Worst Abuses Of Unregulated Art Market Look A Lot Like Typical Day In Financial Industry

If you like or hate financial regulation you might take a quick look at today’s front-page New York Times article about how the art market is unregulated. Apparently this leads to terrible things like “chandelier bidding,” where auctioneers get the ball rolling by calling out a few fake bids, as well as conflicts of interest involved in third-party guarantees where someone writes the auction house a put on an artwork, is paid a variable commission for that put, and in some cases is allowed to credit that commission against his own bid for the artwork.1 One question you might ask is “why is that bad?”; the answer seems to be that some rich people who go to art auctions pay more for art than they would in the absence of these systems, and then feel vaguely uneasy about it. I think the whole thing disappears in the face of one more iteration of “well, why is that bad?,” but perhaps I am wrong.

There are places where you should think “customers should be protected from various sorts of sharp practices by dealers,” and there are places where you should not think that. I guess? Are there only the former?2 I come from a place that believes deeply in the separation between “sharp practices” and “illegal fraud” and works to keep them distinct. One thing the Times article mentions is that there is a law saying that stores have to display the price of their wares, and art dealers ignore that law, and this is bad for some reason. Try that law on derivatives dealers. One of the main driving forces behind financial innovation is finding novel places to hide fees.

The rest of the art-auctioneer tricks also seem pretty familiar. Imagine an M&A banker who couldn’t bluff, to the one serious bidder for an asset, that he had other bidders waiting in the wings. And of course the financial industry is very familiar with the creative use of options and guarantees to allocate value in ways beyond a headline purchase price. One flavor of that is “schmuck insurance.”3

Basically every horrible thing allowed by the absence of regulation in the wild-west art market is pretty much standard practice in the highly regulated financial markets.4 Which … which will probably precisely confirm your priors, whether they are “regulation is dumb” or “the financial industry is full of scumbags.” As Matthew Klein at The Economist’s Free Exchange blog put it, in discussing calls for financial-crisis prosecutions and the Morgan Stanley shitbag CDOs: “One explanation for the confusion is that many things that are considered normal in finance look like fraud to almost everyone else.” Even, apparently, art investors.

And now perhaps someone – some NY state legislators, as it happens – will finally get around to protecting those investors from their hobby, and hey that’s super.

In the financial world things are more complex. Consider this weirdly ominous FT article about bank “living wills”:

US regulators have warned banks not to assume [in writing their resolution plans] that countries will work together to avoid the catastrophic failure of a financial group. … Several bank executives told the Financial Times that the guidance – which one called “shocking” – left them believing regulators were losing confidence in their ability to improve on 2008 when countries either failed to co-operate, or even fought over assets, in banks from Lehman to Landsbanki in Iceland.

The “living wills” are sort of a silly thing, full of vague theories about how to wrap up a multitrillion-dollar global balance sheet in the face of an unknown but bad future crisis. If you could actually plan for it it wouldn’t happen, etc., so you’re left with vagueness. One part of your vague plan could be “we expect that national regulators won’t stop us from doing sensible things like selling off assets etc.”; alternatively, your vague plan could be “here are all the things that we’d do assuming that national regulators are as unhelpful as possible.” Sort of by definition the second plan will be worse than the first, systemic-risk-wise, but what can you do.

The failure to cooperate is not, of course, driven by stupidity or malice: it’s driven by each regulator’s desire to protect the customers and investors in its jurisdiction. It’s just that those are, y’know, different customers for each regulator. You don’t have to go back to 2008, or even to cross-border cases, for examples. Just last year, MF Global dissolved amid turf battles between the SEC (which oversaw MF’s broker-dealer and protected securities customers) and the CFTC (which oversaw its futures commission merchant and protected futures customers). The regulators fought over what MF Global could do with $220mm of money that was in a broker-dealer account: each regulator wanted it for its own customers and so they “worked at cross-purposes,” telling MF Global contradictory things about what it could do with the money. In MF Global’s confused final days, it’s hard to imagine that this helped. The WaMu story is full of similar disputes between the FDIC, charged with protecting depositors and its own insurance fund, and Fed/OCC/Treasury, charged with protecting the financial system as a whole.

The FT article goes on to note a “tone of optimism” at the Basel regulatory coordination meeting, quoting what I assume is a banker saying approvingly that “regulators are listening now and moderating their approach.” Regulators who “moderate their approach” to protecting people who fall into their jurisdiction really might be doing the right thing for the overall health of the financial system. But judging by some people’s out-of-nowhere desire to regulate the art market, you can guess that they’ll get some pushback.

As Art Values Rise, So Do Concerns About Market’s Oversight [NYT]
Just who should we be blaming anyway? [Free Exchange]
US regulators warn banks on living wills [FT]

1. That is what this sounds like:

A guarantee typically operates as it sounds. When someone offers a piece for auction, the house will sometimes guarantee that the seller will make at least a minimum amount by arranging with a third party to purchase the work for a specific price, undisclosed to the public, should it fail to sell for more. In exchange for putting up the funds, the guarantor, whose name is also not revealed, gets a cut of any proceeds above the guarantee. … The problem, some dealers, collectors and art advisers say, is that the neutrality of an auction is lost when these underwriters can bid on a work they’ve guaranteed. Critics argue that the guarantors have an undisclosed interest in the outcome and an unseen advantage over other bidders because a buyer who wants the work might wind up competing against someone who only wants to bid up the price. … At Christie’s and Phillips, both large auction houses, even if a guarantor ends up owning the work, he would still pay less for it than anyone else. For example, if a guarantor’s bid of $12 million turned out to be the winning bid, the guarantor would not pay the full $12 million because he or she still gets the cut — called a financing fee — of any amount above the $10 million guarantee.

