

One of the first branded dealers was Joseph Duveen. He targeted the newly rich like John D Rockefeller and JP Morgan, who knew little about art, but needed social acceptance. Duveen convinced them that they had to "pay high for the priceless."

Another important dealer was Frenchman Ambrose Vallard, who was worth $15 million when he died in 1939. Much of this fortune was based on the single best deal in art history: finding Cezanne depressed at the extent of his debts, Vallard bought 250 canvases at 50 francs each. Some of these were later sold for 40,000 francs. Today these 250 works would be worth about $4 billion.

Artists who do not find mainstream gallery representation within a couple of years of graduation are unlikely ever to achieve high prices. 2 out of 5 new artists will no longer be showing in a mainstream gallery five years after their first show, and only 1 will be profitable to the gallery (and the successful one will be targeted by established galleries trying to lure him away).

Dealer markups are pretty standard - dealer keeps 50% of the sale price. Unless you are an established artist, who may be able to negotiate commission down to 30%.

If you really want to know what's happening at a show (how many people are really buying), never talk to the receptionist. She will just call the manager if you look like a serious collector, and be rude to everyone else. Talk to the security gurad. No-one else talks to him, so he's never been told not to say anything. he know's all the gossip - what's been selling and what has been overpriced.

Scarcity of traditional art. In past 25 years over 100 new museums have opened, each looking for an average of 2000 works.

1997 Damien Hirst and a few friends opened a restaurant in Notting Hill called The Pharmacy. Hirst contributed art and designed fittings such as medicine cabinet sculptures, ashtrays and signs. When the restaurant went belly-up in 2003, Hirst bought all the art back from the receivers for £5000, which was quite a good deal, since Sotherby's auctioned the stuff for £11 million.

AA Gill had an old painting of Stalin by an unknown artist that he'd bought for £200. In 2007 he tried to get Christies to auction it at one of their mid-week cheapie auctions but they rejected it. Gill said "Well how about if it was by Damien Hirst?" They said "We'd love it!" So he got Hirst to paint a red nose on Stalin and add his signature. Christies accepted it with an estimate of £8 - 10,000. It went for £140,000.

galleries send their expensive offerings on quick (private jet) flights around the world to where their big dollar collectors live. Auction-goers express surprise that someone would buy a costly painting unseen, but often the painting has visited the buyer.

Before they auctioned Picasso's Dora Maar au Chat, Sotherbys flew it to London, Bahrain, Tokyo and NY before finally to Las Vegas so that Steve Wynn could try it on his casino gallery walls. In the event the buyer was completely unknown to the gallery - the auctioneer had to ask for his paddle number - an unheard of step in High Net Worth Individual offerings.

Buyer Psychology

Auctioneer might say "There is a request that this work be loaned to MOMA/Tate/Pompidou this September ...." The 'request' has come because the auction house offered it. But to the bidder, if MOMA wants it, it must be important. And it's better that it will be in a future exhibition than a past one, because successful bidder will now see his name on "From the collection of ...."

Everyone comes with a maximum price in mind, but hardly anyone sticks to it. When you become top bidder the endowment effect kicks in. Bidder's reference point has changed to "This should be mine." The loss of something almost owned far outweighs the relief of not having overspent.

A significant number get to the payment desk and say "I don't think I bid that much?" which is why the auction houses videotape all sales.

Eli Broad bought (In late 1980's) Roy Lichtenstein's I ... I'm sorry for $2.5 million, and paid for it with his Amex card, earning 2.5 million air miles. (Cost Sotherby's 1% card fee so $25,000 out of its $225,000 commission; they immediately changed their payment policies). Broad donated the air miles to LA art students.

"It is sobering to realize that winning an auction means you have just paid more than all the other people in the room think the work is worth."

Francis Bacon said that a portrait shouldn't be a realistic painting, but one that distorted the face and features to capture the subject's personality. He originally adopted the triptych format as a result of drunken forays into railway station photo booths - a succession of images like a short film.

Bacon also interesting because of the contract he signed with his gallery. He wasn't much interested in money so signed an agreement to sell them his paintings based on size. £165 for 24" x 24" going up to £420 for 6' x 6'. But they also paid for a PA who basically organized his personal life - from getting laundry done to paying his taxes and gambling debts.

Sometimes auction houses don't bother auctioning paintings. There are only three Raphaels left in private hands. Every auction house and every top dealer knows where they are and who would bid on them should they become available: basically the National Gallery in London, the Getty and perhaps a couple of other American galleries, a few Russian oligarchs and Dubai. There is no particular advantage in exposing the work to a larger group with an auction.

