Debtors Can’t Be Hoarders

To some people, great art is more important than anything, including food and shelter.

For most of us, though, no matter how moving we find a piece of artwork, the choice between parting with it and meeting our basic needs would really be no choice at all.

The conflict between preserving culture and survival has recently played out on a national scale. Portugal, a country that remains desperately short of cash, partnered with Christie’s to prepare 85 pieces of art by Spanish surrealist Joan Miro for auction this month. However, in part due to the efforts of Portugal’s Socialist Party to challenge the sale, Christie’s withdrew the art just hours before the planned London auction. Even though the High Court in Lisbon dismissed the challenge, the auction house still cited concerns about legal complications that could affect future ownership rights.

The incident has been an embarrassment for Portugal and also leaves the government in a bind. Jorge Barreto Xavier, Portugal’s secretary of state for culture, said the government would have to consider next steps. “If we want to hold onto these works, we will have to find money for them somewhere,” he said, possibly in the form of additional cuts to the already slim budgets for education or health.

The Banco Portugues de Negocios, the bank that formerly owned the artwork, was nationalized in 2008. The bank purchased the Miro collection from a Japanese investor in 2006; the collection was never displayed in Portugal. Though The Wall Street Journal reported that it is not yet certain whether the works will be auctioned by Christie’s in May or if they are destined for another fate, Portuguese opponents of the sale have lauded Christie’s decision as a cultural triumph anyway.

Pedro Lapa, the art director of Lisbon’s Berardo Museum, said “The Portuguese people should have the right to keep and enjoy what is now theirs.”

His sentiment is understandable but deeply misguided. Portugal still relies on other members of the European Union, and other international sources, for support. But somehow it has become vital that this collection of artwork remain in the hands of the government, which never set out to acquire it in the first place.

If it is truly of great importance to the people of Portugal to retain this art, and if they would rather pay higher taxes, forego even more services or sell some other government property instead in order to keep it, that decision is their business. I don’t object. But it seems crazy to imagine that most of the people who have suffered through five years of crushing austerity will say their government’s top priority should be to collect artwork on their behalf.

The channel of art from private collection to collapsing bank to government to auction, in all its variations, is nothing new. The Bank of Ireland was among several Irish banks to sell their art collections during the height of that country’s recent austerity. Seized artwork from a collapsed South Korean bank went to auction in 2012. But the gap between critics’ reaction and financial reality is most closed mirrored by a situation here in the United States.

As part of its bankruptcy proceedings, Detroit hired Christie’s to appraise the value of the portion of the Detroit Institute of Arts’ collection owned by the city. The auction house valued the 1,741 works of art in question between $421.5 million and $805 million. Some of the city’s creditors claimed this was a low-ball estimate. Either way, it is dwarfed by Detroit’s $18 billion debt.

Detroit is literally broke, making its situation even more outrageous than that of Portugal. The city barely functions. A lot of people to whom Detroit owes money are not going to get paid in full, or anywhere close. It is the duty of the bankruptcy court to get creditors paid as much as reasonably possible while allowing the debtor to clear the slate and go on with life.

Art lovers who have visions of Detroit someday becoming a world-class city again are loath to part with the city’s collection. But when the streetlights don’t work, ambulances don’t come and pensioners don’t get paid, it is at best a case of grossly warped priorities to insist on holding the art.

If some wealthy philanthropist – or a group of them – wanted to buy the art at fair market value and arrange to lend it to the DIA indefinitely, or establish or endow an independent museum in Detroit to house the art, that would be a great answer. There would be nothing more to talk about.

For now, a group of private foundations has stepped forward to try to preserve the art. Instead of purchasing it from the city, however, the group would pledge its funds toward Detroit’s pension obligations directly in exchange for the city leaving the art alone. So far, the foundations have pledged $370 million – not enough to meet even low end of Christie’s estimate. Officials at the museum have pledged to raise an additional $100 million, and Gov. Rick Snyder has asked the state Legislature to provide $350 million to reduce possible pension cuts and, at the same time, leave the museum’s art collection whole.

Art is important, but it is hard to argue that it is more important than reducing Detroit’s 58-minute average 911 response time or meeting its pension obligations, believed to be underfunded by up to $3.5 billion. Any outcome that leaves Detroit’s artwork in the hands of a city that can’t afford to maintain it, much less do without its value, or that underpays the city for what the art is worth and thus underpays the city’s citizens and creditors, would be almost grotesquely unjust.

Being broke has consequences. One is that you have to liquidate some assets and carefully set your priorities. Debtors can’t afford to be hoarders.

About Larry M. Elkin 551 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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