Credit risk be damned, art-backed lending is booming.

Record-thumping sales in the contemporary art market have been creating new pools of art-backed loans at a rate of 20% per year, over the last six years, according to Suzanne Gyorgy, head of the art advisory at Citi Private Bank.

"It's like a glorified home equity loan," she said. "There is so much money and so many people involved that there's become a financialization of the art market."

According to data provider ArtPrice, public sales of contemporary works increased 1,078% over the last decade. The art market, as it would seem, is in a bubble that refuses to be burst, and titanic sales are facilitating even bigger loans, though no one is certain the art values backing them won't someday collapse. It could just as easily be said that bigger loans are facilitating bigger sales, said Gyorgy.

This kind of lending has potential to grow larger, and its borrowers may increasingly turn to it to capitalize their businesses and other investments. The problem is that nobody really knows how much bigger the market may grow, and potentially helpful data from art sales doesn't fully exist. Complicating the matter is the nature of contemporary art valuations, which are used to determine the size of the check. Art historians can't say whether now-record sales for works by living contemporary artists will hold lasting value over time, like their Grand Master or Impressionist predecessors.

Nothing encapsulates the market's transformation better than the story of a Wall Street commodities trader who three decades ago quit his job at Smith Barney to pursue sculpture-making. The artist cultivated his skills, gaining incremental fame along the way. In 2007 the artist saw one of his pieces sell for $23 million at auction. It was a new record. His work had appreciated $19 million in a year and everyone in the art world was amazed. The old cotton trader shattered another record in 2013: $58.4 million paid for a single piece of art. The artist's name is Jeff Koons.

He is now the most expensive living artist in the world, but he has company at the top, and there are plenty of other candidates vying to take his place. Bidders last week tore apart sales figures at Christie's post-war and contemporary art auction with a record $853 million sold last Wednesday, and at Sotheby's last Monday, a record $422 million for impressionist and modern works. Koons' "Balloon Monkey," which sold for $25.9 million, was among eleven works at Christie's to sell for over $20 million. Three sold for over $50 million.

The buyer base facilitating this rapidly growing capital deployment is expanding inside a mini shadow world. Some buyers are utilizing art-backed loans to unlock liquidity in their vast wealth portfolios. Big art collectors may see the benefits of financing new acquisitions with an art loan in order to avoid the painful 28% capital gains tax rate that they'd have to pay on a sale. This bubble claims to have immunity to global slowdowns, and returns are said to outperform the S&P 500, at least according to one barometer that supposedly tracks those gains, the Mei Moses Fine Art Index.

MARKET 'IMPOSSIBLE' TO GAUGE

Last year, public auctions raked in $66 billion. Private auctions are said to double to triple that figure, but then again, they may not.

There is a complete disregard, if not opposition, to centrally document private exchanges. Without that data, valuing new art and loans made on those works is very difficult, and it fuels the insiders' game that manifests itself in price speculation. Infiltrating the data guardians, coaxing them to share any numbers is difficult, and believing them is another challenge. Obscurity is the name of the game.

"It is simply an impossible thing to predict," Sotheby's CEO William Ruprecht told analysts on last Monday's third-quarter earnings call when asked about the flows of private sales. None of the financial analysts interviewed for this story doubted the statement. It is, indeed, probably, impossible to know, they said, using as many hedging words as a complex sentence spoken verbally would allow.

A $9.45 billion figure thrown together by British insurance broker Robertson Taylor W&P Longreach is sometimes cited in art reports to estimate the annual volume of art-backed loans made globally. A specialist lender called Artvest Partners estimated in 2012 the market to be near $7 billion. These estimates indicate the business is exceptionally niche relative to global credit.

But depending with whom one speaks, those volumes may be far too low. As the world's wealthiest grow richer, spend more, and the size of banks serving them continue to shrink, wealth managers are grasping for ways to make their services stand out and keep their clients in house.

Oxfam estimated in October the number of billionaires worldwide has doubled since the financial crisis, to 1,645. Asset diversification has moved in tandem. Barclays estimates art now comprises 9% of wealthy individuals' assets worldwide.

According to a recent Deloitte report, 36% of private banks surveyed offer art-secured loans today, up from 22% in 2011. Three-quarters of wealth managers, including family offices, would collateralize a painting.

