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The first thing to know about the art market is that it’s tiny. Despite its prominence in cinema, literature, and the news, the majority of the market is composed of a small collection of dealers and auctioneers catering to an exclusive list of ultra-rich clientele. Each year, on average, $61.
9 billion of art is sold. $61. 9 billion is a big number, but not in context.
$61. 9 billion is what Walmart, for example, sells in just 41 days. The global market of tomatoes generates $190 billion in annual sales—three times as much as art.
There are single companies with greater annual sales that you probably haven’t even heard of: AXA, the Centene Corporation, Exor, the McKesson Corporation—the entire art market is smaller than each of these. The second thing to know about the art market is that it’s extraordinarily consolidated. Over the past decade, 82% of sales, by value, were made in the US, UK, or greater China.
That’s to say, the global art market is a phenomenon largely restricted to New York, London, and Hong Kong. But the consolidation doesn’t end there. 43% of art dealers, nearly half, had fewer than 20 unique buyers in 2020.
Their sale and buyer numbers can be as limited as those of realtors, which starts to make sense when comparing the sale prices of the two markets. Unsurprisingly, this means that power in the industry is extraordinarily concentrated too. One study found that 30% of solo exhibitions at museums in the US, considered the hallmark of success, featured artists represented by one of just five galleries.
Once you move into the upper echelons of the industry, however, the concentration intensifies. During the studied period, eleven out of twelve solo exhibitions at the Guggenheim, considered one of the world’s preeminent art museums, presented artists represented by one of the same five galleries. So, to summarize, the key features of this market are that it is small and concentrated—without knowing anything more, an economist could tell you that this is, theoretically, a market ripe for exploitation and corruption.
But that’s just theory. To understand where the malpractice occurs, one must first understand the practice—how art sales work. Nearly three decades ago, in 1994, artist Roy Lichtenstein put on one of the last solo shows of his career.
For this, he created a series of nude portraits—a novel subject for Lichtenstein, presented in his archetypical style. Now, in order to translate his work into income, Lichtenstein partnered with the Leo Castelli Gallery. This was no surprise, as Castelli and his gallery had been long-time partners of the pop-art icon.
Three decades prior, Castelli had presented Lichtenstein’s first-ever one-man show. The two had formed a professional relationship over the years prior while Lichtenstein worked as an assistant art professor at Rutgers University and Castelli believed his work could be a commercial success. He was, of course, correct, as every single piece was sold prior to the show’s opening.
This skyrocketed Lichtenstein’s career. Overnight, he was transformed from, essentially, a hobbyist, into an internationally-known, commercially-successful, professional artist. So, for all intents and purposes, Castelli made Lichtenstein.
Therefore, Lichtenstein stuck with Castelli throughout his career, which brought him to that 1994 exhibition—entitled “Nudes: 9 Color Relief Prints. ” As is common in the high-end art world, it’s difficult to precisely trace the ownership history of given works, but we know that one of the pieces, Nude with Joyous Painting, was sold by the Castelli Gallery to a private collector in New York, then sold by the James Goodman Gallery to a private collector in Detroit, before it was purchased by an unknown, new owner. That new owner then decided, in 2020, to sell the painting.
Therefore, they contacted Christie’s. Now, Christie’s and it’s primary competitor, Sotheby’s, are the big movers and shakers in the art market. They’re auction houses, and facilitate the sale of much of the world’s most expensive art.
Of the ten highest priced sales in 2020, eight occurred at either Christie’s or Sotheby’s. Their process starts with an appraisal. Each auction house employs in-house experts who determine what they believe a piece will sell for, and present a range—a lower number and a higher number.
Then, assuming they want to move forward, the auction house and seller will mutually agree to a reserve price—a number equal to or less than the lower range of the estimate, under which they will not sell the piece, even if an offer is submitted. Typically, with higher-end sales, however, the auction house will persuade the seller to use their services by guaranteeing the sale—agreeing to purchase the artwork themselves for the lower end of the estimate, even if no bids are submitted. On the other end of the spectrum, the auction house takes a 2% fee if a piece of artwork is sold above the upper estimate to incentivize performance, although this is often waived in contract negotiations with the seller.
