Banking on Art: Financial Institutions and the Art Market,” 1989

Guggenheim Museum Archives Reel-to-Reel collection “Banking on Art: Financial Institutions and the Art Market,” 1989

MICHAEL THOMAS I think now that we’re hooked up, we might as well get going. My name is Michael Thomas, and I have the pleasure this evening of being surrounded by as distinguished and influential a gathering of genius in this particular subject as you could hope to find. On my right is Barton Biggs, the chief investment strategist for Morgan Stanley and Company, a man on who surmise and speculation entire markets have been known to convulse. (laughter) To my right, my old friend Gilbert de Botton, chairman of Global Assessment Management, a large, London, New York, Geneva, St. Moritz, and so on, based (laughter) money management firm and himself a distinguished collector in his own right. To my left is David Gibson, who is [01:00] the head of Citibank’s private banking division, the first and still the preeminent institutional factor, one would have to say, in this wonderful world we’re now living in, where large financial institutions have been called upon by their clients to advise them of their art holdings. And last, but by no means least, on my far left is Richard Feigen. He has been described as the dealer for the age by no less an authority than myself. (laughter) He is a man who is as much at home in the tortured and labyrinthine corridors of self-doubt of the modern tycoon as he is in the marbled halls of the Louvre. The topic tonight is financial [02:00] institutions in the art market. And, at least until the end of the evening, I hope that none of us here will use this as an excuse for further and useless deplorations of the reign of King [Mammon?] in the splendid kingdom of art. What we want to do is talk, more or less, precisely or as precisely as it is possible to talk in these things, about the effect, one thing on the art market of what I believe can be aptly expressed as its increasing resemblance to the financial markets as any of those who are familiar with financial markets have come to know them. I would say by way of introduction that I regard this as both institutional and behavioral. [03:00] On the institutional level, not only do we have large players like Citibank, which David speaks for, but, of course, most particularly and most influentially, the auction houses, which I think it is now clear since the disclosures of the financing of Mr. Alan Bond’s picture of the Van Gogh irises a couple of years ago, are functioning as much as houses of finance as they are clearinghouses for taste, connoisseurship, and all the other things we think of. Indeed, the art market today does resemble the securities markets as we know them. Down in Soho you have the equivalent of the initial public offering market. (laughter) Somewhere out there there is doubtless the equivalent of the penny stock market. (laughter) You have the same avidity of people who make [04:00] their living buying and selling in this market [for cycling?] the interest of buyers into new things. In the stock market, it’s the Dow Jones stocks, then the [NIFTY 50?], then high tech and so on. In this market, I have, well, the best way to express it is I was trained as an art historian that when one heard the name [Bouguereau?] or another of the [Ponfea?] painters of late nineteenth-century France, one shielded one’s eyes and retreated delicately from the room, but today there is indeed a very active and very high-priced market in those painters. For the behavioral point of view, it seems to me that we have moved from a market based on long relationships, cash buyers, deeply advised, to one of transactions in which to paraphrase [05:00] Scott Fitzgerald, buyers seem less believed by their confidence in their own taste than in the comforting presence of an underbid. (laughter) As a market assumes the characteristics of another market, as the art market assumes characteristics of the financial market, it seems to me that it also, to some degree, becomes subject to the rules of nature, the psychological underpinnings, whatever you want to call them, of the financial markets. And as no one among us is really more versed to speak in them than Barton Biggs, I think perhaps he

Guggenheim Museum Archives Reel-to-Reel collection “Banking on Art: Financial Institutions and the Art Market,” 1989 might start, and we’ll take it from there. At the end of the evening, there will be an opportunity for questions, and away we go.

