Yet one more reason why Art and the Financial Markets are
doomed 100% linked!!
Here's a story most art types probably didn't read from Lauren Schuker of The Wall Street Journal this weekend.
Yes.. the waves from this massive mortgage credit crunch.. are about to washout some people in the art world.
Look out below!!
given the events of the last few weeks, and the total lack of any real government assistance, as an insider on wall street, we at MAO can say..
it's a foregone conclusion that both the US real estate market and the Art market are in for some difficult times ahead.
(Painting by William Turner, Peace - Burial at Sea, 1842, Oil on canvas.. currently at the Tate)
Art Loans Get Hung Up
Credit Crunch Raises
Concern of Defaults
In a Lucrative Market
By LAUREN A.E. SCHUKER
September 1, 2007; Page B1
The credit crunch shaking up Wall Street is now hitting the big-money world of art-backed loans.
For years, art loans -- ones with a borrower's Raphael
or Rothko as collateral -- were the purview of large banks serving
wealthy clients. But as the art market boomed in recent years, other
firms have pushed into this lucrative business.
Today, hedge funds, auction houses and specialty
lenders all offer rival services. Often they cater to less wealthy
borrowers dabbling in the big leagues.
Some loans are like reverse mortgages, letting
borrowers receive monthly payments against the value of their art,
rather than selling it outright and taking a capital-gains tax hit.
Other lenders essentially act as high-end pawnbrokers,
taking possession of the artwork itself during the loan period -- a
practice that banks with more high-end clients sniff at. (They're
inclined to let you keep the art on your wall.)
As these newer kinds of loans proliferate, concerns
are rising in the art world that some borrowers could default or find
themselves in over their heads. Art is notoriously tough to value, so
if prices fall sharply, lenders could find that they're holding
collateral worth less than the loan it is backing.
That hasn't happened yet, but experts say there's a
precedent for worries like these. Hope Tate, a banker at Fine Art
Capital, a subsidiary of Emigrant Savings Bank, points out that there
was a spate of defaults on art-backed loans in the early 1990s
triggered by "a very serious correction in both the real-estate and art
Back then, "the people who defaulted on their art
loans for the most part had real estate as their primary business,"
says Ms. Tate, who worked on a handful of defaults like these at
Citibank at the time.
"When people have calls on other loans, such as
real-estate loans, it increases the risk that they will default on
their art loans," she says.
Already, the market volatility of the past few months
is changing the art-lending landscape as traditional lenders scale back
on noncore activities like art lending. A spokesman for First Republic Bank,
one of the major players in the niche business, says that while art
lending is a very small part of its portfolio, "we have recently
tightened somewhat in this area of our business."
Rivals like Fine Art Capital, based in New York, say
they have seen a burst in loan applications as a result of the pullback
among bigger banks. "The subprime market is triggering a general
tightening," says Andy Augenblick, the firm's president. "We have been
a beneficiary of this market disruption."
A "significant percentage" of the inquiries that have
come his way during the past couple of months have come in the form of
referrals from other financial institutions, he says.
Meanwhile, Art Capital Group says it has seen referrals of loans that institutions like Lehman Brothers Holdings, UBS, HSBC Holdings, Merrill Lynch and Bank of America declined to do.
Karl Schweizer, head of art banking at UBS, says the
bank doesn't lend against art but is studying its policies. Bank of
America said it hasn't made changes to its credit policies regarding
art loans. Other institutions didn't return phone calls seeking comment.
Even collectors aiming to borrow against their art are
taking additional measures to obtain a loan. Asher Edelman, a collector
and businessman, says he recently advised a friend taking out a loan
against his art to put up three times the loan value, rather than the
usual double, because he will get a better interest rate.
Terms on these loans vary widely, based on the quality
of the art, the lender's policies and the borrower's financial
condition. Generally, interest rates range from 8% to as high as 18% --
making it a lucrative, if risky, game for lenders.
The potential for outsize returns like that is one reason hedge funds have pushed into the business in recent years.
To protect themselves, some lenders require what are
essentially margin-call provisions: The lender reserves the right to
reappraise the collateral, and if there's a drop in value, to ask for
more collateral or partial payback of the loan.
For instance, "if there were a significant drop in the
Warhol market, and you had a loan out on a series of Warhols, we could
use this mark-to-market provision," says Ian Peck, president of Art
Capital Group, an independent art lender in New York with provisions
While that can protect the lender, it carries obvious
risks for borrowers. "Would you buy a house with a one-year mortgage
that had a margin call, so you were forced to sell your home when the
market was depressed?" says Mr. Augenblick of Fine Art Capital, which
doesn't require margin calls. "I don't think so."
The perils to lenders of art-backed loans are many.
For one thing, by the time a lender forecloses on such a loan, the
borrower has usually tried aggressively to sell the art. "So by the
time the lender gets it, the art is already stale in the market," says
In the notoriously murky art market, the prospect of
defaults is particularly unnerving. Fears were renewed in 2003 with an
incident involving SageCrest, a hedge fund that loaned $37 million to
Art Capital Group, which in turn lent $20 million to Berry-Hill
Galleries, a New York art gallery.
Berry-Hill filed for Chapter 11 bankruptcy protection
in 2005, triggering a wave of alleged loan defaults, followed by
several suits and countersuits in New York State Supreme Court.
SageCrest's attorney, Robert Friedman, says the hedge
fund sued Art Capital Group after it failed to meet its obligations
under the loan, including payments due late last year.
Mr. Peck, Art Capital Group's president, says
SageCrest's claim is "total nonsense." Berry-Hill didn't returns calls
It's particularly tough to get loans backed by
contemporary art, one of the hottest parts of the art market now. Art
advisers say banks have become more skittish about betting on a segment
of the market that doesn't have a long track record.
Joel Beck, who runs Roebling Hall, a gallery
specializing in contemporary art in New York's booming Chelsea arts
district, says banks and loan firms "just don't know what to make of
Mr. Beck, who sells work by Ivan Navárro -- such as a
chair made out of light bulbs -- says that when he attempted to get an
art-backed loan years ago, the bank asked him instead to put up his
house as collateral, something he didn't want to do.
"They might believe the work is worth a lot, but they have no idea how to value it," he says.
Write to Lauren A.E. Schuker at firstname.lastname@example.org