The seller also pays a percentage fee, supposedly as much as 10% for lower-priced works, and as low as 2% for higher-priced works, although official numbers are not published and are highly subject to negotiation as auction houses are eager to bring in sellers. The bulk of the auction house’s money is made from the buyer. They pay, on top of the final sale price, a percentage fee.
At most Christie’s auction houses, it’s 25% on sales up to $600,000, 20% for sales up to $6,000,000, then 14. 5% on sales above that number. This is all to say, when Christie’s or Sotheby’s gets their hands on the kind of artwork that lists for 10s of millions of dollars, they are highly, highly financially motivated to make the sale.
Roy Lichtenstein’s Nude with Joyous Painting falls into this category. A deceased, highly commercially successful artist; a break-from-style piece, created towards the end of its artist’s career—there was a lot going for this painting, and Christie’s knew it. Therefore, they scheduled its auction to take place at one of their top events of the year.
Under the constraints of the COVID-19 pandemic, the auction house organized a new format for one of 2020’s biggest auctions. While each of their auctions typically occur under the banner of one of their locations, their Hong Kong, Paris, London, and New York auction houses teamed up to run a simultaneous, global, live-streamed auction. Now, of the 79 lots put up for auction, the absolute least expensive was a piece by Matthew Wong appraised between $60,000 and $80,000.
Most were well into the millions, and this was by design. Christie’s, Sotheby’s, and other auction houses will aggregate their highest-priced works together into a few yearly auctions, so that they can turn them into can’t miss events for the art world. Their job is essentially the marketing—they’re trying to build anticipation and excitement for the sale of a given piece—so they’ll spend the months prior working their catalogue of buyers, talking to the press, and exhibiting works all around the world.
Then, after almost all of the work is completed, the night of the auction arrives. In this case, the event started with Hong Kong. Their auctioneer, live-streamed to the world, sold nine relatively lower-priced works before passing the torch to Paris, from where 15 higher priced lots were auctioned.
Then, it moved onto London, where hammer prices crept further and further into the millions, and finally, it was New York’s turn. Saving the best for last, all of the true headliners were auctioned from New York. This included Picasso’s, Basquiat’s, Calder’s, O’Keeffe’s, Warhol’s, and, of course, the Lichtenstein.
Bidding opened on Nude with Joyous Painting at $20 million. That was quickly pushed up to 22, 26, 28, then 29 million dollars. Two anonymous bidders from New York, aided by phone-laden representatives at the auction house, pushed the price up by half-million increments to 36, until a buyer from Hong Kong swooped in and bid $37 million.
One of the New York bidders responded with $38 million, then the other New York bidder came back with 38. 2. It went to 38.
5, 39, 39. 5, 40, before the Hong Kong buyer bid $40. 5 million, which met no response, and the auctioneer’s hammer came down on what would become the third highest-priced art sale of the year.
With fees, the buyer ended up paying $46,242,500, meaning Christie’s netted at least $5,742,500 from the 10 minute and 14 second long auction. Across the evening, though, some $421 million of art was sold. That means this one, four-hour event, and its 79 lots, accounted for almost a full percent of the entire world’s art sales in 2020, by value, and that Christie’s, as a company, earned upwards of $60 million.
So… where’s the problem? So far, most of this process probably seems above-board—its just a collection of wealthy people buying and selling expensive art through a few exclusive auction houses. Well, its not so much the process itself, but what it enables.
Most of the issues arise out of a simple truth—art does not have intrinsic value. Say you stopped by a thrift store, saw this painting on the wall, and it had no label, no price tag, no information at all beyond the piece itself. How much would you pay for it?
Some would only spare twenty or thirty dollars, while others, impressed by its intricacy and age, might pay a couple hundred dollars for it. This is roughly what happened in 1958 when it was presented at a small auction in London as a poorly-maintained copy of a lost work by Leonardo Da Vinci, and sold for £45 to Minnie and Warren Kuntz. The couple carried the painting with them to Southampton, then boarded a ship bound for Houston to return from their European vacation.
