Who: George Wachter, Vice Chairman, Old Master Paintings, Sotheby's
Where: Caf? Boulud, 20 East 76th Street, New York, February 20, 2009
On the Menu: Fois gras, coq au vin, and the enduring value of Old Masters.
For about a year, many people have been warning that the current economic crisis could rival the Great Depression in terms of the devastation it will inflict on the economy. By some measures it already does. When I arrive for my lunch appointment at Caf? Boulud, an Upper East Side French restaurant favored by the art dealer community, the shares of General Motors trade at their lowest levels since 1938.
The old statement, "What's good for GM is good for the United States of America," keeps popping into my head. The reverse must also be true.
This is why I want to chat with George Wachter, vice chairman of the premier art and antiques auction house Sotheby's. In a previous issue of Research, "Food for Thought" explored gold as an alternative investment in an uncertain financial market environment. In fact, the day I meet Wachter the yellow metal trades above $1,000 per Troy ounce for the first time since last July. Now, I want to discuss another timeless asset, fine art and other collectibles.
Wachter points out that his specialty, Old Master paintings — works painted in Western Europe before around 1800 — are very much like gold because their appeal and their value have held up over centuries. Even better than gold, because there is plenty of gold around and more is being mined every day, whereas there will never be another Old Master painting.
"Companies go bankrupt all the time," says Wachter. "Even countries can go bankrupt. But Old Masters have endured."
However, Wachter starts our conversation by talking about a more transient financial asset — notably, the price of Sotheby's stock. Trading on NYSE under the clever symbol BID, the shares of Sotheby's Holdings, Inc., spiked above $60 in October 2007, but they have been literally decimated over the past year, falling below $7.
"It has been completely incomprehensible to me," says Wachter.
Admittedly, the company posted a worse-than-expected loss in the third quarter, and in October-November the slump in the market came very suddenly after so many good years. Nevertheless, Sotheby's is going to remain profitable, Wachter asserts, and has plenty of cash on hand. It is also responding to the new environment promptly, reducing staff and cutting costs. "I don't think anybody really understands what is going on in the market."
This is pretty alarming coming from someone who has been at Sotheby's since 1973, has been involved in the sale of such important collections as the New York Historical Society and the estate of Walter Chrysler and has seen a number of ups and downs in the art market.
Battered Art Prices
Actually, Sotheby's has been marked down for two reasons. One aspect of the company's business is to provide financing to clients with works of art as collateral. Anything having to do with credit has lately been a dirty word for investors. More to the point, the art market, along with commodities and real estate, has been one of those asset classes that got disproportionately inflated during the years of easy money.
However, the art market consists of several very different segments, Wachter explains, and each has its own dynamics. In recent years, prices have been particularly high in the contemporary art segment, which is also where most speculative interest has been concentrated. Investors have been drawn in by stories about a collector buying a secondary work by Andy Warhol, for example, and reselling it for 10 times the original price a few years later.
Speculative interest has now dried up and contemporary art prices have fallen sharply. This market segment has been closely correlated with the stock market. In some cases it has been hard to find buyers at any price.