BARTON BIGGS Well, Michael, I guess what I should say is that I’m not a collector. I’m a philistine. [06:00] But what I am interested in is the pattern of prices in markets, and as that pattern is affected by the momentum of prices and by changes in crowd psychology and by the collision of fear and greed, which is what financial markets or art markets or commodity markets, any kind of market is all about. And frankly, we’re interested in art because we run money for a lot of wealthy individuals, and art is an important part of their assets, and so we try to look at art as an investment asset. And that’s the only area I’m qualified to talk about it on, and we have done a lot of studies going back even into the 18th century, but more recently, in what we call modern times, which in modern times [07:00] really begin with the end of the Second World War. We don’t assume that art has a negative yield, other words by negative yield I mean that there are certain costs involved in owning art, insurance, taking care of it, and things such as that. We’re assuming straight appreciation, and we’re not making any allowance for transaction costs, either going in or going out. And I think if we did, it would reduce the return on art, compared to other investments that have transaction costs that are lower. Now we are including the yield that other investments generate, but in any case, the long-term trend in modern times on art has been that art has risen, in nominal terms, about nine percent a year. And in the period of time [08:00] that we’re looking at, beginning with the end of the Second World War, inflation in US dollars has averaged about three percent. So the real return on art has been six percent, and that’s very respectable, and, in fact, quite high, compared to the returns on a lot of other assets. But the interesting thing is that, though that’s the long-term rate of return and using all kinds of [length series?], that return stands up. [I mean?], as I’m sure you’re all aware the returns in recent years — and then just taking the Sotheby’s index, for example — have been way above that nine percent trend. The last five years, Sotheby’s index has compounded at 23.2 percent a year. The last two years, it’s gone up 87 percent, and the last year through, I think it was August 30th, something like that, it was up 34 percent. And certainly within that index, [09:00] certain areas, such as modern art, impressionist art, has compounded over the last five years at a rate of more than 35 percent a year. And so my only point is that when one of our clients asks us about art as an investment or as an investment category — not as a situation he wants to get pleasure out of, but as an investment area — I mean, I think the art markets look very, very expended. Other words, you’ve got prices that are way above their long-term trend. And the history of markets is that when prices go up for a long time and the psychology becomes that you can’t lose and the credit, whether from banks or whomever, is a significant factor in the market, and, interestingly enough, in the really extended markets throughout history, there’s usually been [10:00] a new marginal buyer that comes in at the very end. And I would respectfully suggest that maybe the Japanese in the art markets are that new marginal buyer. That kind of pattern, [where?] you go back to the Dutch tulip bulbs or the [Sukamanac?] in Kuwait or the New York Stock Exchange, that pattern in markets repeats itself. So I guess, [Michael?], that’s my message that...

MICHAEL THOMAS Well, I think Gilbert has a slightly different view about how high this particular tulip might grow, (laughter) whether it’s equivalent to Jack’s beanstalk or something less. (laughter) And so why don’t you pick up there?

Guggenheim Museum Archives Reel-to-Reel collection “Banking on Art: Financial Institutions and the Art Market,” 1989

GILBERT DE BOTTON Thank you, Mike. Well, unlike Barton, I am a collector, but, like him, I have been called a philistine.

MICHAEL THOMAS Are you a philistine?

GILBERT DE BOTTON Exactly. (laughter) I have been called a philistine, and I suppose I wouldn’t be on this panel if I wasn’t one. [11:00] (laughter)

MICHAEL THOMAS Just give the news (inaudible). (laughter)

GILBERT DE BOTTON I’d rather be in the audience on this one. The question that I ask myself with [art is?] all the time is why I’m reading the figures — as Barton has summarized them so succinctly — that whether you take it back to the days when Charles the First was, and the Second, after the [Cromwellian?] (inaudible) were collecting to today, why has there been this fantastic explosion in very recent times, and is it linked to the deterioration in the value of money? Now, in this, after doing much thinking, perhaps not enough, I’ve come to a conclusion, which puts the thing on its head, and this is that [12:00] although when the purchasing power of money deteriorates in inflationary times, the value of certain rare and assets that can’t be duplicated does rise and gives substance to the theory of the inflation protection value and hedge value of certain assets. In truth, my feeling is that the extraordinary explosion that we’ve seen is the result of the period of lessened inflation — what is known in economic balance as disinflation, a reduction in the rate of inflation of dramatic proportion in recent years — contrasting with the high inflation of the ’70s. And in this, there’s a parallel, but perhaps not the conventional parallel that some [13:00] see between what has happened in financial markets and the art market. Mainly that, after many years of inflation, you have a situation where certain assets do not increase in value as much as they might because of the competing drawing power of money and the return on money. When the prime rate was at 20 and treasury bonds were yielding 15 percent, the market was in the dumps. When, on that fateful day in August 1982, there was a dramatic swing, this is when values began to explode. And the values began to explode from an extremely low level and brought in [the train?] the necessity to finance the purchase of undervalued assets, rather than [14:00] the finance creating a rise in these values. Now, I, therefore, believe that the prosperity that is being brought by marginal elements, which Barton has just mentioned, such as the Japanese, mustn’t be seen — not that Barton has put it this way — but should be seen, perhaps, expressing it positively, as the Japanese prosperity being based on the ability to produce and create wealth and, yet, do so in a very stable financial environment so that their interest rates are very low. The value of their currency rises. The capitalization multiple of streams of earnings in Japan is very high, and huge purchasing power is unleashed. The same purchasing power has been unleashed in the United States with the recapitalization [15:00] of market values. If one looks at the capitalization of the Standard & Poor’s index just as an index, one sees that there’s been an enormous explosion in this, which has put huge firepower in the hands of people whose shareholdings were worth X million and are now worth 10 times X million. (inaudible)...