THE LEND-SCAPE

Six banks were repeatedly mentioned during the reporting of this story as active art lenders.

They included Citigroup, Bank of America, Deutsche Bank, Goldman Sachs, JPMorgan Chase and HSBC. They are not viewed as equals, but none of them would detail their lending volumes. Others, such as the Swiss bank UBS AG, shuttered their art advisories after the crisis, but may still offer art credit through other channels.

Goldman Sachs in May filed loan documents to extend billionaire hedge fund manager Steven A. Cohen a check collateralized by his $1 billion-plus art collection. Most art loans top out around 50% of their collateral's value. For a point of comparison, a top-end jumbo home mortgage ranges between $417,000, a threshold defined by government mortgage programs, and at the high end of where most banks feel comfortable lending, somewhere around several million dollars. Goldman's European wealth managers are believed to be building a $5 billion portfolio of high-dollar consumer loans, the Financial Times reported in June. Their books will likely include art collateral, Deloitte consultants suggest.

Citi offers average art loansbetween $25 million and $30 million, and this spring it hired a sixth art adviser, a former Sotheby's expert, Edie Hu, to lead its expansion from Hong Kong.

Bank of America, according to John Arena, who oversees art credit for the bank's wealth management division from Florida, expanded its existing art loan portfolio 33% in first six months of 2014, and that's not even close to the 45% annual growth rate experienced in one of the years since the financial crisis. Arena declined to name the year or B of A's portfolio size today.

Chris Krecke, a partner at Art Finance Partners in New York, claims one bank executive at a recent meeting boasted an art-backed loan portfolio in excess of $5 billion, which if true, would suggest that the British insurance broker's estimate may be too low. He declined to name the bank. Everything is a secret.

"Clients don't want anyone to know they are borrowing against their art," he said. "They don't want to be perceived as being desperate."

RISE OF THE SHADOW MARKET

Krecke eyes the middle market as ripe for opportunity. He lends in the range of $2 million to $5 million, and his firm represents a new breed of specialty lenders to have emerged on the back of sky-high art sales.

Unlike the auction houses and the wealth managers, Art Finance Partners is exclusively a lending operation. It lends directly against the art, not the borrower, and it is backed by opportunity funds. There are a slew of firms in this middle market, fueling intense competition.

"A major bank turns someone away for $500,000. We can offer them $5 million in a matter of days," said Meghan Carleton, partner at the firm, while walking amid the Bunny Mellon collection at Sotheby's. One of her clients had an eye on a painting by Keith Haring. Graffiti-style. On vinyl tarp. Pre-sale estimate: $3 million to $5 million. "Too full," she said of the estimate, pointing to creases where the tarp was folded, instead of rolled. A few items didn't sell at Sotheby's that night. The Haring was one of them.

Krecke and Carleton's business of lending and advising has grown large enough that the firm is in talks with several banks to obtain a commercial bank line. Such access would cheapen the costs for clients, who on average pay 10%-12% interest for one-year loans of $2 million to $5 million, they said. Krecke claims he's in deep conversations with several regional banks looking for a yield play.

"These are slightly larger regional banks, not money centers," he said. "I don't want to name them. It could make my own costs go up. It is that competitive."

So many specialty lenders are now willing to collateralize the various mediumsthat advisor Todd Levin claims he can't even name a single one. Levin, director of Levin Art Group, says the advisory business came into force in the early 2000s, as more and more buyers found themselves swindled and cheated by those exploiting the market's lack of regulation.

"Everybody," he said, is offering art lending services these days. Even the Manhattan galleries, such as Larry Gagosian's, are known to extend a friend an advance with zero effective interest, according to Levin. Galleries have been in shadow lending for years, and their zero interest terms were a way of escaping what Levin described as an early attempt by former Gov. Eliot Spitzer to tax the industry.

'NO CONSTRAINTS'

On a grander scale, the city of Detroit was granted two weeks ago approval to move ahead with a municipal bankruptcy plan dubbed "The Grand Bargain," which ultimately may save the Detroit Institute of Arts from creditors' threats to liquidate its collections.

The debt-ridden city in August received a $4 billion art loan proposal from Art Capital Group, another New York art lender. One iteration of the proposal would have given the city $600 million secured by 30 paintings, including three Picassos, three Van Goghs and a Rembrandt. The proposal was received with controversy in Detroit, and the city has since agreed to a $275 million tax-paid loan from Barclays Capital to go along with $800 million it raised from benefactors, foundations and the state of Michigan.

