Strange Duopoly: The Structure of Monopoly Power behind the Auction Market

[An extended version of the recent Op-Ed published in The Art Newspaper, November 2018.]

The controlling shareholders of Bonhams recently sold their stake in the auction house to Epiris, a British private equity firm, which quickly brought on additional management. As a former director, I am encouraged by this new infusion of financial support and executive leadership. However, I believe the challenges in expanding market share for any auction house are structurally endemic to the industry and are not easily overturned by a fresh infusion of capital and personnel alone.

In the New York Times (“The Art World’s Elephant in the Room” 9/21/2018), Scott Reyburn recently suggests that Bonhams is an auction house “whose business model has (so far) relied on traditional lower and middle range art and antiques.”  In Reyburn’s view, this market is languishing as an effect of growing income inequality, as the wealthy seek ever more expensive prizes, leaving the sub-$50,000 marketplace bereft of buyers and liquidity.

As the former Director of Business Development for Bonhams in the US, I can assert with confidence that Bonhams was very much motivated to break into the upper echelons of the Impressionist & Modern, and Postwar & Contemporary markets, where most of the highest priced works reside.  However, over the past 10 years of my tenure there, less than a dozen artworks were successfully consigned in those categories with a hammer price over $1 million.  Most works we sold successfully in that price range were in the Chinese, Russian and Old Masters sales, where we had relative strengths and comparative market share.   

The fact that we were largely unsuccessful might reflect poorly on my efforts, I admit, but the fact that Bonhams, one of the four 18th century British firms to dominate the secondary market, could only manage to capture less than one half of one percent of these leading categories, suggests that there is a more specific, structural constraint at play in the marketplace, and which remains an obstacle for any firm jostling for market share.

Most art world observers may have a generic sense that Sotheby’s and Christie’s enjoy a monopoly, or more accurately a duopoly, in these signature categories, with the close ascension of Phillips in recent years.  Indeed, according to Clare McCandrew’s reporting, these two dominant firms own over 80% of this market share for works over $1 million in these core categories.

However, a closer analysis would reveal that this is a very strange kind of monopoly indeed, at least measured against classic economic theory. Joseph Schumpeter outlined the basic theory of monopoly power based on three chief criteria: artificial scarcity, inefficient distribution of resources, and deadweight loss.  In effect, a monopoly exists when one party (or a consortium) maintains strict barriers to entry and thus controls the market mechanism or a natural resource, and then artificially restricts supply in order to drive prices higher and increase their profits.  Consumers, lacking another source or venue, are forced to pay inflated prices, and the effect is the inefficient distribution of the commodity compared to an unencumbered market, which leads to “deadweight loss,” or unused resources, as the cost of inflating the monopolist’s profits.  Thus, for example, OPEC in the 1970s choked off the supply of oil, sending gas prices soaring while retaining huge reserves that could otherwise have been allocated more efficiently.

However, the auction markets appear to evince almost none of these classic features of monopoly power. 

First of all, there are no significant barriers to entry. You could open an auction house tomorrow with simply an auction license and a business address (as one of my colleagues on the Antiques Roadshow did recently in North Carolina).  It is essentially easier than getting a real estate license in most jurisdictions.  Nevertheless, hanging up your shingle doesn’t mean someone will just go ahead and consign their $50 million Rothko with you.  And that provides the first clue as to where the monopoly power is lurking.

Secondly, there is no single dominant player, but rather active and intense competition all the way up the food chain.  No one firm controls the marketplace, ostensibly giving consignors alternative options, and in fact the internecine battle for market share at the top of the pyramid in fact provides favored consignors with many enticements, from global guarantees to hammer bonuses.

Thirdly, there is no evidence of artificial scarcity in effect.  As most auction professionals will tell you, they will sell anything and everything they can get their hands on, with the modest exception of artist’s estates or concentrated collections that might otherwise flood the market and depress prices.  Thus, there is no “deadweight loss” in practice, except of course for the roughly 28% of lots that failed to meet their reserve on the first go-round, and may now clog up storage rooms after being ‘burnt’.

So, where on earth is the monopoly effect at play?  Well, one further insight arises from considering a counter example of a duopoly in practice, such as exists between Boeing and Airbus.  These two firms dominate the commercial airline industry, and they compete based mostly on legacy relationships with airlines and the enormous inherent costs of shifting from one fleet to the other.  However, the battle for market share remains on the field of innovation: whoever builds faster, lighter, more fuel-efficient planes is likely over time to enjoy greater market growth in the future, and so they invest enormous sums in research and development.

However, in the auction market, innovation plays virtually no role in deciding market share.  All the major players offer essentially the same services and expertise, despite their prognostications and self-plaudits to the contrary.  Furthermore, the promotion of newfangled online platforms or social media apps is not going to make a material difference as to where a significant $100 million estate is going to consign their property.

And this dilemma has been the Scylla and Charybdis facing many new entrants in the online space.   In the past, I would often would ask promoters of these slick new platforms: what would Alex Forger do?  Alex Forger is the retired Chair of the Trusts & Estates department of Millbank Tweed in New York, and was long known as the giant killer for major estates coming to auction, including Jackie Kennedy’s and Bunny Mellon’s.  The question is: under what circumstances would Alex Forger (or a person of his ilk) consign a major estate to a dotcom?  The simple answer is: when hell freezes over, and therein lies part of the answer to our conundrum.