Guggenheim Museum Archives Reel-to-Reel collection “Banking on Art: Financial Institutions and the Art Market,” 1989

MICHAEL THOMAS [So it’s?] the explosion of world wealth then?

RICHARD FEIGEN Yeah.

GILBERT DE BOTTON Yeah.

MICHAEL THOMAS Yeah.

RICHARD FEIGEN I’d like to make one comment if I can, suitably controversial, I hope. (laughter) I think the Sotheby’s art index is nonsense. And because I think it’s nonsense, I think that people are, perhaps, misled, even institutions. First of all, there are various art markets, and they respond to different stimuli, and they’re susceptible to different forces. [16:00] You’ll notice that the Sotheby’s art index stays flat from beginning of July until mid-October because there are no auctions. (laughter) Now a lot of your most important objects are sold privately, which aren’t reflected in any indexes. In those indexes you’re going to find a lot of pictures which are damaged, which are fakes, which are not by the artist they’re ascribed to in the catalogs, that have been up for sale three and four times and have been, what they call, burned. They’re all lumped into these averages. The average is, therefore, polluted. They don’t mean anything. There are things that are grossly undervalued. You have Old Masters, which haven’t risen in price, which are historically indispensable to museums that don’t have them that eventually could, all of a sudden, need them, and the price would jump geometrically overnight. Artists, we’re talking about every single [17:00] object here is different from the other one, by and large, unless you’re talking about prints or multiples. And I’m afraid when you’ve got a market that calls a lot of things art that are not art — and obviously you don’t have cookie jars in the Old Masters index and Sotheby’s, it’s true — but the fact is that the auction houses, let’s say, which, regrettably, apparently have become quasi-financial institutions. And we in this field have got to live with this monetization of art. We may not like it. I happen to be a committed collector, and I don’t find it much fun anymore. All the nooks and crannies, by and large, have been sniffed at. The museums are out of money. They can’t buy. You know, countries are raising barriers to export because they’re terrified. They’re intimidated by the tremendous financial forces that are coming into this market, and they can’t compete. So the walls are going up, [18:00] and they don’t want to let things out. So the supply is diminishing, and the demand is increasing arithmetically because of these vast accumulations of green paper that we printed. The fact is that these indexes are very, very flawed, and if people make decisions based on flawed numbers, I think that they could have some very serious mistakes in store for them.

MICHAEL THOMAS Are they flawed in understating the appreciation or overstating?

RICHARD FEIGEN

Guggenheim Museum Archives Reel-to-Reel collection “Banking on Art: Financial Institutions and the Art Market,” 1989

Understating some and overstating others because, you know, see when you talk about an impressionist index, what’s in there? [Lazos?] and —

MICHAEL THOMAS Right.

RICHARD FEIGEN — then third- and fourth-rank impressionists. What are they putting there? Are they just Monets and Renoirs? I mean, (inaudible).

MICHAEL THOMAS I think what he’s saying is that it’s as if Dow Jones was both in the business of printing an index and as a stockbroker.

DAVID GIBSON You don’t have an unbiased clearinghouse for the determination of value. You’re locked into a single index.

MICHAEL THOMAS Characteristically, in meetings of this sort, the man with the money has chosen to remain silent until (laughter) last. [19:00]

DAVID GIBSON I think I’m here to represent the illegitimacy of financial institutions in the world of the arts.

MICHAEL THOMAS No, you’re here to [make it?] —

DAVID GIBSON (laughs)

MICHAEL THOMAS — decent, clean, and mother-loving.

