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Saturday, January 18, 2014

Finally - an explanation for the ridiculous prices for Chinese and Contemporary Art.

During the 42 years that I have been an art dealer and collector, the
one constant has been the integrity of Sothebys (BID).  While there
may have been a price fixing scandal many years ago, I was not
affected negatively by this.  In fact as part of the settlement, I was
paid over $300,000.  So I personally benefited.

Every time that there has been an issue between me and Sothebys no
matter how seemingly insignificant, the management and experts working
at Sothebys from Bill Ruprecht, the outstanding CEO, the heads of
departments, especially David Redden, the scholars, the catalogers,
everyone in accounting, even the people in shipping have acted with
honesty and with a view of keeping my relationship with them intact.
They have succeeded splendidly.  I love Sothebys.  Doing business at
the very highest possible standards is a significant part of their
DNA.

The nature of the art business is that rich people expect to be
treated with great care.  No matter how outrageous the request, a
smart team will find a way to give in and satisfy their client. Time
and time again this has been the case for me and for other collectors
that I have observed where Sothebys has been involved.  One major
reason is that only 200 people make up 80% of Sotheby's sales.  So
keeping all of those people on board with fair dealing and great
service is key.  It is a daily impossible task that they succeed
at brilliantly.  They are the masters at understanding their clients
and building long term relationships based on always doing the right
thing.  From my view and experience their whole team should be
commended and emulated.  Their 200 top clients are a very valuable
franchise because of this.  I have spent over $90,000,000 with them in
the last 4 decades and am proud to be part of that group.

It is my opinion that no other other auction house in the world does
this as well as Sothebys.  The skill, scholarship and integrity of the
Sothebys team is deeply impressive to me and has been for over 40
years in my business experience.

One reason that Sothebys are considerably better than Christies is
that Sothebys can liberally and cheerfully extend credit and give fair
shipping rates. My experience with Christies is that this has not been
the case for over 20 years.  They have severely disappointed me again
and again with their business practices.  Recently an attempt was made
to bid me up at an auction by a woman from Christies.  She lied to me
and told me someone else was bidding when there was not.  When the lot
did not sell because it did not reach the reserve, I was very unhappy.
  Nothing even close to this has ever happened at Sothebys.

It is the integrity of Sothebys over the long term that will cause it
to hold a dominant position in the art dealing world. They recognize
how important this is and do everything they can to add even more
luster to their reputation with each passing day.  I cannot imagine
how they could do a better job.

Two increasingly worrisome events of the last decade pose great risk
to Sothebys in the short term.  While I am sure that their team will
find a solution that will
preserve their existence, they are going to take a serious hit as word
gets out to the general art buying public, US Attorneys and their
equivalent counterparts in China.

The first danger is the overwhelming fundamental reason behind the
high prices that are being paid for Chinese Art. The law in China now
is that art can be traded for land owned by the Chinese government.
What is happening now is that two or more collaborators will drive up
a work of art to 100 to 200 times more than their cost.  That art will
now be traded to a museum at this vastly inflated value in return for
land.  Real estate promoters can now acquire land for a small
percentage of what their competition pays without access to this
method.  As a result most real estate developers are flocking to this
scheme even though they have little if any interest in collecting art.

Using their auction scheme, it is now possible to get $50,000,000 of
land for a cost in the range of $1,000,000 to $2,000,000 if one knows
the right government officials.  This is the primary reason that most
of the so called buyers in China are in the Real Estate business. They
call themselves patrons of the arts but they are just market
manipulators bidding at auction against their partners for artwork
they already own. The "established" auction results then create
inflated trading credits for the land that these developers wish to
acquire.

This predominantly explains why Chinese art, especially Contemporary
Art, sells for such inflated prices at auction in China.

When the Chinese government decides to end this practice or decides to
expose the perpetrators abusing this, the price of Chinese art will
plummet.  Collectors lured into this construct looking to unload their
investments will find that they are lucky to get very much of their
cost back.  It is not a real collecting market at the current prices.
It is a sham.