Most auction property comes from estates, and are managed by attorneys and executors who for the most part have not consigned before, or will not do so again for the client in question. As a one-off affair, they are understandably highly risk averse and are thus attracted to the powerful brand position of an auction house and their demonstrable market share in the category.  As a result, this endemic conservative undertow strongly favors the dominant players who can recite past successes in these same categories.

However, even at the core of this duopoly there remains intense competition for estates, and in the absence of any forward edge of innovation, the only mechanism for gaining advantage resides in the commission structure on offer. In effect, whoever offers the best terms wins, and that has driven a countervailing effect: not deadweight loss, but rather the ballooning and metastasizing effect of buyer’s premium.

Buyer’s premium first emerged in the 1970s when Sotheby’s was having an off-site sale and realized they could charge an ancillary fee of 10% from buyers to help offset the overhead costs.  What they soon realized is that buyers have no negotiable power in this scenario: if you truly want that Camille Pissarro watercolor, you are going to have to pay our buyer’s premium, because you can’t get it anywhere else.  And that set off an arms race of ever larger and more onerous increases in the buyer’s premium boondoggle.  (It is sort of astonishing that several executives from the major firms went to jail in the 1990s for actively colluding over setting equivalent rates for seller’s commission, and settled the charges for $512 million in 2001, as shortly thereafter in 2003, Christie’s raised their published bands for buyer’s premium, and were swiftly followed 6 weeks later by Sotheby’s at roughly the same tranches, followed in tow by the other auction houses.  No one needed to actually talk about it, or actively collude in this respect, because it was an inherent feature of the marketplace that you could not compete unless you matched your competitor’s base commission terms.) 

They have subsequently raised the bands of buyer’s premium in concert at least three times, and have been followed in lock step by their smaller competitors.  Buyer’s premium may remain a scourge on the marketplace, as an engrossed tax on bidders that is particularly infuriating—as the cumulative rates make it nearly impossible on the fly to calculate what amount you are actually bidding—but it is a natural effect of monopoly power.

In effect, this fee has mushroomed precisely because it allows the auction houses to apparently negotiate more favorable terms with those sought-after estates on the seller’s commission.  If you are already ostensibly collecting 25% from the buyer, then you can offer 3% or even 0% seller’s commission to unsuspecting estates who think they are getting a bargain.

All of this is to say that in the auction markets, it is not a monopoly of prices but rather of monopoly of commissions.  No auction house is artificially inflating prices by holding back inventory and creating artificial scarcity.  Rather, as the dominant players can only compete on terms, they will progressively lean on buyer’s premium rates to extract competitive terms for sought-after estates, and every would-be competitor must match those rates to stay in the game. If a monopoly extracts a price from all market participants, it resides in buyer’s premium, and the logic of competitive commissions.

As a result, it is nearly impossible to garner market share from the dominant players, in the absence of true innovation, or the wholesale abandonment of buyer’s premium as a categorical differentiator.  This would be a highly risky strategy, but would at least set one apart and expose the mechanisms of monopoly power. Whether the Alex Forgers of the world would be persuaded is another matter.

The mirage of riches in museums' vaults

The Art Newspaper was kind enough to recently print my Op-Ed on museum storage as a panacea for financial woes at museums.  However, the limitations of space in the print edition meant that the full article could not be reproduced.  I attach below the extended full article, as I believe it helps to flesh out some of the argument and explain the role of deaccessions in museum ethics more broadly.

The recent debates over deaccessions by the Berkshire Museum and LaSalle University have led some to conjecture that such sales might easily solve the scourge of museum admission fees.

For example, a recent op-ed on artnet news entertains the “fantasy” that the Metropolitan Museum could simply sell nine works selected by the authors to pay for museum admissions in perpetuity.  More emphatically, Michael O’Hare, a Professor of Public Policy at UC Berkeley, boldly asserts in the San Francisco Chronicle that museums “should sell works in storage to avoid raising admission fees.”  O’Hare insists that there is an enormous windfall residing in the 90% of collections at most museums that remain languishing in the storage vaults, which could be readily disposed of and redeployed to satisfy any number of fiduciary challenges.

“I have estimated, by triangulation from a couple of cases in which museums did value their collections, the monetary value of the collection of one of my favorite museums, the Art Institute of Chicago: It’s about $35 billion.”  This appraisal figure of the roughly 260,000 items in the AIC holdings has apparently been a popular party trick O’Hare has trotted out for shock and awe: “This finding has dilated the pupils of everyone I have ever shared it with. ‘How much??!’” 

O’Hare asserts that this valuation came about through a “triangulation” from the competing appraisals of the Detroit Institute of Arts collection during the bankruptcy proceedings and an anonymous valuation of the holdings at the Berkeley Art Museum.  O’Hare goes on to suggest that—given this enormous windfall—selling the mere bottom one percent of the AIC collection would generate an unencumbered cash infusion of roughly $350 million in endowment funds, which could then pay for free admission at the AIC in perpetuity on interest payments alone. 

