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September 01, 2007

Yet one more reason why Art and the Financial Markets are 100% linked!!

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
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 markets."

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 like these.

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 Ms. Tate.

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 seeking comment.

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 us."

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 [email protected]


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Does this mean I'll be able to afford art again soon?

Hmmm...bargains galore, I hope! Wish wish wish...


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But Steve, don't you, um, work for an auction house? I detect a conflict of interest. :-)

Very interesting article. Thanks for the nice read...

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