Permanent and Infinite (The Risks the Auction Houses Take with Guarantees)


'Permanent and Infinite” is the first of a series of monthly and possibly bi-monthly articles I will publish on Artnet News and, subsequently, post on my blog The writings will focus on art, the economics of art, art markets, art fraud, art crime, amongst other related topics. As I have tried to do in the past, taking seemingly complex topics and reducing them to their parts, which I will try to accomplish again. I welcome interaction and, when possible, will be responsive.

 While we are frustrated by the lack of transparency and the implications for “level playing field” purchases in guaranteed sales, we neither focus on the extent of the problem nor the advantages to buyers.

How many guarantees for the Contemporary night sales?

Sotheby’s has guaranteed or arranged guarantees on 39 works of art out of a total of 81 pieces in the sale. The dollar amount of these guarantees we estimate to be in excess of $200,000,000. 

Christie’s has guaranteed or arranged guarantees for 39 works as well out of a total of 72 total works for sale. We believe Christie’s guarantees to exceed $250,000,000 in value.

The public in this auction, other than the guarantors will not be informed of the most recent provenance (sometimes even past provenance), the terms of the guarantees (profit shares, commission shares, financing fees etc.), the edge the guarantor has over other bidders should he buy the work and many other salient issues, even, at times, whether the work sold or not. Clearly, the guarantor is participating on better terms than any other bidder for the art work. One would think that this glitch in a “level playing field” would deter bidders from trying to purchase guaranteed lots. But, in fact, guaranteed lots offer a huge advantage to non-guarantor bidders. 

 Guarantees Become Securities

 As has always been evident in the last years, Guarantees are arranged through the auspices of the auction houses, often with the auction houses committing or financing the guarantee early on and then replacing or reselling the guarantee to an investor or collector. The auction houses act as underwriters of these transactions, often as principal before, during or after the sale is put together. Not all are passed on to third parties.

The auction house (underwriter) has mated an asset with a financial product (guarantee) and then offered that combination (by definition a security) to the public through the auction process. Presently, there has been little focus on the idea that the asset (a work of art) and the financial product (the guarantee) when lumped together constitute a security. If, indeed, these offerings are securities then there are disclosure rules which need to have been and need to be followed. You would not offer a preferred stock without telling the buyer the interest rate or the low allowable issue price. One would need to indicate who was selling, the company or shareholder, the distribution of funds and of commissions would have to be designated specifically etc etc etc. None of these rules have been followed in the case of offering guaranteed priced art. In fact even the actual sale prices are distorted by the nature of the guarantee.

 If the package (guarantee plus artwork) constitutes a security and the concomitant level of disclosure is not offered to the buyers it is possible that the underwriter (auction house) could be permanently liable for any losses incurred by buyers of guaranteed lots whether the house, itself, was the continuing guarantor or it had laid off the bet on a third party.

 Will this observation prompt additional disclosure in the auction process? Will it draw in buyers who will view it as a secondary guarantee against their future losses? Will the excessive speculative climate experienced in the evening sales subside? Will the regulators come knocking at the door? All is possible but the best result will be full disclosure and a return to a level playing field.

Asher Edelman

A Fighting Chance

Dear Friends,

There has been a long hiatus in my commentary. Some of you, even many of you, have asked why I stopped writing if I really believed my story – that the single largest giveaway ever of taxpayer’s money to any special interest group had taken place channeled by two administrations wishing to cater to and be included in the unintelligentsia golf-club-toting establishment.

Yes, for five years, I wrote about this phenomena and the harm it caused economically and socially. Then, I stopped. I stopped because the press, both news and editorial, picked up the ball and reached out with far more breadth and power than my writing in the wilderness. Yes, the information flowed, but never from the inside, the inside of government.

Now, finally, we get a good part of the whole scoop from the horse’s mouth: Elizabeth Warren’s new book, A Fighting Chance, to be released next week. By now, most everyone knows of the “great giveaway,” programs which stripped middle-class taxpayers for the ostensible purpose of saving the banks and turning the economy. Neither has been accomplished to date. We hope A Fighting Chance serves as an additional wake-up call to end the administration’s economic blundering.

For those of you who like or even dislike my epistles, I have taken up a new cause, one more fascinating than economic blundering. Coming Soon.