Picking up the mantle of O’Hare’s conjecture, Tim Schneider in artnet news further calculates that the 452,000 items in the Met’s online collection could likewise be extrapolated to suggest a market value of roughly $62 billion, of which prospectively $55 billion is currently languishing in storage, “walled off from visitors like the works were leaking uranium.”  In his view, this unacknowledged revelation, somehow suppressed by the museum administrators themselves, should “change the debate” on museums and their business decisions, and that we should “at least seriously consider how billions of dollars in stored art might be able to help solve some of the crises afflicting art museums around the world.”

On its face, this does seem like a fabulous, unexpected vista onto untold riches that could be redeployed to solve most museums’ current and ongoing fiduciary dilemmas.  Indeed, it is precisely this commodification principle that has driven the Berkshire Museum to disgorge the chief highpoints of its collection in order to garner a windfall beyond any reasonable expectation of their actual fiduciary needs, as Felix Salmon and others have cogently pointed out.

However, if this panacea were so close at hand, then why haven’t museum trustees and directors cottoned on to this simple solution, but rather, in O’Hare’s estimation, “have cooked up a ‘code of ethics’ that forbids them from selling from their collections except to buy more art...”  Well, in answer to this simple question, it might be helpful to quote Hobie Doyle in the recent Coen brothers film Hail Caesar!: “would that t’were so simple…”

Putting aside the messy procedural concerns of museum ethics for a moment, let’s consider the cogency of some of these financial assumptions.  The current director and chief registrar of the Berkeley Art Museum are unaware of any comprehensive valuation of their collection ever having been produced.  As for the Detroit Institute of Arts collection, there were several competing attempts to place a value on the collection by parties with wildly divergent vested interests.  In 2013, despite the irate protestations of the museum’s trustees, Christie’s agreed to value a small subset of 2,773 objects that were acquired by museum purchase, at an aggregate valuation of $454-867 million.  This represented only 5% of the collection by object, given that the rest had been bequeathed and may have had donor restrictions and other encumbrances. 

However, that does not mean that one can simply multiply Christie’s figure by twenty and ascertain an aggregate value for the whole collection, in that 90% of the value actually resides in less than 5% of the collection, and is unevenly distributed over purchases and gifts alike.  Christie’s also found that an enormous 75% of their appraised value of purchased works resided in just 11 major works of art, and the rest quickly descended into the low three figures for the majority of the remaining collection, creating enormous discrepancies across the spectrum of works, and illustrating the weakness of using this particular sliver of the collection as a benchmark for the value in aggregate. 

A subsequent appraisal of the collection by Artvest Partners placed an aggregate valuation of $2.7 to $4.6 billion on the total of 66,000 objects, but noted presciently that the headwinds from donor lawsuits, market weakness in some categories, the effect of flooding the market, and the notoriety of destroying the venerable museum collection would likely yield, in practical terms, a much more modest return in the range of $850 million (at the top end of Christie’s valuation of the mere 5% of purchased works alone).  A final, competing appraisal by Victor Wiener Associates was commissioned at the behest of one of the bondholders—who stood to lose hundreds of millions of dollars in the looming bankruptcy—and after a quick two-week review process, alternatively placed the aggregate value at $8.5 billion, without countenancing any of these countervailing market effects if the works were actually sold. 

It would seem then that O’Hare’s “triangulation” postulate involves in part the simple extrapolation of this most optimistic valuation ($8.5 billion; 66,000 objects) to the AIC’s larger object count (260,000 objects), yielding the tidy figure of roughly $33.5 billion. 

However, even granting the wildly divergent figures offered here and bracketing for a moment any ethical considerations, do these estimates have any real meaning, if they are in fact intended to justify an actual policy for liquidating art in the public markets?  In other words, if the AIC were to take the unfathomable step of liquidating its entire collection, could it truly expect a $35 billion windfall to come back to the empty institution in a cashier’s check from Christie’s?  Absolutely not, for the manifold reasons that Artvest Partners and others have outlined, in that it would create enormous headwinds for any practical sales plan along these lines.  O’Hare’s breezy approximation of the AIC’s aggregate value appears rooted in untenable foundations.

To help illustrate this, we might look to a more unencumbered benchmark of a museum collection’s actual value.  In 2002, the Rand Corporation published a groundbreaking study by Ann Stone on the collections of the Fine Arts Museums of San Francisco (FAMSF), when the author was granted unprecedented access to the museum’s records over a century.  The study found that a significant portion of the most valuable works in the collection had received a curatorial valuation of fair market value, as the museum staff indicated that they internally use “monetary value as a kind of ‘shorthand’ for quality” in terms of “planning and decision making.”

The museum possessed at the time 112,569 total objects, of which 13,119 objects were accompanied with curatorial appraisals of fair market value; these 13,000 objects at the time had an aggregate valuation of $797 million. Although this figure indeed only covered 12 percent of the total objects in the collection, most of the high-value objects were included.  As a mere benchmark measure, it is instructive that the author also finds “about 90% of the collection’s value resides in less than 5% of the collection’s objects” (or 1,499 objects with an aggregate value of $718 million), even of this smaller cohort of 12 percent.  Given this detailed analysis on an item-by-item basis by professional staff, it would appear that the aggregate value was in the neighborhood of $1 billion.

