High art subprime: borrowing on private art collections surges into billions

The international art market is a looter's go-to gambit for grifting their money out of their national borders and getting it into a no-man's land out of reach of every tax authority in the world, but it is also stubbornly illiquid, because selling your Picasso takes a ridiculously long time.

That's why private banks — the kinds that offer discreet, no-questions-asked service to super-wealthy individuals whose money comes from undisclosed sources — have built up a giant debt-bubble backed by art.

In 2017, Deloitte put the US art-backed debt issuance total at $17-20b, up 13% from 2016, and estimates are that the sector has enjoyed year-on-year double-digit growth, with Bank of America Private Bank leading the industry in this fine art financialization.

The US leads the sector, but the EU is catching up, thanks to banks in the UK and Germany.

Athena, America's largest boutique lender, requires art worth about $2m to secure its minimum loan of $1m. At Bank of America and other private banks, the minimum loan is closer to $5m. Both accept only works by well-known artists as collateral, since they are the only ones with reliable longevity. Thus art-secured loans are less risky than many believe, says Arturo Cifuentes of Columbia Business School.

"We can lend millions of dollars in three or four weeks," says Cynthia Sachs, chief investment officer at Athena. But boutiques' greater speed and flexibility come at a price: interest rates that outstrip those at private banks by several percentage points. That may hobble their growth. Rachel Pownall, a professor of art finance at Maastricht University, thinks the market for specialist lenders may be limited, since most art by famous names belongs to super-rich clients of private banks. Among dealers and gallerists, only the smaller ones have to turn to boutique lenders.

Borrowing against art is growing at a stunning rate [The Economist]