Thank you for your kind interest,

Asher Edelman


Is it a surprise that during the last five years Federal Reserve Bank actually has accounted for about 25% of the Federal Budget Deficit and a 5 trillion dollar increase in the US National Debt?

Yes, if we were to reverse the extraordinary five year asset purchase scheme of the Fed our debt would now stand at about 12 trillion dollars rather than at the 16.7 trillion dollar ceiling presently in question.

At the same time the US budget deficit projected to reach approximately 900 billion dollars for 2013 would be reduced by about $220 billion dollars if rational monetary policy were in place.

Rational Monetary Policy

We acknowledge the difficulty of reaching anything near “rational” while both the Fed and the Treasury leadership consist of bankers who are either preparing for their future banking careers or on a sabbatical from them. The banking lobby is one of the three most aggressive and free spending of industry lobbying groups while the President is proud to convene advisory conferences with the heads of the major banks in the country, many of whom are accused of criminal behavior. Reform is not generally the prime topic on the minds of these folks.

The Numbers

How simple and yet how obfuscated!

The deficit: During most of the last five years the Fed has supplied money to the large banks at a zero rate of interest. At the same time the Treasury and other government and quasi government borrowers have borrowed money at an average interest rate of about 2%. The outstanding amount of monies on loan to the banking community has been about two trillion dollars. The government machine (Fed Reserve) has added 40 billion dollars of annual expenditures via this policy.

Beginning in 2008 the Fed entered into a program of quantitative easing (the QE programs). Designed to keep down interest rates and reward the banks, the QE program will account for about twenty billion dollars of the US budget deficit this year. Essentially the QE program buys 85 billion dollars of government and quasi-government debt monthly from the banks at a premium we estimate to amount to about 20 billion dollars a year or an additional 20 billion this Fed activity has added to the annual deficit.

During the past five years the Fed (QE programs) has accumulated about four trillion dollars worth of government and quasi government debt in an effort to increase the large banks’ profits while depressing interest rates. The Treasury (it should be noted the Treasury is part of the same entity as the Fed – the US Government) is currently paying interest to the Federal Reserve Bank of about 80 billion a year. In addition, we estimate that other excesses in monetary policy account for an additional fifty to one hundred billion dollars in government expense per year. It is clear that the Federal Reserve policy costs to the nation are somewhere between two hundred and two hundred and twenty billion per year when combined with the asset accumulation of the QE scheme has increased the US debt level by no less than 5 trillion dollars.

Results of Monetary Policy

Though the handouts to the larger banks have exceeded a trillion dollars over the five years of the QE programs most, if not all, of these institutions remain underwater if their assets were to be marked to the market.

The QE programs have so increased the budget deficits and debt levels of our country as to exacerbate the political debates and to bring the United States of America a taste of the political Third World (right here). Total employment in the US has continued to drop. We are now at the lowest rate of total employment since 1978. The percentage of the population at or below the poverty level approaches that of the time of the Great Depression. Velocity of money (M2) is at its lowest ebb since the 1960s when the index was first calculated. “Real unemployment” is at its high point since 2008. Though the stock market is up and asset prices, out of the reach of the 90%, are still rising there has been no general economic benefit from the QE programs.


1) Cancel the debt between the Treasury and the Federal Reserve. They are, after all, part of the same company, the U.S. This will knock four trillion dollars off the debt level and about eigty billion of interest costs out of the budget.

2) Cancel QE programs. This will reduce the budget expense by about 20 billion per annum – the premium paid to purchase government and quasi government paper.

3) Discontinue 0% lending to the banks a difference of forty billion dollars to the budget.

4) The Fed is supposed to be the “lender or over of last resort.” As the lender or over of last resort it should charge, at least, interest rates equal to or greater than that of the collateral presented to secure these loans. We estimate fair interest charges to the borrowers would increase the income of the Federal Reserve Bank by eighty to one hundred and twenty billion dollars per annum.

Some or all of these savings could go towards more useful economic distribution, distribution that would kick start the velocity of money (M2) and get the economy moving towards a general growth scenario. It might even settle a few feuds in Congress (ha ha ha).

If you wonder what will happen to the banks, it is clear. The “investment” use of client and government money will have to come to an end. Speculation and investment banking are useful to the economy but must not be supported by either depositor or government funds. These functions of each and every bank must be spun out to investors willing to bear the risks and rewards of these non banking functions. Otherwise we are destined for another 2008.