There are four international art fairs that are impt: TEFAF, the European Fine Art Foundation fair held each march, Art Basel in June, Art Basel Miami Beach each December, and London's Frieze held each October. There are at least another 100 lesser international fairs. fairs represent a culture shift in art buying - more like a mall than a gallery.

2007 Louvre agreed to lend its name to a new museum in Abu Dahbi for 25 years, and 300 works out of its storeroom, for 5 years. €400 million for the name and €575 million for the art. (The building itself only cost $115 million).

Former director of MOMA reckoned 40% of the high-end art market are fakes. At one time 600 Rembrandts hung in major museums around the world, and another 350 in private collections. These figures are a little surprising given that Rembrandt only did a maximum of 320 paintings. Pollock is one of most copied - estimated 10 fakes in circulation for every genuine one.

Economic theory is completely unable to explain why a 'perfect' (as in the expert is unable to tell) copy is less valuable than the original.

The concept of authenticity has been very flexible over the years. Rembrandt had many apprentice painters working in his studio doing most of the background and repetitive detail, while he did the faces and hands.

Once he was famous, Picasso literally never paid for anything. He would write cheques for even the smallest amounts, knowing that the recipient would keep it for its signature.

Critics don't matter because no-one takes much notice of them. But curators of top museums do matter, because the best branding an artist can get is to be shown in the top galleries.

Of the 20,000 who visit the Louvre every day, half only want to see the Mona Lisa, so special entrance just for them.

Ronald Lauder, son of cosmetic queen Estee Lauder, says there are 3 categories of art: 'Oh", "Oh my" and "Oh my God", and he only collects the last category.

Fairly easy to work out the operating budgets of a big museum. MOMA spends $150 million a year, of which $25 million is for acquisitions. 3 million visitors, so each one costs the museum $50. But the admission fee is $20, and only half pay full price. The $30 million shortfall has to be made up by profits from bookstore, gift shop and restaurant.

Like most galleries, the Guggenheim has no room to expand. Owns 6500 works, but has wall space to display less than one third. The solution is to franchise the name and lease them the art.

The success of the Frank Gehry designed Bilbao Guggenheim sparked a global art tourism craze: G Abu Dahbi, Singapore, Taiwan, Rio and Berlin.

Collector's fat wallet can rewrite history. If someone pays $140 million for a Pollock, it is by definition a masterpiece. Then the artist has to be on the wall of every other status-seeking collector. So the next Jackson Pollock is more desirable if priced at $141 million because new owner then has bragging rights.

Prices only rachet up, never down. If there are no bidders, auctioneer will chandelier-bid it to the reserve, then pass it in, or 'sell' it to the guarantor (who has been paid a fat fee by the gallery to provide the guarantee). If work by an artist consistently fails to reach reserve (ie the level achieved in past auctions), he will no longer be accepted for evening auctions.

Is art a profitable investment? Headlines only tell you about the showstoppers, such as the Picasso bought for $30,000 in 1950 and sold for $104 million in 2004. But never see the downside - Monet's Grand Canal, sold by Sotherbys for $12 million in 1989, then auctioned by the same house 16 years later for $10.8 million.

Some interesting rules of pricing:

* portrait of attractive woman/child will do better (Andy Warhol's Orange Marilyn is worth 20 times his Richard Nixon

* colours matter: red -> white -> green (except for Warhols, where green, colour of money, predominates)

* bright colours better than pale colours

* horizontal better than portrait

* nudity better than modesty

Author sums up: "I thank everyone who was kind enough not to point out the gaps in my understanding, and who helped contribute to the originality of my writing." "And I'm using originality in the spirit of Laurence Peter's (Peter Principle) who said that 'originality is the art of remembering what you heard but forgetting who told it to you.'"

(NZ Herald)

In 2000, a work known as Lover Boys, comprising 355lb (161kg) of individually wrapped blue and white candies piled in a triangular shape in the corner of a room, came up for auction at Sotheby's in New York. It was by the "very branded" artist Felix Gonzalez-Torres, who died of Aids in 1996. The intention was that the candy would be eaten by guests - representing Gonzalez-Torrez's lover's body wasting away from Aids. It sold for US$456,000 ($813,216).