Granting the many caveats of any apples to oranges comparison, is it really conceivable then that the aggregate value of the AIC collection, with roughly 2.5 times the object count of FAMSF in 2002 (112,000 vs. 260,000), should be valued in aggregate at over 30 times the latter’s internal valuation by curatorial staff, according to O’Hare’s conjecture?  Even granting the different frames of reference, is it conceivable that the Chicago collection should be more than a full order of magnitude more valuable than their close counterpart in San Francisco, which has an equally diverse and encyclopedic collection?  Or is it more likely that O’Hare’s jaw-dropping estimate of $35 billion, rooted partly in a dubious appraisal from the Detroit collections produced for an interested party during a bankruptcy proceeding, is nothing more of a fanciful confection conjured up to justify the wholesale liquidation of assets from the museum’s vaults?

Reasonable people can disagree as to what is an acceptable benchmark, but these rarified numbers underscore that this is actually an exercise in futility if construed as the pretext of an administrative plan to liquidate actual collections in the real world. 

Part of the problem with using these valuations as a rationale for administrative action resides in an insufficient recognition of the actual market forces that affect auction prices, and the unacknowledged role museum collections play in guaranteeing scarcity.  As I have noted elsewhere, the recent $450 million price achieved by Da Vinci’s Salvator Mundi, touted as the “last” Leonardo in private hands, rested firmly on the proposition that the other 15 in public collection would remain there in perpetuity.  If museums broadly adopted O’Hare’s gambit and sought to cash in on their purported riches, they would paradoxically trigger a catastrophic collapse of the markets which served as the inducement for this course of action in the first place.

Whereas outside observers might imagine a large amorphous population of market participants that provide liquidity to stabilize asset prices, similar to the NASDAQ or FTSE, in truth most auctions involve no more than a few dozen actual bidders, and any given lot may engage no more than two or three truly engaged participants.  This means that even subtle adjustments to supply and demand can radically affect expected outcomes. 

For example, in the 1990s the market for Pre-Raphaelite works remained buoyant as several deep-pocketed buyers—foremostly Andrew Lloyd Webber—actively pursued all available masterpieces, but Webber’s subsequent retreat from the market single-handedly precipitated a pronounced collapse in market prices—a market effect that caught the Delaware Art Museum unawares in their own deaccession debacle, when they tried to sell Isabella and the Pot of Basil by Holman Hunt in 2014, only to have it sell to a single bidder at half the low estimate.  As such, any broadly endorsed strategy along the lines that O’Hare and Schneider advocate would likely have the unintended effect that it would almost certainly tank market prices across the board. 

This underscores the inherently fungible nature of art valuations in the first place.  Despite Mr. O’Hare’s accusation that museums have refused to account for their art collections in their asset statements, this is not some nefarious scheme of a cabal of directors, but a straightforward accommodation US museums made with the FASB board in the 1990s, so they would not need to capitalize collections retained under their charitable purpose on their income statements.  Nevertheless, they do indeed maintain aggregate valuations as a matter of course for insurance purposes, usually in the form of a global insurance value in the event of catastrophic loss.  It is perfectly conceivable that the DIA employs an insurance valuation as high as $8-10 billion for such purposes. However, these confidential assessments of the art collection’s insurance value for actuarial purposes cannot simply be translated into a benchmark of what such objects might actually yield in a liquidation scenario through the public auction markets.

But what of the more modest proposal, of just segregating the bottom one percent of the professed value of the AIC collection, and gleaning a tidy $350 million for an endowment to keep admissions free forever?  Well, if it turns out that the true “liquidation value” of the AIC collections is, in fact, closer to $3-5 billion, then this one percent target would yield at most $30-50 million, hardly enough of an endowment to enfranchise anything but a paltry discount to current admissions prices.

Nevertheless, this hypothetical exercise in parsing fungible valuations is thankfully unnecessary, given the real world obstacles to any such liquidation strategy addressed to the bottom one percent of a museum’s holdings.  As the Christie’s appraisal of the DIA collections and Ann Stone’s reconstruction of FAMSF’s collections illustrate, the vast majority of market value resides in just a handful of major works, most of which are the prized trophies gracing the walls of the central galleries.  The bottom one percent, however, is almost certainly freighted with low-value works that are, candidly, almost impossible to sell.

More specifically, having worked directly with the DIA, FAMSF and the Berkeley Art Museum on their collection reviews in the past, I can assert with confidence that one salient feature has categorically stood out front and center in all of their deliberations: as much as they would love to liquidate some of the bottom one percent of works in storage, there is often no cost-effective means for doing so. 

In truth, the primary obstacle to such an endeavor is not a lack of will or some prurient clutching to outdated ethical norms, but rather that any such transaction would be an enormous loss leader for such institutions, given the costs of administrative oversight and the modest expected return.  Any deaccession must entail an extensive research project to determine any donor restrictions or to secure commensurate approvals from living heirs, and this is a time-consuming and cumbersome process that is not discounted in any fashion for more modestly-valued objects.  As such, the FAMSF and Berkeley have both recently concluded that, in fact, any prudential campaign to reduce some excess in storage would actually cost them more money in administrative costs than they could ever expect to garner in return in the marketplace.