Banking functions – the gathering and lending out of funds in a responsible manner should become the new banking norm. This role would be stimulative, increase the velocity of money and benefit the nation as a whole. The Fed should take an active role in being useful to these new “real banks.” Depositors and tax payers would no longer supply free money to the speculators.

We believe all of this is possible with far less friction between the right and left wings of the political spectrum, especially with transparency as to contributors to campaigns and new lobbying rules in place.

What’s Next?

Now that the House of Representatives and certain Republican-led states are presiding over the illnesses and deaths of the children of the disenfranchised, what is next?

Next on the Right Wing agenda is not a default. The full faith and credit of the United States of America’s debt and interest payments will be met with Republican cooperation - AND NOTHING MORE.

When a Democratically elected government does not act on behalf of its constituents, history tells us we risk social unrest and acts of violence.


Could it be that the House Republicans have been coached in a plan to close down as much of the US Government as possible for as long a period as possible?


Well, the Libertarian, now Tea Party, has ALWAYS rested on a platform of less government. We now have less government, far less government then in recent history. Are we to become acclimated to less government for as long as possible? When we get used to it will we agree to compromises now untenable to rational thinking people. An interesting strategy – perhaps too interesting to credit to Tea Party thinkers but???


800,000 federal employees don’t really need jobs or paychecks. Why would they? Their contracts have been abrogated – abrogated is the new commitment of the new politics.

National Parks – who ever needed or wanted parks, monuments, children’s playgrounds. Wasteful!

The Statue of Liberty – it’s broken anyway. Why visit it?

Intercollegiate sports competitions between Military Service academies? Who needs the ARMY/NAVY game? The poor chaps just bump their heads anyway.

National Zoos – the animals eat too much and children make too much noise.

Government websites? Full of misinformation anyway!

The IRS not functioning? A boon to the 1% at least.

Food and Drug Inspection. Who needs it? Designed to keep the drug companies profits down.
Why would a government interfere with profits by monitoring safety? Disease control. Infectious diseases are not government responsibility. People should fend off germs on their own.

Antitrust laws – Tea Party stand up and cheer – no one there to pursue anti-trust cases.

Federal Communication Commission – 2% of its employees should suffice.

400,000 Civilian Defense Department folks unnecessary. Think credibility. It’s only 72% of the civilian work force for the defense department not there.

At least the stock market is up. Will we get used to it all?

Crazy! Cuckoo! Strategic??

Asher Edelman

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Debt Ceiling: Foolishness in Action

The President, the Fed and the Treasury must not allow political strife to destroy the financial future of the nation and, perhaps, the world.

A Show Stopper

The Federal Reserve Bank as a result of the QE programs, has accumulated holdings of US debt in excess of three trillion dollars. This debt has been issued by the Treasury making the United States both the debtor and creditor. Generally accepted accounting rules, should the US be treated as a business entity, would net out this debt on the balance sheet.

In fact, the debt of the United States, under generally accepted accounting is three trillion plus dollars less than the accepted rhetoric.

What to Do

Surely the administration can engender some realistic accounting procedures which net the “intercompany” debt, the normal accepted accounting procedure or, should the political squealing reach too high an octave, encourage the Treasury and Fed to negotiate the cancelation of debt issued by the US and owned by the US.

Perhaps just the threat of this equitable solution will move the small thinking destructive clique, who would ransom the world economy to further political goals, to move on and deal with politics in a more reasoned manner. Should the threat not move these folks, the cancellation of the debt will suffice to keep our country solvent and out of the path of scorn and ridicule.

For the future and good of our world the cancelation of the QE programs and giveaways to the banks will be of help. As the giveaways have reached near one trillion dollars which now stand as debt we will be well served with a discontinuance of such economic folly.

A Basis for Agreement (Ending the Qs)

It has been eight months since I last set foot in the socio-economic world. So much of what we explored came to fruition the writing was becoming repetitive. Today there is much chatter about the role of the Fed, its Q program, and Fannie Mae and Freddie Mac, guarantees of mortgage paper; an opportunity for the Tea Party to meet and agree with the Liberal thinking folks; a topic on which both worlds can meet without collision. Why?

