Technology & Finance
Monday, December 29, 2008
Clarity in Contemporary Art – From a Canadian Economist, of all People
Confused about modern art? Intimidated by the beautiful young women sitting at the front desks of the all-white contemporary art galleries from New York to London? (See Peter Mayes’ mystery “Chasing Cezanne” for a hilarious account of the art world).
Don Thompson, who teaches marketing and economics in Toronto, London and Boston offers reassurance based on a year of research into the art market which he has turned into a book, “The $12 million stuffed Shark,” a reference to a Damien Hirst shark resold by London adman Charles Saatchi to Greenwich (CT) hedgie Steve Cohen. This is an excellent combination of smart reporting with questions informed by a background in business and economics. Tired of trying to reach through long-winded tomes on the aesthetics of contemporary art? Here’s a welcome and information respite.
You can’t understand, or plain can’t stand, most of what you see? He finds that experts in the field of contemporary art think 85 percent of it is crap – they just argue over which 85 percent.
Whew. I was wondering if I was alone in skipping gallery after gallery in the big art warehouses in New York’s Chelsea. After a quick glance through the doors of most, I move on without ever entering. What’s changed in the last decade is the location – I used to do this in Soho with a pretty visually sophisticated friend. I mean, she got weekly manicures and everything. We kept wondering what was wrong.
That intimidating receptionist? Apt to be an art grad whose father is a collector and got her the job. And the gallery? Four out of five contemporary art galleries close within five years, and 10 percent of more established galleries also go out of business. Only one artist out of 200 will ever get their work into the auctions at Christie’s or Sotheby’s. Thompson says London and New York each have 40,000 artists. Of those, 25 are superstars and about 300 are making a decent living. Whew…how do art schools ever persuade student to spend a couple of years and pay tuition to do it?
That puts a lot of the art world in perspective.
Still, the market is active. More than 100 museums have opened in the last 25 years, and each will want to acquire at least 2,000 works of art. Then again, with 40,000 artists in just two art capitals (And where is Paris in this equation? Good question. No mention of the Chinese villages which churn out copies or the growing leagues of accomplished Chinese painters – maybe in the sequel.)
Thompson shows how the art world overlaps with finance, although any reader of artinfo.com will know at least some of this. Steve Cohen, of hedge fund fame, not only buys a lot of art, he provides auction house with insurance – a hedge – against the guarantees they offer major sellers. (see p. 137) Thompson wonders if traders like Cohen will try to time the art market – an intriguing point.
Despite some occasional attempts to regulate the market (auction houses do now have to say when a piece doesn’t sell) the auctions and dealerships pretty much run their own world as regulators fear that stiffer laws will send the business abroad. (For example, the Maastricht fair is a major event, but most of the deals are actually concluded afterwards, in countries that impose lighter tax burdens than the Netherlands.)
“The auction market, as one commentator described it, is a place where consenting adults can indulge in irrational private acts.”
Contemporary art is, or was, a fast-growing market. In one auction, Thompson notes, a Francis Bacon painting at £5.5 million would have paid for two Monets, one Pissarro and a Cezanne auctioned the night before. Meanwhile, in an effort to beat the two top houses, Phillips de Pury has focused on contemporary art and sold more 21st century art that the other two houses combined.
Think these financiers who buy art are so smart? Thompson says that a Jeff Koons piece which brought $4 million at Sotheby’s in November 2006 could have been picked up from a dealer a few blocks away for $2.25 million.
The art market is in furious flux, with art fairs one of the weapons that dealers use against the auction houses. “In 2008 there were 2005 relatively major art fairs scheduled around the world, compared to 55 in 2001.” He has a great description of the way fairs work, with best buyers allowed in early. On opening night half the important work will sell in the first 30 minutes, and half of that in the first 15. Art Basel Miami Beach has become one of the biggest fairs in the world in just a few years, and it is sponsored by UBS. Thompson notes that 5,000 of the wealthiest people in America winter in Florida – which might account for some of its success. (See http://www.artinfo.com for coverage – I wrote about the photography and design satellite shows on artinfo two years ago and had a great time at the fair.) One result of the busy schedule is that artists don’t have time to be original – they have to churn out new work for their galleries and it can be repetitive.
He wonders whether auction houses will replace the dealers, since they can offer higher prices and lower commissions.
Does art make sense as an investment? No. “Eighty percent of the art bought from local dealers and local art fairs will never resell for as much as the original purchase price.”