DAVID GIBSON Well, that’s the conclusion. I wanted to raise the question that may be in people’s minds, and it gets a little bit at the issue of what contributes to the concerns the Gilbert raised about the amount of money that’s available for the acquisition of art, and, finally — I think to the point that Richard is concerned about — and that is the legitimacy of the valuation mechanism for art and what happens. I would say from the perspective of Citibank, our perception of what we do is that we deal in the art markets through specialists. I have the luxury of being unbiased because I’m ignorant about the world of art, and that properly graces the role of the financial institution [20:00] where we deal through the specialists who participate in the market, and we represent clients. And the point is that we do not make markets. We do not marshal the assets of Citicorp behind markets to bring hyperinflation to markets, but we do represent demand. We represent demand for liquidity in collections much more than we represent demand for just the acquisition of a new painting by someone who doesn’t have the asset base to do it. One of the risks that Gilbert alludes to is, does the existence of this excessively valued market lure people to believe

Guggenheim Museum Archives Reel-to-Reel collection “Banking on Art: Financial Institutions and the Art Market,” 1989

— unsuspecting investors in the absence of an appropriate, God-forbid, government agency to assure honesty — that people will, in fact, be protected from the expectation that everything that you buy will rise, and it won’t. And if you engage in the art markets on that expectation, [21:00] hyperinflation won’t save you. You, ultimately, will lose in that marketplace, and that is one of the concerns as Gilbert has. And we don’t fund that. We don’t fund that kind of market and aren’t interested in funding it. And I think that’s characteristic of most of the financial institutions who have some interest in the marketplace. And Richard’s concerned about the existence of a single index. Personally, I think it’s quite valid. I was suggesting earlier, and it didn’t get a lot of receptivity, but, initially, a lot of exchanges and a lot of goods were owned and operated by individuals, and, consequently, there was an [override to?] premium that was put on the movement of securities that you now think of as moving through exchanges. You could have a clearinghouse for art that was, in fact, established by prominent collectors otherwise, which, effectively, disintermediate those who now have a financial interest in representing what values are. And, you know, that’s one way to [22:00] effectively try to bring a sense in value to the market. But institutionally, the institutional money that’s in the market is there because there is demand for it, either in the form of bringing liquidity to existing collections or in the form of people who have legitimate aspirations as collectors who want to enlarge their collections. It is rarely there in the form of supporting one-time buyers for large purchases who don’t have a more legitimate reason for being engaged in the art markets.

MICHAEL THOMAS But aren’t those one-time buyers for large purposes, the large, single purchases rather, the ones who seem to be dominating the auction scene? One has the sense that with all the money that’s available in the market, that it’s rather like Donald Trump going after American Airlines, that, suddenly, he comes and he targets the Irises by Van Gogh, and the financing is put in place. And he goes for that, and that’s more or less the collection, and there may be [23:00] some rhinestones around the diamond. [But there is that?].

RICHARD FEIGEN But you alluded, Michael, before we came down here to the fact that it is somewhat dangerous to have the market maker also involved as a principle and also involved in wanting prices to be as high as possible.

BARTON BIGGS Not if they’re loaning money.

RICHARD FEIGEN Excuse me?

BARTON BIGGS And the market maker is loaning money.

RICHARD FEIGEN Loaning money. So the point is that we have, what we regret in this, we in the field, both the academics and the dealers regret the conversion of this into a financial market. But if it has become one, then we’re worried — a little bit, some of us are a little bit worried — about the fact that it is an unregulated financial market where prices are [24:00] being created and indexes are

Guggenheim Museum Archives Reel-to-Reel collection “Banking on Art: Financial Institutions and the Art Market,” 1989 being printed and people are buying or selling based on indexes, which are being, in fact, printed by the market maker who is, in fact, acting, often, both as a principle and agent both for buyer and seller and a principle and which is to see prices as high as possible. And I find that this could conceivably lead to some problems in the future if we had any kind of hiccups in the financial market.

MICHAEL THOMAS I mean, you guys down the street lend money, Barton, if somebody wants to buy seven percent of US Steel, you’ll margin them, probably, for half of the deal. The difference is there’s another 93 percent of US Steel out there. Richard constructed a very interesting scenario when we were talking before coming here about how... [25:00] If you take a hard look at it, the way the financing of the Bond purchase of the big Van Gogh Irises was handled, and, obviously, some party to that transaction must have felt there was something dubious about it because the amount of energy spent denying it over the ensuing 18 months (laughter) would have built the Empire State Building several times over. But why don’t you carry through from what you were talking about before, how you start there and then the next big picture that comes up borrows from that? You don’t know what finance can do... I remember with cooperative apartments in New York City, in the bygone era, you couldn’t borrow money to finance a cooperative apartment. Most people would pay X. Then buildings began to relent, as it got to be difficult to move apartments in the late ’60s and early ’70s. And some of these [26:00] people started thinking about X as the down payment so that credit has a tremendous amount to do with the valuation process. And it seems to me that this is the gist of the dark side of Gilbert’s view of things is that if you had a deflation or an abandonment or an inability or credit into the art market, I mean, I think the United States government probably faces it at some point, some conjecture as to its creditworthiness. If credit is withdrawn from the art market, what do you look like?

