Which Ghost Do Art Investors Believe in Most?
On Friday, Alexander Forbes of artnet posted a report titled 10 Things You Need to Know About Investing in Art. The list comprised his main takeaways from this past Wednesday's Artfi, the now three year-old Fine Art and Finance Conference. And while I could probably write about his comments for days (and may), for now I just wanted to take a few moments to address the point that leaped out of the screen at me on my first read like the vengeful ghost in The Ring.
To my sincere shock and surprise, the final item on Forbes’s roundup was, and I quote, “Greater transparency in the art world is going to benefit everyone.” I’ve made this argument at some length on this blog before, so it’s safe to that I agree with the concept. However, every indication I have is that it’s still regarded as something between radical and heretical among the power-brokers and decision-makers of the industry. That the idea appeared at Artfi at all, let alone in an aggressive enough form that it breached Forbes’s top ten list, bordered on the supernatural to me.
Initially, I thought there were only two explanations for why a pro-transparency faction materialized in those conference halls. One was that my thermal scanner for industry opinion had somehow short-circuited months ago, and the spirit of openness had been floating through the art world to a degree I hadn’t realized. This seemed about as likely to me as Obama getting through his next press conference without using the word “folks.”
The other explanation was that certain insiders had encountered signs–or at least felt fears–of some soon-to-be-externally-imposed regulatory change very recently, and that the rest of us just hadn’t found the telltale cold spot in the attic yet. Forbes’s comments suggest that, to the extent a transparency movement existed at Artfi, it was more a result of this motivation than any other, noting that “artnet’s own Cornell DeWitt quipped later in [one] panel, ‘It’s either us in the art media or it’s going to be the Feds.’”
In other words, at least some significant portion of transparency’s advocates at the conference backed the idea out of anxiety over some regulatory specter rather than a belief that openness is actually good business (AKA my continued position). And even if a misting of dread was in the air at Artfi, my impression is that it’s still not felt viscerally or widely enough to motivate real change to the status quo.
In fact, Forbes’s ninth point is more evidence that the market is likely to get more opaque before it gets clearer: “Art exchanges and derivatized art investment products are coming but remain a distant prospect."
My feelings on the flaws of treating art as an asset class, at least by traditional Wall Street standards, are well-documented by now, so I won’t exhume that corpse again. Still, I’m not the least bit surprised that the world’s financial innovators are actively hunting for ways to commoditize, securitize, and collateralize artworks at a level even beyond art indices, art finance, and art funds (which Forbes also addresses as a trend on his list).
The salient point isn’t about either my expectations or even the engineering of simple derivatives (like call options or futures contracts) on artwork. It’s about where the trend leads further down the hall.
To people who have been paying a gram of attention, it’s common knowledge that the financial crisis was largely a product of advanced derivatization of financial assets. The problem wasn’t futures or calls, though. It was the next level up: assets like CDOs (collateralized debt obligations), credit default swaps and the like.
As Michael Lewis shows in The Big Short (as do other authors who have written at length about the crash), these assets were intentionally designed to be so complex that practically none of the investors buying and selling them would ever bother to try to look at the components they were actually made up of. With the assistance of the ratings agencies, that strategy allowed the banks to pass off fecal-grade assets as triple-A opportunities with barely anyone on the receiving end sniffing the problem.
How opaque were these assets designed to be? In probably the most famous case in Lewis’s book, one of the only characters willing to plunge himself into the filth and parse the advanced derivatives to discover what they really were was Dr. Michael Burry, whose willingness to do so is later identified as a product of previously undiagnosed Asperger’s Syndrome.
So if we’re moving in the direction of art derivatives, however slowly, that strongly suggests the art market is wading deeper into the information murk, not retreating from it. And if the takeaway from Artfi was that the transparency movement’s most powerful ally is the Ghost of Regulations Future, then the industry’s increasingly more enthusiastic mimicry of the financial markets is even more reason to discount a coming era of open books and symmetrically informed markets.
There’s arguably no better example that the enforcers are perpetually a step behind their targets than Wall Street’s activity over the course of the past decade-plus. And considering how much crossover there is between the art world and the finance world today, I find it hard to believe that the players involved in either are going to base their plans for the coming years more on the bogeyman of unprecedented regulation than the historically proven profitability of derivatization and its kindred spirits in the netherworld of financial innovation.
Call me a cynic if you will. But to paraphrase a greater thinker, the problem with trying to abandon cynicism is that it makes you so much more likely to be wrong.