In 1987, the artwork was inherited by Kuntz’s nephew, Basil Clovis Hendry, who hung it in his Baton Rouge, Louisiana home until his death in 2004. His daughter, Susan Hendry Tureau, brought the work and much of the rest of her father’s estate to the New Orleans Auction Gallery, where it was listed with a sale estimate of $1,200 to $1,800. It was bought for an unknown amount less than $10,000 by a pair of art dealers, Alexander Parrish and Robert Simon, who had a long-shot hunch that it could be worth far more than that.
They therefore hired a paintings conservator from NYU to restore the work, and as part of her process, she took infrared photographs of the piece to be able to see through the layers of paint. This unearthed the lowest layer, which included the very first strokes—the ones the artist took to outline the general composition of the painting. These first strokes largely matched up with the final product, except for here—the thumb.
They outlined the thumb in a straight position, rather than the curved shape seen in all known copies of the lost Da Vinci painting. It seemed that the artist changed their mind, which would make no sense when copying a painting. These few, hidden strokes served as a crucial, initial piece of evidence that this might be the original Salvator Mundi, painted by Leonardo Da Vinci himself.
Therefore, Parrish and Simon spent the better part of the next five years travelling around, showing the piece to experts and curators, garnering support for their theory. In 2011, they attained definitive validation: London’s National Gallery exhibited the Salvator Mundi and the name on the label read Leonardo Da Vinci. The value instantly skyrocketed.
Parrish and Simon sold the piece to another dealer for $80 million, who immediately sold it to a Russian collector for $127 million, who then brought the piece to auction. Only the 24th known painting widely attributed to Da Vinci, and one of only two not held by a museum, this was sure to fetch an eye-popping price. After a world tour of exhibitions, Leonardo’s Salvator Mundi was sold by Christie’s New York for $450,312,500 to Saudi Crown Prince Mohammed bin Salman—an all-time record price for the sale of a piece of art.
Prior to the recognition by top museums that this piece was, in fact, a Da Vinci, the value was in the low thousands. After, it was in the hundreds of millions. That’s to say, art has no intrinsic value.
The value for what Christie’s, Sotheby’s, or other top auction houses sell is all in who painted it, who owned it, and who wants it. An uninformed person can look at a car, or a plate of food, or a house and guess with some accuracy what it’s worth, but that’s not the case with art. Nearly all of the value is invisible, because the value is simply what other people are willing to pay.
Now, here’s the question: would you genuinely believe that if you had bought that dilapidated portrait of Jesus at the estate auction in New Orleans, you could have successfully convinced the National Gallery in London that it was a true Da Vinci? Do you believe that if, back in 1960, Roy Lichtenstein had met you, instead of Castelli, you could have successfully convinced enough people of the artist’s future prospects to sell out his first show prior to opening? Any answer but no is arrogant.
Value in the art world is defined by an incredibly small number of gatekeepers—the curators, gallery owners, and auctioneers. So, to summarize, the art world is an incredibly small, incredibly consolidated market where prices are almost entirely subjective. These three factors combined mean that, properly executed, sellers can decide what prices are.
Between 2005 and 2013, one fourth of all Andy Warhol works put up up for auction were bought by a single man: Jose Mugrabi. Now, Mugrabi owns over 800 Warhol artworks in total, representing close to a billion dollars in value, at least on paper. Therefore, Mugrabi is highly, highly invested in making sure that the Warhol market stays hot.
Now, there is, of course, a reason why in more traditional markets, monopolies and oligopolies are disallowed: when power is too concentrated, a single player can influence the entire market to their own benefit. That’s exactly what Mugrabi does: whenever a Warhol is up for sale at auction, he’ll be there. Often, Mugrabi will be one of the first to bid, and will work to push up prices with his early offers.
Mugrabi is more than willing to strategically overpay for a Warhol work, because he knows that it’ll be worth it. That’s because auctions act as the only publicly-available index of art prices. When one private individual sells artwork to another private individual, the price is not public-knowledge.