If you don’t like the put terminology consider that the guarantor has basically bought the thing at the guarantee price and is then selling it to the public, given the auction house and prior owner a cut.

2. Are there only the latter? A million libertarians shout “YES!” I dunno. I’m willing to believe that most people should be protected from most home-mortgage sharp dealing. Rich people’s purely extracurricular activities seem distinguishable though.

3. In fact, on Friday’s CNBC slugfest Ackman specifically said that he accepted a lower headline price for the asset he sold to Icahn in 2004 – someone else offered more cash – because Icahn was offering him schmuck insurance and he placed a value on that optionality.

4. Well, in some of them. This is all less true in on-exchange trading: Fake orders there are frowned upon, as are side-letter deals that pump up reported purchase prices while transferring some value back to the buyer. (Though ponder this situation.) It’s very context dependent.

(hidden for your protection)
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27 Responses to “Worst Abuses Of Unregulated Art Market Look A Lot Like Typical Day In Financial Industry”

  1. Chartoholic says:

    Why no charts?

    • Not Matt says:


      Now clearly, charting the WARHOL-BX.07 to present has some potential.

  2. Matt's J Date Bio says:

    Likes: Margaritas, long walks in the park, unregulated markets, convexity, derivatives named after cute animals, charts.

    Dislikes: Bad teeth, financial regulation, insider trading prosecutions, Jon Shazar

    • A Clue? says:

      Jonny Shaz's eHarmony profile pic looks a lot like Matt.

      • Tribe Member says:

        I was really disturbed by footnote 5 of Matt's piece on Ackman/Icahn that said "We’re all Jews here though so it’s okay." Did he mean the whole DB team or just him? Because if Shazar's Jewish I'm really going to be bummed out.

  3. sweet tooth says:

    Writing on the subject of art abuse and you don't credit the artist (G Morandi??) used to illustrate your article? Talk about poor taste.

  4. Chartophiliac says:

    This post is hard to masturbate to

  5. @shaneferro says:

    The best response for why the art market should be regulated is that the public ostensibly has an interest in museums having the best art, but museums are increasingly being pushed out of the market as prices skyrocket, partially due to things like third-party guarantees and chandelier bidding. However, there are lots of caveats to that argument, and Matt is mostly right.

    • Autistic.Artist@UBS says:

      Yea, such as the public has an interest in markets functioning efficiently, and sellers have a right to extract as much value as possible when selling their property?

      • Jane says:

        OMG!!!! MY son KEEGAN has AUTISIM!!!!! You are his role model!! I need to get out of the house and date more!!!!!

    • PermaGuestII says:

      When your money supply becomes infinitely expandable, scarce assets (gold, fine art, first growth Bordeaux, etc.) go through the roof because they're the only sure store of value. Ben the Beard and his friends are more to blame for skyrocketing art prices than any art-dealer-community shenanigans.

    • Guest says:

      Look at it the bright way: most museums already have solid classical art collections, and can in fact monetize some of the surplus for really good cash. What they're short on is more recent work, but since most recent work is trash and will be recognized as such in a generation, the high prices are actually helping if it keeps them from losing money on overpriced junk.

    • Guest says:

      Perhaps in the immediate sense, but if you look at Museums as having a lower cost of capital and some king of nebulous primary mission to preserve Art for the Public in perpetuity, and the fact that private wealth ebbs and flows and for some reason rich folks like to put their names on things before they go bust.. Net/net the Museum is the drainage basin which inevitably collects and retains it all.

  6. Cassandra says:

    I am all for intervention and if necessary regulation (draconian even!) in markets where the public's interest is harmed or compromised by imperfections and/or dysfunction. But I fail to see the public's interest in the art "market" (or the high-end wine market), or for that matter any collectibles market. One almost has to admire Damien Hirst, Larry Gagosian and even even a bona-fide premeditated fraudster Wolfgang Beltracchi for extracting from the extractors and conning the cons.

  7. Laxbro says:

    Fine art and fine wine is just an outlet for bored wealthy men to piss away money in an attempt to showoff and appear cultured. It's not their fault really, once you have more than you can spend, you can't help but run out of dumb shit to buy. Next thing you know there's a $9M Basquiat above your shitter.

  8. Mrs_Slocombe says:

    In a related, but less well reported story, an unidentified auction house executive commented on the lesser know practice of “daisy-chain bidding” whereby “Each bidder perceives he is getting the best deal, when, in fact, every bidder gets it in the ass.”

    • Bad Answer'er says:

      Hi Mrs_Slocombe,

      Gianna Michaels does not take it in the ass since she demands enough for a normal M/F scene. These young girls from Iowa starting out though generally sign up to take it in rear since it gurantees you a scene and a bigger paycheck. Also Gianna isnt always gunna be in the business and would like to save at least one tight hole for her future husband.


      ~Guy who overheard a guy in LA

    • Rodney Basquiat says:

      Show us your Klimt!

  9. Stevie the Shark says:

    Not to mention the people writing about finance and art are mostly shills paid to dupe the rubes.

    (Present company excepted of course since y'all hardly get paid.)

    raising Duchamps urinals and stuffed fish in formaldehyde to outperform

    • PermaGuestII says:

      A college art professor of mine sold a broken fluorescent kitchen light fixture to a gallery by telling a bullshit story about it being "symbolic of the state of modern America." Made it up on the spot when the gallery rep showed up as he was renovating his kitchen and thought the ripped out junk was postmodern sculpture.

  10. CDS says:

    Fuck yeah!

  11. Not Well says:

    Find the commentarist group on We like to schedule circle jerks for the 1st Tuesday of every month.