The Q program and government monetary policy generally has accomplished little more than the transfer of taxpayer money to the banks, create an extra $4 trillion of government and quasi-government debt, and distort the economic future of the United States. It has not had a material effect on a recovery of the economy. In the Q purchase program of government and quasi-government debt, the Fed, while maintaining unsustainably low interest rates, has transferred more than $75 billion from taxpayer coffers to banking interests. Zero interest lending to these same banking interests accounts for multiples of the $75 billion. The explicit and implicit guarantees of mortgage, student loan, and other debt account for multiples again of banking profits even larger than the combined Q program and 0% lending. The folly of misguided monetary policy designed to save our financial system has masked the reality that all of the large banks remain underwater, or close, if their assets were marked to market. Q and present monetary policy has done little more than increase outstanding government debt, mask the reality of the sickness of the banking system, and enable speculation at levels beyond those we experienced at the time of the great transgression of 2007-2008. No, this monetary folly has not solved the banking crisis.

It is accepted common knowledge that low interest rates and the Q program have stimulated, and are stimulating, the economy in general. However, that “accepted common knowledge” is misguided. The stock markets have certainly responded well, but whether up or down, stock markets have little to do with stimulating the overall economy. A small percentage of the population actually benefits from profits gained in the stock market because theses profits are not spent on goods and services and do not increase the velocity of money, or the continued circulation of money entering the economy which is actually spent on goods and services. From 2008 to 2013 the velocity of M2 money has declined by about 20% and rests on its low point.* At no time since 1959, the time at which velocity of M2 was first measured, has the index fallen as low as it is now, in 2013. Clearly the stock market gains fueled by monetary policy have not acted as a stimulant to economic growth. Simply put, the wealthier segment of our society does not spend its stock market profits.

It is accepted common knowledge that higher housing prices are good for the economy and that the low rates and various guarantees of mortgage debt aid the economy. Hogwash! Homeowners do not, and cannot, spend the increases in the value of their homes – read no increase in the velocity of money in the appreciation of residential real estate. The magic ascension of the prices of homes has enabled lenders to bail out of some, not much, of the residential real estate problem they confront. Of course, at the same time the still unregulated “too big to fail” banks have been given a license to speculate in mortgage and interest rate derivatives. The total derivatives portfolio held by banks is now at a level above that of the 2007 high. We are told that these are modest risk portfolios designed to hedge out risk not to speculate. Witness the London Whale. Though responsible lending on the part of the banks would increase the velocity of money, speculation in derivatives will not.

For all of these and many other reasons the right wing of the political spectrum should eschew this massive giveaway of taxpayer money with the accompanying bloated U.S. balance sheet forced upon us by Q and other policies.

What has the Q program and other monetary policy done for the middle, lower, and no income classes? If it hasn’t exacerbated the pain, it certainly hasn’t produced relief.

“Real” unemployment has remained at its highest level since the Depression with few inroads made on any front.

Average family income is at about the same level as in 1988. That would not seem spectacular except the “average” includes the enormous gains of income in the top ten percent of the population masking the significant losses to middle class families. In New York City alone more than 40% of the populace lives below the official poverty line. Similar figures pervade the landscape of the United States.

Our education system, raped by bureaucracy, Congress, and a majority of America’s state and city legislatures, was once among the best in the world.

Infrastructure, degraded throughout the country, is sinking us into third world status as to municipal and other services available to the population.
Children of the poor go malnourished and uneducated.

Homelessness is at its highest point since the Great Depression, with more than 50,000 people  homeless in New York City alone.

Is the collapse of the middle and lower classes attributable to a disinterest in working, a poor work ethic, or laziness? I don’t think so. Those who do remind me of the crazed junior senator from Wisconsin, Joseph McCarthy, who saw a communist behind every tree. Are the “entitlements” really “entitlements” or do they provide a necessary safety net which aids the whole of the population?

The Liberal Left should support a change in monetary policy because the enormous transfer of capital from government to the banks has lead the Right to believe the nation is going bankrupt and to shout at each and every expenditure other than the giveaways engendered by Q and other misguided monetary policy. Simply put, the Left should support the end of monetary folly to get some of these wasted funds to work in the economy in a way that will engender growth, income, velocity of money, legitimate lending, and fund programs which will recreate the great and giving society that once was America.