“In the overwhelming majors of cases, art is neither a good investment nor an efficient investment vehicle.”
Fewer than half the modern and contemporary artists in a Christie’s or Sotheby’s auction catalogue 25 years ago are still offered at any major auction, says Thompson.
The book runs out of steam near the end. Thompson places Thomas Hoving at MOMA – he was at the Met, and he doesn’t probe the economics of museums in much depth. Still, he has interesting anecdotes. The Neue Gallerie in New York went from 800 visitors a day to 6,000 after Ron Lauder paid a reported $135 million for a Klimt painting. (Lauder was the subject of a recent Lunch with the FT column.)
While I can’t claim comprehensive knowledge of art books published in the last year, I would hazard a guess that this is one of the clearer explanations of what goes on in the world of studios, galleries and museums.
The FTs Martin Wolf on Failures to Notice the Economy Faced Collapse
So annoying—the FT web site is reasonably good, but try to find an article from today’s paper and one can get frustrated. Martin Wolf has “an embarrassing admission” on the back page of today’s 29 December US edition—financial professionals from central bankers to risk professionals to pundits to regulators looked at a piece of the emerging world and missed the big picture.
I have been writing about risk management for Banking Technology in London and just today about how hedge funds address risk for Alpha Magazine in New York. A key sin, admitted by many, is to miss the larger picture—how different types of risk interact, or how risks in one part of a firm affect risks in another, or how risks in one geography can cancel or exacerbate risks in a different continent. Banks are concerned about silos of information, a point Wolf also makes on a global scale.
Too bad his academic interlocutors are excellent examples of intellectual silos in action. Tito Boeri of Milan picks up on the theme prety well, but Ricardo Caballero from MIT just calls for more market reforms without looking at how and why regulation failed so miserably. Paul Seabright from the University of Toulouse is even less interesting.
Wolf needs to find some broader minds to comment on his views. The limitations of academics, often apparent when they review books, is stark in the pages of the FT.
Would the TSA Please Shut Up?
Air travel is reasonably annoying these days, with the requirement to take off your shoes, based on one potential failed shoe bomber ages ago, the need to take laptops out of bags, limit carry-on liquids…
But then the TSA continues to talk like a complete idiot. And talk. And talk some more.
Well inside terminals, like Atlanta’s the other day, the announcements continue relentlessly.
Don’t take stuff from strangers and carry it on the plane. Well, by this time the audience is already well past the checkpoints, so presumably anything a strange could hand over has been thoroughly screened. And besides, who is likely to take baggage from persons unknown?
Then the horribly boring announcement that the Homeland Security alert is Orange. When has it not been? This is the default alert level and will probably be announced regularly for the next 20 years, well beyond the point where it has had any meaning. Ok, I guess we passed that point a couple of years ago.
Henry David Thoreau years ago commented on the stringing of a telegraph wire from Texas to Boston and asked, what if Texas has nothing to say to Boston?
PA systems are like that, as I was reminded today on the New York subway. If the audio system exists, someone wants to be heard on it.
Funny, tho—no one has taken the electronic signs which are cropping up on highways and used brilliant quotations, philosophical sayings, or even simple jokes to test them or just show motorists they are working.
A wasted opportunity to brighten drivers’ days and maybe even enlighten a bit.
Sunday, December 28, 2008
Is Washington Killing Tech Innovation in the US?
Michael Malone, one of the top tech writers in the US, argues in the Wall Street Journal that “Washington is Killing Silicon Valley.”
He argues that excessive regulation threatens the entrepreneurial role of tech startups – especially Sarbanes Oxley and accounting rules that require stock options to be entered as an expense on balance sheets.
“At its best, the cycle is self-perpetuating. Entrepreneurs come up with a new idea, form a team, write a business plan, and then pitch their idea to venture capitalists. If they’re persuaded, the VCs invest, typically through several rounds during which the start-up company must meet performance benchmarks. Should the company succeed, it then makes an initial public offering of stock.
The IPO can reward the founders and venture-capital investors, and enables the general public to participate in the company’s success. Thousands of secretaries, clerks and technicians at these companies also have come away from the IPO richer than they ever dreamed. Meanwhile, some of those gains are invested in new venture funds, and the cycle begins again.”
Malone makes a good point – that Silicon Valley is a fragile creature that regulators and Congress think can be exploited and manipulated. One has only to look at efforts to duplicate Silicon Valley in the UK, France, Malaysia and other parts of the world to realize how unusual it is – a product of huge and sustained Federal research funding going back to World War II, great research universities such as Stanford and Berkley, brilliant entrepreneurs and courageous venture capitalists.