This is just one of the extraordinary anecdotes discussed in Don Thompson's book The $12 Million Stuffed Shark. Curiously, Thompson halts his own curiosity about The Curious Economics of Contemporary Art and Auction Houses - the subtitle of the book - at the brink of something that seems like an even more enormous con.

"I'm relaxed about it. It is what it is," says the economist and business school professor after a long pause on the phone from Toronto. "I'm amazed that people pay US$15 million for a Warhol, but they have it and they want it and it's more power to them, I guess."

I have just asked whether the revelations of his book - where art and its value is the product of sophisticated branding and marketing - demonstrate just how ridiculous the free market can get, perhaps signalling the end of civilisation as we know it.

Thompson is unperturbed about what he's uncovered in his year-long adventure among the art elite. Just why people pay preposterous amounts for contemporary art is an almost impossible question to ask collectors, who will give all sorts of justifications.

In the end, he says, it's the same as asking why someone pays US$6000 for a Louis Vuitton handbag. But, says Thompson, when you pay US$17.3 million for a 1964 silkscreen Orange Marilyn and have it sitting over your mantle, people will say: "Wow, that's an Andy Warhol." Translation: "You are a man, or woman, of cutting-edge taste and money." No matter that Warhol may have had little hand in the making of the object spawned from his famous Factory.

Art distinguishes you - a Lamboghini or even a vineyard is (almost) taken for granted, but a top level work of art sets you above the rest.

Thompson agrees the contemporary art market is unique. And that it's completely unregulated - second only in size to the illegal drugs market and possibly just as likely to send its users on a journey far from reality.

But it also needs to be seen in another context: that most of us don't understand how rich really rich people are, that the players in this market, known as UHNWs (ultra-high net-worth) collectors, have so much money they don't require good sense.

Take, for example, Steve Cohen, the hedge-fund trader who paid the US$12 million for the said shark in the title of Thompson's book. Worth about US$4 billion and earning US$500 million a year, Cohen's total income is at least US$16 million a week, or about US$90,000 an hour. So the seemingly outrageous price tag for a poorly pickled tiger shark in a glass vitrine by British artist Damien Hirst represents just five days' income for Cohen.

"If you loved a picture, you'd pay five days' income for it," says Thompson. "These are all grown-ups with free will."

But are they? As Thompson says in the book: "... in the world of contemporary art, branding can substitute for critical judgement, and lots of branding was involved here". Which is about as deep as Thompson gets in his analysis. From the artist to the dealer to the art fair and the auction house, art takes a back seat to branding and marketing. That's to help part UHNWs from their millions. Despite their obscene wealth, when it comes to buying art, they're terribly insecure, always need reassurance, and rely almost exclusively on other people's branding.

"So they buy from a branded auction house or branded artist or branded dealer," says Thompson.

"If you bought from Sotheby's no one is going to say, 'You paid what for a pile of candy?' It must be art if Sotheby's name is attached to it."

To get around the problem of someone faking the Gonzalez-Torres sculpture by visiting their local candy store, Sotheby's auction sales catalogue promised a new "certificate of authenticity" would be provided stating the new owner's name.

Sotheby's also legitimised the significance of the sculpture by quoting Nancy Spector, curator of the Guggenheim in New York, who said: "The work's provocation lies in its seeming open-endedness, its refusal to assert a closure of meaning."

Similar nonsense happened with Hirst's shark, which was commissioned by "branded collector" and advertising magnate Charles Saatchi for 50,000 ($131,000). Saatchi has also been described as the greatest art patron of his time, a secondary art dealer disguised as a patron, and a collector credited with creating the "shock art" movement. A measure of his power, says Thompson, is seen in media articles, auction houses and collectors describing works as "collected by Saatchi", "owned by Saatchi" or "coveted by Saatchi" - all of which are likely to drive prices up. Conversely, artists labelled "rejected by Saatchi" or "sold off by Saatchi" will see a decline in their value.

"Hirst is a genius - the smartest marketing person in the art world," says Thompson. "He said the shark represents the interface between life and death - when it's alive it looks dead; when it's dead it looks alive." Hirst called the work The Physical Impossibility of Death in the Mind of Someone Living. Unfortunately, the shark is looking deader than it should. On loan to the Metropolitan Museum of New York, the current shark, pumped full of formaldehyde solution, is visibly deteriorating.

When it happened with the first shark - rotting shark rotting from the inside out - initially, it was skinned and placed over a fibreglass mould. "But it looked awful," says Thompson. "It was still decaying and pieces were falling off. There were actually scales in the bottom of the tank, so they replaced it with a slightly smaller shark. It is now decaying, if anything, faster than the original."