A related challenge is the fixed costs of auction transactions. The average operational cost for selling a work at auction is calculated by one measure to be on average $856 per lot, meaning that in most instances only objects estimated at $2500 or above (assuming a commission of roughly 30%) actually makes the auction house any money in the aggregate. That is why Sotheby’s, for one, categorically rejects consignments valued below $5000, which is a watermark well above the average market price of the bottom one percent of works squired away in most museum vaults.  As such, most museums find that their least valuable collections, in aggregate, are simply unsellable in the traditional marketplace.

For all of these reasons, the notion that museums could simply liquidate their bottom one percent of collections for a cash windfall that would solve most fiduciary challenges is simply a canard.  The reason that frontline museum administrators have not adopted such a policy is that they are for the most part acutely aware of these obstacles, which brings us back full circle to the protestations of O’Hare and Schneider, that museums are clinging to an outdated ethical paradigm when the arcadia of financial independence simply lies beneath their feet in the sub-basement vaults.

On the contrary, any solid professional ethics should be rooted in pragmatics, and the protocols that US museums have adopted have evolved precisely because they allow the institutions to properly function in an optimal framework. Museum ethics are not an artifice of misguided prurience or outdated fealty to bucolic ideals, but have evolved—like most common law precedents—through trial and error and won acceptance precisely because they have proven to aid institutions in abiding by pragmatic norms.  They are adopted principally because they work. 

Thus, for example, museums generally abide by the principle that they will sequester deaccession funds for future acquisitions because the alternative would undermine the edifice of the museum itself.  If all museums had to secure updated annual appraisals for all objects under their purview and publish them on their financial statements, there would be enormous costs and security concerns.  Hence their prudent accommodation with the FASB board not to capitalize collections to avoid that conflict.  Furthermore, cannibalizing permanent collections for operational purposes is like drinking sea water when adrift in the ocean—it might temporarily quench one’s thirst, but it will only hasten the onset of dementia and death.  The history of deaccessions is littered with occasions of museums that tried to carve off parts of their collection for operational purposes, like the Finch College Museum of Art or the Rose Art Museum at Brandeis, only to find that such disgorgements hastened their prospective demise. 

Finally, if all museums were to capitalize collections in the manner envisaged—besides cratering the art marketplace that made such a proposal attractive in the first place—they would abrogate the terms of their charitable purpose, which is the preservation of objects of cultural worth for the public trust, on an implied contract with the donor to retain them in perpetuity.  Exceptions can certainly be made in specific circumstances, but if the exception becomes the norm, it would engender a world in which every institution is fundamentally at odds with its own rationale for existing—where, for comparison, every charitable foundation that supports cancer research commonly diverts 95% of its incoming funds to support staff salaries and related perks.  Such a convention would make a mockery of the charitable purpose on its face.

This does not mean that we do not face significant challenges when it comes to the many objects in museum storage, and that creative and thoughtful strategies need to be deployed to ensure they are more properly enjoyed and utilized, and deaccessions should indeed play a significant role in concert with a prudential collection management policy.  But the wholesale disposal of them on a quixotic vision of a quick and easy profit, in abeyance of any consideration of donor intent, and a commitment to preserving objects of cultural worth for the public trust, probably is not one of them.

© Martin Gammon 2018

Amicus Brief - Berkshire Museum Case

After consultation with counsel, I submitted an amicus brief to the Supreme Judicial Court of Suffolk County in the proceedings related to the Berkshire Museum case held this afternoon.  I thought I would share the contents as this is now part of the court record.

COMMONWEALTH OF MASSACHUSETTS

SUPREME JUDICIAL COURT, Suffolk County

Civil Action No. SJ2018-065

TRUSTEES OF THE BERKSHIRE MUSEUM, Plaintiff, v. MAURA HEALEY, ATTORNEY GENERAL OF THE COMMONWEALTH OF MASSACHUSETTS, Defendant.

CY PRES PROCEEDING

BRIEF OF AMICI CURIAE MARTIN GAMMON

STATEMENT

I am the former director of Museum Services at Bonhams auction house, and have for the last 17 years worked with dozens of museums on deaccession reviews. I have been a sponsor and featured speaker at the AAM, AAMD, AAMC, AAMG and Museum Trustee Association meetings for over a decade.   I am also the author of the first critical history of deaccessions by museums since the 18th century, which is forthcoming next month by MIT Press, Deaccessioning and its Discontents: A Critical History.  On the basis of this professional experience, I formed an independent art advisory firm to counsel museums, trustees and curators on the prudential steps necessary for ethically navigating challenging deaccession reviews. 

In my opinion, the scope of the deaccession sales proposed by the board of trustees of the Berkshire Museum is flawed on a number of fronts, and the recent determinations of the Attorney General’s filing before Massachusetts Supreme Judicial Court on February 9, 2018, have in many ways exacerbated and compounded those flaws.