GILBERT DE BOTTON Exactly. Talking this week and being in New York this week, especially on Sunday, has particular relevance because, for the first time in the history of the United States and possibly of the world, a central, vital government [27:00] or official instance has taken action ahead of time to ensure the avoidance of a major crisis — the fed — by announcing what it did on the Sunday, unlike 1987 when it did it on the day after the crash, manifested what seems to me a conclusion that the stock exchange is of greater importance than it ever was before, in terms of the seriousness of recycling savings and ensuring an absence of pandemonium. It wasn’t in an extreme form either, but previously there was an attitude, which veered more towards the caveat (inaudible) if people are foolish enough to want to fool around on the stock exchange and they lose money from time to time — as long as [28:00] proper safeguards, such as those instituted in the ’30s by the SEC, et cetera, are in place — it’s their privilege to lose money. Now, in art, we’re still in the Dark Ages with respect to certain things which [be it?]...

MICHAEL THOMAS Well, the people that are moving the money around are not in the Dark Ages.

GILBERT DE BOTTON No. No. (laughs)

MICHAEL THOMAS

Guggenheim Museum Archives Reel-to-Reel collection “Banking on Art: Financial Institutions and the Art Market,” 1989

They are...

GILBERT DE BOTTON Absolutely not. I think we’re in the Dark Ages in terms of... Well, again, I could stress the [metaphor?] that you know you have (inaudible) (laughs) [enabled?] to do things, which in other areas, be it the classic financial arena of the securities industry or banking or in strictly consumer items — if you’re selling biscuits, you have to [warrant?] and make [representations?] that are infinitely stricter than those that you have to make today in art. As Richard pointed out so rightly, the home brewing [29:00] of an index in art is something which is perfectly tolerated now, whereas in many other areas it would be subject to criminal prosecution.

DAVID GIBSON Gilbert, isn’t it true that the people that you’re most concerned about — that is those who may be less informed — aren’t the people who are creating the problem? In fact, it’s people who can command sizable amounts of credit who create this problem in the market. You were talking about the stock market. You’ve simply got the desire for orderly markets, where you’ve got two major players in the markets. You’ve got no regulators, nobody who’s going to come in and create an orderly market in the art market, except the people who are buying themselves. And since you’re talking about people who are dealing at a fairly high level, they simply can withdraw from the market and, thereby, create order in the market.

BARTON BIGGS It’s not the people that demand the credit. It’s the people that supply the credit with other people’s money [30:00] (overlapping dialogue; inaudible) famous (inaudible). (laughter)

RICHARD FEIGEN Could I just point out one...

MICHAEL THOMAS Afraid so.

RICHARD FEIGEN I’d like to point out just one episode, which I think illustrates my fear of the results of this monetization of art, the indexes and all that. Recently, we heard of a savings and loan association in Miami, which I believe was at least partially funded by junk bond financing. And this savings and loan is, in fact, backed by the taxpayers [of?] Full Faith and Credit and also has shareholders and also has junk bond debt holders. Whether or not inspired by indexes or whether they thought that, as you said, let’s say, the Old Master market when up X percent per annum compounded or whatever is, and, therefore, the man felt, [31:00] this president of this savings and loan, thought that this was a good place. Let’s say it was nine percent or 12 percent or whatever those silly averages say that it did. And, therefore, he goes plunging in with money that comes out of the public pockets and buys art for the savings and loan. Now, there were allegations that since the art had been sold by the market maker, who makes not only the indexes but creates the prices and now is selling them privately, not even in public forum and selling them to an institution funded publicly, I begin to worry about the liquidity of that institution. One of those objects was alleged to be worth far less than what they paid for it because the man had no way of gaging what the value really was. Now, professionals are equipped to go in and

Guggenheim Museum Archives Reel-to-Reel collection “Banking on Art: Financial Institutions and the Art Market,” 1989 say, “Well, this is a painting. This is by whatever the artist may be, [32:00] and it’s worth this and that.” And he consults authorities in the field, but a man — a naive CEO of a savings and loan somewhere — reading these cooked indexes, I’m afraid, can be led astray, and there can be some casualties.

BARTON BIGGS Instead we’ll have to save Sotheby’s.