The shark's predicament also raises questions about original artwork, not to mention who exactly is the artist when works are fabricated and refabricated by others. As Thompson points out, if you overpaint a Rembrandt it's no longer a Rembrandt, but replacing a shark is okay - apparently, it's still an original because it's conceptual.

Not everyone agrees. Saatchi, the original buyer, was appalled at the replacing of the shark, says Thompson. "He said the essence of the work was that it decays - that's the purpose of it and to replace it is to deny its original meaning."

Anecdotes such as the rotting shark - stories which appear to expose the industry's monstrous fiction - are the shining light of Thompson's book. Like the story of Australian entrepreneur Alan Bond's purchase of van Gogh's Irises at Sotheby's for US$53.9 million in 1987. The price was so unexpected, rival auction house Christie's challenged Sotheby's to prove there had been a real "underbidder". Bond himself also raised the question of whether the only underbidder had been the famous "Mr Chandelier" - a reference to the practice of accepting bids from the chandelier in the auction room. As it turned out there was a real underbidder, but it was later revealed Sotheby's had loaned Bond half the value of the work and after two extensions had not been repaid.

Once again Thompson is largely unperturbed. "It's just that this industry has grown up with its own set of rules - the auction process is willing buyers and willing sellers." No, he hasn't come up with a new economic theory to explain the art world - although some in economic circles have referred to the book as a case study in branding. If there is any further academic research to be done, Thompson suspects it's in the field of consumer behaviour and motivation rather than economics. He doubts also whether intervening in the art industry process would do any good.

"One proposal has been to regulate auction houses by eliminating guarantees or eliminating secret reserves, but the reality is most people in the room know they are there."

He does, however, highlight a fundamental misconception about the market - it's not true that the work you buy will always go up in value. Two-thirds of the contemporary artists being sold 20 years ago are no longer being offered for sale today at major event auctions. "Buy it if you love it, but don't buy it as an essential part of your pension plan."

If there is a misleading part to the art world, says Thompson, it's that we only read about the successes. "Nobody writes about the 80 per cent of art that resells for less than you paid for it."

As to how the market is faring right now, he says it's hard to tell because so much of it is "opaque and nobody has any incentive to tell you the truth".

However, contemporary art at auction is down 30-35 per cent from a year ago and modern and impressionist is down by about 20-25 per cent. So far it's not as bad as the crash of 1990-94 when art dropped by about 50 per cent and it took 12-15 years to come back to where it was in 1990 - the peak of the bubble. So what's an UHNW collector fallen on hard times to do?

"If you live in the upper east side of New York and you've lost your job in the finance world and you've got an expensive condo, an expensive wife, expensive children and expensive schools, the first thing you sell is the Warhol over your mantle. You go to the auction houses and they say: 'We'd love to handle it, but it may be 18 months'. So you take it to a dealer and you say: 'Sell this for me privately and as far away as you can.'

"That part of the market is entirely opaque and the general sense is that anybody who is buying in the secondary market from dealers is making lowball offers - so it may be down more, but those who know aren't talking."

For those with more money than good sense, perhaps it's a good time to buy.

Top end

Art price records

* Most expensive paintings sold privately

No 5, 1948 (1948): Jackson Pollock, US$140 million, negotiated sale by Sotheby's New York in 2006 to Mexican financier David Martinez.

Women III (1952-3): William de Kooning, US$137.5 million, private sale in 2006 to Steve Cohen.

* Most expensive paintings sold at auction

Garcon a la Pipe (1905): Pablo Picasso, US$104 million, Sotheby's New York, 2004.

Dora Maar au Chat (1941): Picasso, US$95.2 million, Sotheby's New York, 2006.

* Most expensive post-war work sold at auction

White Center (Yellow, Pink and Lavender on Rose, 1950) : Mark Rothko, US$72.8 million, Sotheby's New York, 2007.

Green Car Crash (Burning Car 1, 1964): Andy Warhol, US$71.7 million, Christie's New York, 2007.

* Most expensive sculpture sold privately

Bird in Space (1923): Constantin Brancusi, US$38.5 million, private sale brokered by New York dealer Vivian Horan to a Seattle collector.

* Most expensive sculpture sold at auction

Bird in Space (1923): Brancusi, US$27.5 million, Christie's New York, 2005 (a different version to the one sold privately).

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