One result of all the new regs is a near disappearance of IPOs. In 2008 there were six in the US, compared to 269 in 1999, says Malone. Now companies want to sell to Google or Cisco rather than go public – it is easier.
(What is happening to venture capitalists? See my article in Securities Industry News (SIN), 5 January – I am looking into it and the situation may not be so dire,
but it will definitely impact financial tech software firms.)
Congress could do worse that sit through some testimony by T.J. Rodgers , CEO of Cypress Semiconductor and one of the more stimulating critics of American political correctness, in corporations and at Dartmouth, where he was on the board. Maybe still is, but he certainly hasn’t won a lot of friends in the PC world.
As Malone writes:
Meanwhile, FASB has fiddled with the accounting rules so much that, as one of America’s most dynamic business executives, T.J. Rodgers of Cypress Semiconductor, recently blogged: “My financial statements are a mystery, even to me.” FASB’s “mark-to-market” accounting rules helped drive AIG and Bear Stearns into bankruptcy, even though they were cash-positive, says Malone.
I have written at some length about mark to market, as a search here will show…and the issue remains a difficult one. Do you want to let firms offer their own pricing on illiquid instruments? Philippe Carrel, EVP at Reuters, has been talking about this issue for at least a year and trying to bring industry participants together to find a way to agree on valuations – a story I have followed a bit at SIN.
Interestingly, Joseph Stiglitz, in the January Vanity Fair, argues that stock options are evil because they provide incentives for bad accounting to boost stock options. (Then again, when execs want to boost their compensation they have all sorts of ways to do it – See WAMU piece below).
Perhaps a new Congress will make some sense of all this. Joe Nocera, writing in The Times a few weeks ago, noted that Rep. David Waxman had held a substantive hearing with major hedge fund bosses such as Ken Griffin, head of the Citadel Investment Group; John Paulson, who made billions betting against mortgage-backed securities; and George Soros.
“They all agreed with Mr. Waxman, and with the other Congressional questioners, that in certain cases hedge funds could indeed pose systemic risk. All but Mr. Griffin said they would favor at least some regulation of hedge funds. They all agreed on the need for more disclosure. They said they had no problem turning over now-hidden information about their portfolios to a federal regulator. Mr. Simons and several others (though, again, not Mr. Griffin) said that if Congress changed the tax laws in ways that caused them to have to pay more taxes, they would be O.K. with that. I almost fell out of my chair.
Later, after the hearing was over, Mr. Waxman shook hands with Mr. Simons. “Thank you,” he said. “It was a good hearing.” Then he broke into a wide grin.
“Very substantive,” he added.
He sounded surprised.
Maybe Washington has the capacity to surprise us all with intelligent regulatory response to this crisis.
But I wouldn’t bet on it.
Responsible Investors Group Asks Obama for Greater Corporate Transparency
An organization of responsible investors in the US has published an open letter to President Elect Barack Obama asking for greater transparency and criticizing the SEC for standing in the way.
Some excerpts:
We believe that greater disclosure in the financial markets and strengthened shareholder rights are among the elements that can contribute to the development of a sustainable economy….specifically the right of investors to propose and vote upon resolutions asking a company to evaluate how specific risks may affect the company’s business.
…These include the kind of credit risks associated with the mortgage crisis, as well as an array of environmental and social issues which we believe may have large financial implications, e.g., climate change and product toxicity.
The group criticized the SEC for blocking investors in their quest for better reporting from corporations.
“Within the past year the agency even struck down a proposed resolution at Washington Mutual asking the company to discuss its potential financial exposure as a result of the mortgage securities crisis.” Hey, that was a good idea. It might have prevented the total evaporation of the firm.
The group wants broad reporting, including environmental risks:
“The existing Securities and Exchange Commission decisions block shareholders from filing certain shareholder resolutions in fulfillment of our fiduciary obligations. For instance, it has become apparent that many companies knew about the potential financial risks posed to their companies by toxic chemicals in their product lines. However the disclosure of these issues is seldom made in existing corporate financial reports.
Resolutions that would have addressed this type of risk through the proxy process are the same resolutions that the Securities and Exchange Commission staff chose, arbitrarily and without justification in law, to exclude.”
You do have to wonder just where the SEC has been—just part of the deregulation mania.