When we examine the historical record, we find many precedents for the Berkshire Museum case: an institution with financial difficulties, and a new vision plan for reinventing their mandate.  The closest analogue is the New-York Historical Society in 1995, when, facing potential insolvency, they elected to sell selected European works from the Thomas Jefferson Bryan collection of Old Masters in order to refund their endowment and retool their mission.  However, in the N-YHS case, the items selected were deemed out-of-focus to the Society’s mission of collecting the history of New York and American Art, and no American works were slated to be sold from the Bryan collection or other N-YHS holdings as a result.  In addition, only a small sliver of their core collections was liquidated, and finally, the attorney general ruled that NY state institutions were granted a right of pre-emption to acquire works at a slight discount of fair market value after the auction, to ensure works could stay in the public trust whenever possible.

While the Berkshire Museum faces an analogous set of challenges, their proposed course of action alternatively entails the wholesale disposal of works in many collecting categories without any curatorial rationale whatsoever.  These works have been chosen apparently solely for their high market value, not in keeping with a core curatorial mandate that ensures the core collections are preserved.  This is perhaps not surprising given that the Berkshire Museum appears to have no curator in charge of the art collections at present, but that further raises the expectation that they should seek outside counsel in that regard, and not depend on the selections preferred by an auction house.  Furthermore, apparently from the outset, no serious attempt has been made to keep these important works within the public trust if possible through a private sale to other museums, apart from the now latent prospect of the sale of one of the Rockwells to another museum.

While it is certainly true that museums have an obligation to refine collections from time to time, and deaccessions may be a prudent consequence of such reviews, it is our strong view, and the clear inference from the historical record, that they should always be guided by clear curatorial objectives. 

Furthermore, one of the chief findings of our book on the history of deaccessions includes the proposition that there are three distinct constituencies that need to be addressed in any proper curatorial review: the donor, the object itself, and the museum as a public trust.  One cannot promote fealty to one constituency in abeyance of the others; rather, they must be considered in equal measure.

In that regard, you cannot advance a vision of the museum’s mandate that runs roughshod over any consideration of the donor’s intent when bestowing the collections in the first place, nor can you abandon your responsibility to ensure the collections under your care have a proper home and enduring legacy in the public trust whenever possible.  At the Berkshire Museum, they have adopted a quixotic vision of the museum’s future which clearly violates their duty to the donor’s intent, and which ignores their duty for the proper care and preservation of collections whenever possible.

In specific terms, they have promulgated a “New Vision” plan that couples an ambitious rebuilding program with a new set of science technology exhibits, as well as a greatly expanded target for their endowment that seems beyond their true fiduciary needs, even in the face of years of chronic deficits.  The only financial means at hand by which to secure this grossly ambitious three-pronged initiative, from the outset, was to countenance the wholesale decimation of the most valuable paintings and works of art in their collections to pay for them...

In truth, there is simply no reason why these core works of American Art need to be sold if the proceeds from the Gregoriev works and other European and non-Western works were to be sold as a last resort.  This should yield in the neighborhood of $15 million or more in their own right, which is more than sufficient to restore the endowment given the financial assessments by others.  Under any circumstance, the rebuilding and technology programs should be funded by other means than the sale of core collections.

After months of review, the recent Attorney General’s resolution of February 9, 2018 is also seriously flawed for a number of reasons, and should not guide the court in the determination of this matter, in our opinion, as the AG’s recommendations oddly make the subversion of the trustees’ ethical mandate even worse.  In particular:

•    The seven works that were originally withdrawn from the November 2017 auction in October because of objections from the Attorney General’s office, apparently because they were acquired before 1932 and could not be sold according to the Museum's original charter, no longer appear to face that same restriction or embargo, as they appear to be part of the 40 works the AG now warrants for sale.   What happened then to that stopgap provision enshrined in their original charter?

•    The $55 million proposed threshold to be raised is excessive and can be justified only by accepting the necessity of funding the complete wish list of projects the trustees would like to undertake.  However, the liquidation of core collections should only be a last resort and severely curtailed to solely address the core fiduciary goal of supporting the museum’s continuing operations, which the AG provisionally estimates at an already high $25 million.  However, that might be achieved by the proposed sale of the one Rockwell painting alone, rendering all other sales moot.  Conversely, granting such a high financial target beyond any defensible rationale will virtually guarantee that all the works will need to be sold, because in the real world auction estimates can generally be inflated against the actual net proceeds.

•    Furthermore, the ominous criterion in the AG’s filing that that first $50 million can be used for "any purpose whatsoever" is a bizarre and serious regression from all ethical standards, in that at least in the original plan the funds were earmarked for the endowment and the New Vision plan.  Can they now raise the Director's salary to $1 million a year, pay for a six-week Caribbean vacation for all staff, or other irresponsible measures with impunity from those funds?   What purpose does this reckless clause serve?

•    Only the thin sliver of $5 million above that $50 million threshold is now secured for the preservation of collections, which is the actual ethical standard that the AAM requires of all deaccession funds, but even that portion can also be used for the "New Vision" costs as well in the AG’s determination.  So the principle of securing funds for future acquisitions or care of collections is completely gutted, and it reinforces the interpretation that the first $50 million can now be used for purposes beyond their original proposal as well.

•                Although there is a clause about exploring other homes in the public trust among the 40 works now on the block, none of that is enforceable or even advocated as a first step.