RICHARD FEIGEN Hmm?

BARTON BIGGS How would you feel about the fed bailing out Sotheby’s?

MICHAEL THOMAS Be terrible if we read tomorrow that Alan Greenspan is guaranteeing that Manet on Thursday will not (laughter) make less than six million dollar— that would be a new one, absolutely.

RICHARD FEIGEN I don’t think they’re going to need bailing out. (laughs)

MICHAEL THOMAS No, but you don’t know. I mean, you take the [Dorrance?] collection, which is going up tomorrow night, there’s a very interesting case of how the behavior of financial markets might or might not impact values. That’s a collection that was put together largely with a dealer in New York. He made a bid for it. His bid was not accepted by the fiduciary for the estate against [33:00] a guarantee from the auction house. Well, let’s suppose that the market had continued its slide of last Friday, yesterday, and today, and tomorrow, and the auction house found it necessary to walk away from this guarantee, which it might do. I mean, the trouble is that you are — I think, as Barton’s point is, no beanstalk does rise, ultimately, all the way to the sky. And in a panic, what has concerned me is that I think a lot of these values have been pumped up by credit in the market, by financial [gains?], which are quite extrinsic to the way one normally thinks about buying a work of art. I don’t know, David, whether you use a lot of credit. I mean, you might lend somebody money to buy a work of art based on [34:00] his other net worth.

DAVID GIBSON We will do that. I wanted to emphasize that point earlier [is?] —

MICHAEL THOMAS Because you might want to move through the audience and pass out forms. (laughter)

DAVID GIBSON I thought he was going to do this to me. (laughter) But then he assured me earlier he wouldn’t.

MICHAEL THOMAS (laughs)

DAVID GIBSON

Guggenheim Museum Archives Reel-to-Reel collection “Banking on Art: Financial Institutions and the Art Market,” 1989

We do try to be discriminating, in terms of what we do, because, basically, our interest — I mean, I speak for Citibank in this case — is to support people who have an established interest in the arts, and it is not to lend money to single, one-time purchases by people who aren’t there for another reason. And so, I think that institutions, I would say to get back earlier... Because I think you’re raising the question and Gilbert raises the question of are there appropriate limits to place on the ability of an individual to represent his wealth in an art market? If he can muster the capital, should he somehow be prohibited from participating in the markets to the [35:00] full extent of what he wants to dedicate to that market? And how should we protect him from himself in that case? I mean, that’s a critical issue that gets asked in all the cases...

MICHAEL THOMAS How do you?

DAVID GIBSON I think, finally, you don’t unless people who have a collective interest in the world of art establish a different and better clearinghouse that the players in the market themselves — by the players I mean collectors, people who are, let’s say, regarded as more legitimate entrants in the field — choose to have values assigned. And I’d rather guess that a lot of the people who choose to have values assigned by the current means, that is those who are selling irises, rather like it. And so until those two parties come together and say, “We don’t think that’s an appropriate mechanism,” you’re going to have it. And it can be subject to collapse. You have values in society today. You have, you know, the environmental interest, where real estate developers have a great interest in competing [36:00] for the availability of land for that purpose. Again, that’s a financial purpose — the conversion of an environmental asset into another purpose — and you could say that’s attributable to the availability of finance. So is everything. But finally, it’s going to play a role. The access of an individual to money is going to play a role in the arts. It’s sought after, when it comes in the form of contributions, and the thing is is to recognize that it is at play, to recognize it, and to withdraw from the markets if that’s the right judgment because that’s the only limiting form that you have. There is no Alan Greenspan.

BARTON BIGGS David, if somebody comes to you with an appreciated picture, how does that work? You would make them a loan on that picture?

DAVID GIBSON Let’s suppose a typical situation would be where somebody is a client of the bank or is not a client of the bank but approaches us because, typically, he would have a collection, not a painting. That would be the typical situation. He would [37:00] have a collection. And for a variety of reasons, he may want to bring liquidity to it. It may be that he wants to buy some, and, frequently, that’s what happens is that somebody who has a collection wants to augment the collection. And the way to do that in advance of other cash flow is to borrow against the existing collection, and to buy another piece which complements what he has. That’s a very typical transaction, as opposed to somebody who just wants, you know, kind of, casually drops by and says, “I’d like $27 million to pay my half of the payment.”

BARTON BIGGS

Guggenheim Museum Archives Reel-to-Reel collection “Banking on Art: Financial Institutions and the Art Market,” 1989

But how does that work? You don’t take possession of the pictures. The picture stays in the guy’s living room, but...