Four trillion of government debt created by, and now owned by the government. Close to a trillion of gifts to the banking system, all of which could have gone a long way towards engendering a growing economy. Let’s end the monetary folly and put this money to work productively, a no brainer basis for agreement.

Asher Edelman

* There are several components of the money supply,: M1, M2, and MZM (M3 is no longer tracked by the Federal Reserve); these components are arranged on a spectrum of narrowest to broadest. Consider M1, the narrowest component. M1 is the money supply of currency in circulation (notes and coins, traveler’s checks [non-bank issuers], demand deposits, and checkable deposits). The broader M2 component includes M1 in addition to saving deposits, certificates of deposit (less than $100,000), and money market deposits for individuals.

Money Laundering & Art: The Law Vs. the Perception of the Law

Today there appeared on the front page of the New York Times an article, “Valuable as Art, but Priceless as a Tool to Launder Money” (click to read). About a month ago we sent out a commentary, “The Raid: A Highly Regulated Art Market in Sight,” (click to read) with a N.Y. Times article attached, “Agents Descend on New York Gallery, Charging its Owner” (click to read).

Today’s article highlights an untenable shipment into the U.S. of a multi-million dollar Basquiat valued at $100 for import purposes. The article’s focus is that there are no safeguards on money laundering in the art market. However, the Times is mistaken. The art market and its participants are subject to the same money laundering, tax evasion, fraud, and other laws applying to transactions as any other business. That these laws are sometimes ignored, intentionally or inadvertently, by art dealers et al., who become enablers to illegal transactions is the issue.

It is true that a blatant criminal transaction was stopped in its tracks, but who were the counter-parties? Was the picture sold and paid for? Was it to be sold and paid for? Did the counter-party do its required due diligence?  If sold, was the payment to go to an unnamed account or a named bank account of the owner of the picture? What was the end buyer, if transacted, told of the provenance? The list goes on and doesn’t only apply to simple money laundering fraud. It applies to much more elaborate schemes which break multiple laws that are not exclusive to any asset class or industry, but are all encompassing.Though there is a highly regulated market in sight there will be many such law enforcement activities within the industry in advance and concurrently with the coming regulation.

The Raid: A Highly Regulated Art Market in Sight

Today’s raid by Federal agents on the Nahmad Gallery should be viewed as a small part of the puzzle leading to heavy regulatory controls on the entirety of the art industry.

Art and art-related transactions have remained relatively untouched by either Federal or local governments. The raid on Nahmad Gallery is the first significant step in what will evolve our industry into one regulated in a similar fashion to financial institutions. Nahmed is simply the first such action surely to be followed by many more.


Debt Ceiling

Happy New Year to all.

A lot of fanfare and hoopla about a non-existent debt ceiling has captured the imagination of the press, the Tea Party, and even the President. The United States of America is more than three trillion dollars from the so called “Debt Ceiling.”


A sidebar of the Fed’s massive giveaway of taxpayer money to the banks is that the Fed has purchased between three and four trillion dollars of US GOVERNMENT DEBT - that is to say, that the US Federal Reserve Bank has purchased debt issued by the US Treasury and and holds it with public reference to the size of the Fed’s “Balance Sheet.”

Designed as a support function to the banks (the transfer of taxpayer money to bank profits) this Federal Reserve policy may in fact serve the purposes of defusing the “Debt Ceiling.”


A smattering of accounting knowledge will yield a simple paradigm. When the same entity (in this case the United States of America) is a lender and a borrower to and from itself the balance sheet of that entity should be viewed in terms of its Net Debt. Net Debt is the amount of debt that entity has outstanding after the reduction of the inter-entity debt. In this case the Net Debt of the United States of America is between three and four trillion dollars less than the present “Debt Ceiling” approved by congress.

Now, we may or may not approve of the massive transfer of taxpayer funds to the banks by the Fed, but Mr. President, Mr. Bernanke, and Mr. Geither, move over. Declare the concept of Net Debt a very real one economically or even declare the cancellation of the inter-entity debt and leave ourselves lots of room to fund the United States of America. Maybe, at the same time, you will review the Fed’s bank giveaway program and encourage the growth of properly targeted fiscal spending and the curtailment of irresponsible monetary policy.

Please submit any questions or comments to by Monday morning. All will be answered in a follow up post, which will include the body of the questions or comments.