In summary, if the court were to authorize only the sale of European and non-Western works from the collection, they would be supporting an action that comports with a clear curatorial rationale; even if the proceeds were not sequestered for future acquisitions, as most museum protocols require, they should significantly improve the endowment and stabilize the financial conditions of the museum.  This narrowly confined purpose, as in the N-YHS case, is the only acceptable rationale for diverting the funds from the sale of artworks from the collection to anything but future acquisitions.  The broader ambitions for a rebuilding campaign and technology exhibits should only be funded from other sources, not the commodification of collections, or otherwise they would be seriously abrogating their duty to donor intent.

Even if we suspend disbelief and something like $55 million is ultimately justified by some defensible fiduciary rationale, why this summary rush to liquidation?  Why the urgency of auctioning the entire targeted cohort as soon as possible?  In truth, the historical record indicates that many other institutions—like the Detroit Institute of Arts, the Frank Lloyd Wright Foundation, and the Wedgewood Museum in Great Britain—when they tabled deaccession as a possible last resort to stave of financial insolvency, often found that in fact other sources and donors stepped forward that made that ‘last resort’ option ultimately unnecessary at the end of the day.

In contrast, the Berkshire Museum trustees oddly seem to elicit little or no reticence or regret about this drastic course of action, insist they cannot countenance any alternative options or refuse to pause long enough to properly deliberate about them.  Conversely, they appear intensely eager to dispose of the highpoints of their core collections at auction as quickly and expeditiously as possible, from which there can be no remediation once the gavel falls.  That alone seriously calls into question their adherence to core custodial principles, if nothing else.

Where lies the specter of financial Armageddon that will ensue if all these works are not sold as soon as possible?  I fail to see it and see no argument to support it.  Likewise, the concept that their fiduciary prospects have been seriously impaired by the Attorney General’s recent review is, in fact, the inversion of the truth.  In actuality, auction houses have sales on a regular 6-month cycle that could always accommodate these works at any time, and indeed, a less controversial atmosphere might actually aid and abet the financial results, as in truth many market participants might refrain from a sale infected with the many perceived ethical defects in this case.  If they were to ameliorate some of those perceptions by a good faith effort to compromise, they might, in fact, see their financial goalposts have dramatically improved.

[Let me add, parenthetically, that I am acutely aware of the tremendous strains and difficulties that many museum trustees face, as these often unsung volunteers on behalf of the public trust we all enjoy are often treated unfairly by those outside the administration who are not conversant with or sensitive to the nuances of the complex financial challenges many museums face.  I am sure the current trustees are acting in good faith and an honest commitment to what they perceive as the best course of action for the museum.  I think, however, they have been seriously misguided by bad advice or a limited discussion of their true latitude to consider other options, compounded by a failure to truly engage their professional peers at the AAM and AAMD that could offer more holistic counsel.]

Consequently, if the court were to warrant a limited sale of the European and non-Western works, and that in turn proves to be insufficient for supporting operations in the course of time, then the trustees could then petition the court and consider some of the core American works for potential sale, but then they should be offered in a collaborative process through the auspices of the AAMD to other public institutions first, as the likelihood of another museum willing to acquire them is high, and they would in most cases remain in the public trust.

This would be a more reasonable and balanced approach, and comport with the limited cases in the past, like the N-YHS in 1995, where such campaigns have proven successful in bringing museums back onto a solid financial footing without severely abrogating their obligations to donor intent and the preservation and care of collections.

March 19, 2018                                               Respectfully submitted,

                                                                        MARTIN GAMMON

Preview of our Op-Ed for The Art Newspaper, December 2017

Salvator Mundi: a new watermark on a common tide

This past week, on the day that Credit Suisse announced that the top 1% of households now controls over 50% of global wealth, an auction of Salvator Mundi, a damaged oil on panel attributed to Leonardo da Vinci, sold for over $450 million, almost three times the prior auction record.  Some have decried the ostentatious display of wealth that this new benchmark reveals, or declaimed that this presages the coming end of times.  However, unprecedented as it may seem, we have witnessed similar financial inflations before, and these seismic expansions often mark a significant sea change in the art market dynamics in the years to come.

For example, the Metropolitan Museum of Art acquired the Diego Velázquez portrait of Juan de Pareja at auction in November 1970 for £2.3 million, or $5.6 million at contemporary exchange rates. It may be hard for us to fathom the enormous financial consequences of this purchase today, but at that time only a handful of works had sold for over $1 million, so the auction likewise exceeded the prior record by almost three times, through an acquisition by a museum no less. 

The purchase created an international sensation, and was accompanied by a round of second guessing by the Met trustees, triggering a cascade of deaccession sales from the Adelaide de Groot bequest to pay down the debt, and bringing the notorious practice of deaccession to public attention for the first time.  The Velázquez was a critical prize for the Met, beyond its singular importance as a Renaissance masterpiece, as the new inclusion of a minority figure in the front ranks of the Met collection mitigated the strident calls for “decentralization” of the museum holdings to the outer boroughs, which had been circulating since the late 1960s.  However, the sale also turned out to be a high watermark for Old Master paintings at the time, and presaged a dramatic sea change in the art market, as the groundbreaking Robert Scull auction shortly thereafter in 1973 announced the rise of Abstract Expressionism and Pop Art as the market dominant genres for generations to come.  A ‘combine’ by Robert Rauschenberg that Scull had recently acquired for $900 was sold for $85,000, and Rauschenberg angrily confronted the seller at the auction, but the die was cast on the subsequent inflation of contemporary art under the new ceiling the Velázquez had just recently held aloft.