DAVID GIBSON It depends on how —

MICHAEL THOMAS With a discreet tag, I dare say. (laughter) (overlapping dialogue; inaudible).

DAVID GIBSON Often, it will stay in the apartment. There are a number of those here, but, you know, there are risks. How do you control mobile collateral? I mean, you know, it’s a legitimate risk, which we try very hard to make sure we have control of where that is the collateral. But we do work on that issue [38:00] a lot. It’s an important issue, but we will do that for, generally, typically, where there are collections involved. (overlapping dialogue; inaudible).

BARTON BIGGS I mean, that would not be a good sign when people are borrowing money on existing securities portfolio to go out and buy more.

DAVID GIBSON But that’s characteristic behavior.

MICHAEL THOMAS But isn’t that what you do in [the margin?] business?

BARTON BIGGS But when you see that happening, that’s a sign of a market that’s getting very speckled and very overextended and very dangerous.

MICHAEL THOMAS But if you’re getting 11 percent you’ve satisfied with the collateral as the lender, and you’ve got your hands on the collateral, as a lender, you might worry about the market macro, but you look at your income statement —

BARTON BIGGS Sure, sure.

MICHAEL THOMAS — (inaudible), it’s not altogether discomforting.

BARTON BIGGS (inaudible) the markets, not the ethics of the lender.

RICHARD FEIGEN Also, Citibank, I don’t want to, you know, speak for David, but we deal with them there, and we bank there. And I know that they are [39:00] extremely sophisticated. I mean, they’re the only

Guggenheim Museum Archives Reel-to-Reel collection “Banking on Art: Financial Institutions and the Art Market,” 1989 major financial institution that has an in-house capacity for assessing these values very accurately. I know because they come in and buy from dealers with their clients. They have a very accurate way of assessing these values safely. And also, when you say that the market is inflated, well, somebody’s got to make the judgment as to whether a 1917 Renoit of inferior quality that may at this particular time be worth $5 million to the Japanese but that [X?] the Japanese buyers that painting may have a value of 500,000, and you have a tremendous amount of air in there between if the Japanese should exit because of some problem in their real estate market or something. And the difference between that and, let us say, a great Guercino that might cost you a million dollars, which hasn’t even begun to appreciate, and whichever [40:00] museum in the world might desperately need either now or ultimate...

MICHAEL THOMAS Yeah, but you’re in a market where half the people think [a?] Guercino plays centerfield for the Oakland A’s (inaudible). (laughter) I mean, (inaudible) to deal as a practical matter with what they’re after. I mean, I’d kind of like to shift to the behavioral side of this because I’ve been told by people in the auction business that the average bidder, not the average bidder, but the big bidder today, let’s say, pays 17 and a half million dollars for a painting, and there was an underbid, and whether that underbid was legitimate or whether there was this wall covering doing the bidding, which one hears occasionally has been the case, that he really thinks himself as only paying half a million dollars for the picture because somebody else was willing to pay 17. Now if you’re buying a hundred shares of UAL, (laughter) I believe — what could you buy it for today, about 129 and a quarter, (laughter) something like that. There’s somebody else out there willing to pay 129. [41:00] There are other increments of 100,000 or 10,000 or a hundred shares. This psychology strikes me as the ultimate in marginal, if that is the word, and yet, I believe, that is where you really depart from all notions of intrinsic value, all notions of relative worth artist to artist, period to period, works within an artist. And yet, I think that this is very much the way the (inaudible) field has been dominated, to a large extent, by the auction houses. I think the bigger perception of Mr. Taubman when he acquired Sotheby’s was that the world was shifting in this way, that we were moving toward a [transactionist?] mentality. And that, in the end, I think, is what ultimately will [42:00] kick Barton’s numbers, as he says that’s what makes them vulnerable. I don’t know how you feel about that — any of the rest of you — but all of us here have lived through — we’re all old enough — so we’ve lived through a complete change in the way business is done in practically every area of human enterprise. And I think that this is a unique characteristic where the art markets are virtually, in my opinion, coalesced with the financial markets.