In 2013 Chinese Art accounted for 12% of Sothebys sales for $675m in
2013 and 11% of Sothebys sales in 2012 for $465m.  This is a market
that could well plummet for Sothebys in the short term should the
Chinese government decide to end or limit this practice as it gets out
of hand.

The second danger is similar but with much larger numbers and risk  -
this is the practice of a few American contemporary art dealers
bidding against their partners to drive up prices.  They do this for
two reasons - The first is to establish auction values for
unsophisticated collectors to lure them into "special deal" purchases
at or under auction prices. The second reason is to give their clients
a profitable exit with the opportunity to make substantial tax savings
by giving the art away after they have owned it for a year.

My guess is that almost no one reading this article knows anyone who
has spent over $1,000,000 buying contemporary art.  I have over 200
people who are members of the Forbes 400 on my mailing list who have
been clients over the years and few if any of them collects
contemporary art that I am aware of.  And yet there are considerable
numbers of contemporary paintings that sell for over $1,000,000.  I
have no idea who is buying them.  And I have been in this business for
42 years with major retail locations on Madison Avenue in the heart of
the Upper East Side in New York City, in San Francisco, Houston and
Philadelphia.  There certainly may be real collectors out there but I
find it it very hard to believe when virtually ALL of my billionaire
clients always relentlessly negotiate for months just to make a
$10,000 purchase.   The richer they are, the tougher they are.  And I
certainly know NO ONE from this entire group who has spent more than
$100,000 for contemporary art much less $1,000,000 and certainly not
$10,000,000.

Of course I am jealous and only until recently have come to realize
that these crazy prices are not due to the selling skills of the
dealers or intrinsic values of the artwork.  It is a market built on
collusion and fraud driving prices up at public auctions in New York
City and London.  After this initial spark, the madness of crowds
takes over and the frenzy feeds on itself.  But sooner or later the
realization that this is the case will end the bubble as it has
happened before with Tulips in the 17th century, the South Sea Bubble
in the 18th century, Orchids in the 19th century, Automotive Stocks in
the 1930's, Airline Stocks in the 1950's, Enron Stock, internet stocks
and real estate.

Once this practice is discovered, tax deductions for so called "market
value" will end and deductions will be limited to the buyer's cost.
This will require an act of Congress to change the law but the abuses
in the United States have been so vast, that the outrage of Congress
will make this elimination of this deduction a very strong
possibility.  This will cause a severe downward pressure on prices.

And, should the inner working of this market manipulation ever come to
light they will prove to be irresistible for US Attorney's offices all
over the United States.  A partnership that knowingly bids up works of
art to create tax deductions for its clients will be irresistible for
this branch of the US Government.  This will be especially true if
certain members of these partnerships are existing targets that these
very same US Attorneys have so far failed to put in jail.

Right now Contemporary Art Sales represent 27% of Sothebys sales of
$1.2B in 2013 and 29% in 2012 or $1.1B.

A business model based on abuse of tax laws in the two largest markets
in the world is highly risky. Tax laws can be easily changed by a vote
of Congress especially since
the elimination of tax deductions for fair market value will only harm
the very rich and the museums that are their beneficiaries.  The
current administration clearly finds the support of both these groups
a very low priority if a priority at all.   And in China the land for
art laws can change with the stroke of a pen.

These two areas of the art market, Chinese Art and Contemporary Art,
represent close to 40% of Sothebys current business model.

Sothebys is faced with a massive challenge.  My observation and firm
belief is that they have not knowingly participated in anyway with
this vast fraud in both the US and China even though their top
Contemporary Expert and super salesman, Tobias Meyer, just quit. It is
my firm belief that they will be be found to be completely innocent of
knowingly participating in these scams. However all the market
manipulators that have been using Sothebys to boost prices to
stratospheric levels will drag them into a nasty, prolonged, expensive
legal morass.  The unsophisticated buyers who bought in this mad run
up will undoubtedly want to be made whole.

Once this long battle ends, Sothebys will be again be good value when
they go back to their core businesses of the last 250 years.  There is
no other auction house in the world that is even close to them in
stature and integrity.

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