Likewise, the highest price paid at auction in America in the 19th century was the astronomical sum of $66,000, bid at an American Art Association auction in New York in 1887 for Ernest Meissonier’s painting Friedland, 1807, a grand historical canvas depicting Napoleon on the battlefield.  The painting was subject to much of the same dramatic stagecraft and messianic crowds we have seen with the Salvator Mundi in an earlier age, as the New York Times article “Two Great Masterpieces” (March 26, 1887) revealed at the time.  “When two negro servants, gloved and in livery, drew back the great red curtain that covered Meissonier's masterpiece at Chickering Hall last evening a hush crept over the throng of thousands who attended the third night of the Stewart sale. It was ‘Friedland—1807,’ the loving tribute of the greatest artist of France to the greatest Monarch in France's history.”  The painting was in short order donated to the Metropolitan Museum of Art by the buyer Henry Hilton.  This did not completely outstrip the prior record, Jules Breton’s Les Communiantes, a pious religious scene, in 1886 for $45,000.  That painting was later reoffered almost a century later at Christie’s London in 1988, where it realized only $163,000, hardly the mark up one might expect over 100 years.  As such, Meissonier’s 19th century auction record set the high benchmark for academic painting precisely at the moment of its long subsequent deflation, and ushered in the rise of the new vogues of Impressionism and Sargentism to come.

In light of these precedents, what can we make of the potential sea changes wrought by the shattering auction record of Salvator Mundi?  As noted in many quarters, the marketing ploy supporting the work was magnificent, even if founded on some wholly unsupported declamations.  It is certainly not the “last” Leonardo da Vinci in private hands, as at least two remain so, including one owned by the Duke of Buccleuch on long term loan to the National Gallery of Scotland. 

Nevertheless, the specter of the billion-dollar hammer price is now no longer unimaginable, and this once unfathomable aperture will inevitably distort the market field.  The sale has intensified the cratering of the old market categories, when an ‘Old Master’ outpaces all others in an otherwise ‘Post-War and Contemporary’ sale.  Indeed, the ‘PWC’ label is increasingly becoming obsolete as the Second World War recedes from view, while the category of ‘Impressionist and Modern’ grows increasingly blurred with 19th century paintings.  Indeed, the category of fine art itself is disintegrating, as the hallowed evening sale has been transformed into the preeminent venue for ‘masterpieces’ of whatever denomination.  One might now expect to see the Rothschild Book of Hours paired in a sale with a Twombly chalk drawing, or the Northampton Sekhemka statue paired with a Jeff Koons stainless steel sculpture derivative of the same genre.

We may also see new-fangled financial arrangements in the aftermath of the sale.  Rumor has it that the unusual auction format was partly engineered by an ingenious double guarantee scheme, wherein the three owners of Andy Warhol’s Sixty Last Suppers guaranteed the Leonardo at around $100 million, and Ryobovlev in turn guaranteed the Warhol for around $50 million.  This gambit assumed that neither work was likely to sell privately, and the owners could mitigate their risk through this double-bind guarantee scheme, which certainly paid off handsomely for the owners of the Warhol.  The latter just passed the presumed guarantee with a hammer of $56 million, while the upside on the Leonardo was presumably split with his third party guarantors, limiting Ryobovlev’s windfall. 

In some respects, this might function as a form of enhanced, conditional 1031 exchange: each party either acquires the work they have guaranteed, and thus prospectively eliminates the capital gains on the work they offered for sale according to current 1031 tax rules, or they enjoy a portion of the upside if the bidding exceeds their guarantee.  In either case, both parties secure a guarantee on high-value speculative works, in addition to enhanced tax benefits or investment returns, whatever the outcome.

Finally, the premise of the “last” Leonardo in private hands, shaky as it stands, helpfully underscores for us the unexpected consequences of museum acquisitions in the marketplace.  Indeed, the enormous fund of masterworks in every category now resident in the great encyclopedic museums of Europe and the Americas has compounded the demand for the few masterworks that have slipped their grasp, and indirectly fueled the rise of contemporary art as the only remaining game in town.  The paradox of museum accession is that it exacerbates scarcity in the marketplace, and enhances the fiduciary challenges of museum administrators, when they discover they now own works worth tens of millions of dollars as a consequence of that long sequestration, and are on occasion tempted to disgorge them to satisfy pressing operational needs, as in the recent sorry episode of the Berkshire Museum.  In any event, the prospect of a $450 million Leonardo rests firmly on the foundation that the other 15 in public collections will remain there in perpetuity, and is a direct corollary of the close interdependence of the museum and the marketplace.  We must therefore remain vigilant in the protection of our cultural patrimony, as the specter of this inflation effect places even more museum collections at potential risk, as the market flits higher on Icarus’ wings.