When one private individual sells artwork at auction, the price is public-knowledge. So, that means that Mugrabi is willing to go to an auction and bid copiously, regardless of actual market value. Either he’ll have pushed up the price for another bidder, which is good for him, or he’ll have overpaid for the art, which is still good for him.
That’s because either way, the fact that a Warhol work sold for a good price and the world knows it pushes up the hypothetical value of the rest of his Warhol pieces, which he can then sell for more in private. What’s more, this manner of market manipulation is entirely legal. Collectors will chose a niche, and then dominate it.
Plus, given the small size of the high-end art market, Mugrabi almost certainly knows all the other top Warhol collectors, and collectively, they realize that if one of them sells a piece publicly for a bad price, it’ll hurt all of their portfolio values, so an informal social cabal arises that further influences the market and artificially inflates values. However, this is only the tip of the iceberg. The same market conditions that enable Mugrabi’s influence mean that collusion and corruption are confoundingly easy.
There isn't one, blockbuster scam at the center of the art market. Rather, it’s a market composed of scams. For example, counterintuitively, wealthy individuals can turn a profit by donating art.
It’s rather simple: in the US, when one donates artwork to a non-profit museum, they get a tax-write off. That’s to say, if someone donates a painting worth $10 million, they don’t have to pay taxes on $10 million of income which, in theory, would save them about $4 million. Of course, given the difficulties in determining art’s worth, the IRS requires expensive artwork to be professionally appraised prior to a write-off.
Considering all the aforementioned market conditions, though, it’s not tough to manipulate an appraisal to go one’s way. Of the hundreds of thousands of artworks donated each year, the IRS audits only a couple hundred, but even those few paint a stark picture. In 2018 and 2019, about a third of audited artwork was found to be over valued in its appraisal by an average of 38%.
In fact, overall, only 42% of artwork was found to have been appraised correctly, in part thanks to the competing pressure for some to undervalue their work when its received through inheritance, in order to reduce the estate taxes paid upon transfer of ownership. So, a rich person could buy a piece of art for $4 million, let it appreciate over a few years, shop around for a favorable appraisal, overstate its value, rely on the fact that the IRS only audits a tiny percentage of pieces, donate the art $10 million, and they’ll have already broken even. It doesn’t take much for the percentage a wealthy person will save in taxes to eclipse their original purchase price.
As a cherry on top, of course, the presence of an artist’s work in a museum is known to inflate the value of their other art, so if a wealthy person owns a collection of a given artist’s work, as is common, donations earn them further money through the effect it has on the rest of their collection. In aggregate, the situation is this: art is a highly exploitable market. It was created by rich people, for rich people, so it suits their needs.
Whether its tax avoidance, money laundering, or simple price-fixing, the art market enables all. Despite this, it’s almost entirely unregulated. There are no official records of who owns what or how much they paid, so it’s nearly impossible to prove any malpractice in the market.
It’s a largely lawless market, except for the simple, practical rule that you must be able to spend millions to enter it. So, who loses out? Well, for one, artists.
Rich people use artwork like trading cards—coveting a select few for arbitrary reasons—which excludes those who are unable to persuade the gatekeepers of their value—those who don’t fit the galleries’ vision of a marketable artist. Art is no longer an exercise of skill, it’s one of branding. Warhol’s are like Supreme, but for the wealthiest percent of a percent.
Who also loses out is us: everyone who is unable to access this exclusive market by sinking millions of dollars into a single, volatile investment. We lose out because we can’t conduct the same financial wizardry as those who walk through Sotheby’s doors. We can access the stock market, where tax avoidance, money laundering, and price-fixing are heavily regulated and monitored, but not this market, where these ruses go largely unnoticed.
The reality is that any market can be exploited, which is why markets are regulated. The difference here is that art is a unique market where individual players have both the influence to manipulate the market, and the influence to keep the market manipulatable. Everything you’ve heard so far is about the largely legal malpractice the art market enables, but it also makes illegal actions like money laundering and forgery strikingly easy.
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