GILBERT DE BOTTON I guess the question is where is the public interest aspect of this? As long as it’s a group of collectors, art lovers, or greedy people, or a mixture and a good blend of the two in the same person sometimes, playing in the sandbox of art and having a great deal of fun, does it much matter if they push that tree in the direction of the sky and find out it doesn’t and then it topples? [43:00] Who really gets hurt? And who has profited unfairly, perhaps, from the fact that some people get hurt? I think that if we take a [leaf?] and, again, we approach it as you were saying, behaviorally, from other disciplines and walks of life, certainly in free enterprise systems, people have a right to hurt themselves up to a point. And then the point becomes one of public interest, even though it’s their own business. I mean, there are attitudes in some societies that you don’t

Guggenheim Museum Archives Reel-to-Reel collection “Banking on Art: Financial Institutions and the Art Market,” 1989 even have the right to commit suicide. In others, you have no right to destroy yourself with drugs or drink if it gets to have a social aspect. So in the art market, the question that’s preoccupying a lot of us is it devours us with curiosity. We really want to know, [44:00] are we in a manic stage? Are we in the tulip mania stage because if we are, we know that there could be an adjustment that’s going to be very difficult. Now, how we address this question, I don’t quite know.

MICHAEL THOMAS Many of us, I think, from the point of deep social concern wonder, whether we ought to be selling in here or not. This is the art business after all. This is a rather small number of very rich people scrambling after what comes out of the market. What’s deplorable about it, obviously, is that the museums have been put out of business, but that’s in the nature of the world. I think that art museums were really not established by God. I doubt if the Dorrance sale should fail that the country will be brought to its knees, although these days nothing is certain (laughter) in that regard. But I think that’s a good point. Is there a social point?

DAVID GIBSON I think [45:00] you could get at it, Michael, by at this issue of transactional concern, about hyperinflation and violating social values [with art?], you can write a novel. And I suggest (inaudible)...

MICHAEL THOMAS But I keep trying to do that, (laughter) and then nobody buys it. And nobody reads them, and I go on.

DAVID GIBSON I suggest that the title of your novel would be the “Bonfire of the Vanities,” and then I think you’ll get...

MICHAEL THOMAS With that, I’m going to leave. (laughter) I mean, Richard, you’ve been most outspoken as we were meeting before. You see this sort of broadly impacting on the whole business of making art. And then, you know, really we can talk about what goes on at Sotheby’s, but what goes on downtown, in my opinion, frequently, makes the final Salt Lake City firm of Blinder Robinson look like Morgan Stanley (inaudible). (laughter)

BARTON BIGGS I don’t know [of?] Blinder Robinson. (laughs)

MICHAEL THOMAS Well, they’re the penny stock kings. They’re —

BARTON BIGGS Oh.

MICHAEL THOMAS

Guggenheim Museum Archives Reel-to-Reel collection “Banking on Art: Financial Institutions and the Art Market,” 1989

— featured every other three weeks on 60 Minutes, (laughter) shots of the firm’s principles being led off in manacles. (laughter) [46:00] I mean, Richard, you were quite eloquent earlier, and if you can recapture some of that eloquence (inaudible). (laughter)

RICHARD FEIGEN You told us not to talk before because we (inaudible)...

MICHAEL THOMAS I didn’t want [them?] to leave their fight in the locker room (inaudible). (laughter)

RICHARD FEIGEN Well, no, I think that what’s happened here has been described, and that is clearly that too much money’s been printed. And there aren’t enough places for it to go, and people are worried about the traditional parking lots. And now they’ve created the art market into another one, so money is parking there. And it’s causing some problems. It’s causing problems to the museums. It’s causing problems to certain countries that don’t want the art to leave. They’re erecting barriers. It’s causing problems in a lot of areas, and it’s causing some nervousness because things are called art that are not art. The cookie jars are clearly not art. It’s a question of whether Bugatti automobiles are $10 million a pop or [47:00] art. In any event, it’s clear that a lot of this is not art historically imperative. They’re not things that, ultimately, the Metropolitan Museum is going to have to have, whether they are willing and able to want it now that in five years or ten years, they’re going to have to have it. A lot of it is clearly not that. So there’s no imperative in it. It’s my opinion, for whatever it’s worth, that as long as all this green paper is washing around the world that we print every time we need it and don’t have it for some kind of an adventure, well, as long as that’s the case, I think the art market now has been su—

END OF AUDIO FILE 9009500_01-Banking-on-Art-Financial-Institutions-and-the-Art-Market.mp3

Banking on Art: Financial Institutions and the Art Market, introduction by Michael Thomas / Barton Biggs, Gilbert de Botton, Richard Feigen, 1989/10/17. Reel-to-Reel collection. A0004. Solomon R. Guggenheim Museum Archives, New York