Ultimately, these stories boil down to two simple questions: Is art really an asset class? And how much will investing replace collecting as a reason to buy art?

Deloitte's 2014 art and wealth management survey showed 76% of collectors are buying with investment in mind, rather than purely buying for passion, compared with 53% in 2012.

"Art is a pretty good asset class," declared Tracey Warson, head of Citi's Private Bank in North America, at a Halloween day lunch with reporters. "It's the last unregulated market."

"We have no balance sheet constraints lending against art," proclaimed John Arena at Bank of America. In the third quarter this year, Bank of America's global wealth management business reported total assets of $125 billion. Officials would not break out what percentage are art loans. What they were willing to say is that the art loans comprise a multibillion-dollar portfolio, and some individual ones swell into the hundreds of millions of dollars.

According to Arena, the bank's art loan business took on a whole new scale after 2008, when hedging instruments proved to be a major boon. "Liquidity was exiting the market in droves, and margin calls were putting entire firms out of business. To protect those positions, we took clients out of those contracts and moved them into art-backed contracts," he said.

This kind of product deployment is where the banks stand apart. Banks offer art loans as one smaller service in a bigger package of wealth management and financial instruments. That is their true business, and in many ways, they aren't competing at all against Christie's, Sotheby's or firms like Art Finance Partners. On the other hand, banks can't afford to cede any ground.

In February, Sotheby's opened a $449 million credit line with GE Capital. It was the first time the auction house opened a dedicated capital facility and the first time it sought external funding. Their bridge loans, which are primarily purposed to finance future acquisitions, have more than tripled over the last five years, according to its financial services head Jans Prasens. Twenty-five years ago, the business was significantly smaller and most of its customers were domiciled in North America, Britain and Switzerland, but then again, those were the old days.

"We have the strangest countries you could ever imagine today," Prasens said. Bidders at Monday evening's postwar and contemporary sale phoned in or registered bids from 40 different countries.

Through June, the new GE-backed credit facility had churned out a $611 million portfolio. Sotheby's doesn't really pay much attention to its borrowers' total credit profile. They internally value a piece or collection and simply offer a loan against that singular value. The auction houses approach the business with a different goal than a bank: banks lend to attract new clients and keep existing ones well-diversified. Sotheby's wants to keep buyers selling, and sellers buying.

"Their loan business is outstanding," said George Sutton, a stock analyst covering Sotheby's for Craig-Hallum Capital Group. "It is able to earn a handsome premium on its cost of funds."

Sutton argues the auction houses do compete against banks. In his opinion, their specialized knowledge, auctions and private distribution capability give them a competitive edge over traditional lenders.

SUSTAINABLE?

It's unclear how the differing underwriting guidelines may hold up in the long term. Nearly 15% of Sotheby's loan portfolio is considered past due, filings show. There are few other ways to measure the loan performance based on public data.

Private lenders have their own risk tolerance. Art Finance Partners has less than a 5% default rate on its books, Krecke said. "But to be blunt, I could call a lot more clients in default for technical reasons. If I governed our relationships by the letter of the loan docs, more of them would be out of compliance."

Creative insurance providers intend to mitigate some of the credit risks associated with collateralizing acrylic paint on tarp, and many of them don't even begin to address the issue of counterfeiting.

Insurance broker Robertson Taylor W&P Longreach claims its policies have the potential to triple the volume of art-banked loans. Lloyds Bank has partnered with the insurer, and through their assurances, may offer as much as $125 million for any one collateralized loan. Other insurers include Hiscox, which will cover lenders should a borrower flee with his or her art or move it into a legal jurisdiction outside their reach.

Arena claims these are novel policies, and they're not widely used.

"A house has a deed, a car has title. Art has none of that. It's hanging in someone's house, indicated by something as simple as a bill of sale. That is why we underwrite to a client's credit profile."

As collateral, art is answering all the same questions posed to any other credit product. More time may best determine whether the structural deficiencies in the art market make it suited for actual investing. There has also been little public discussion as to what impact art investing may have on new works' creation. The question may be inconsequential to those who see only money on the wall.

In the meantime, art sales and lending continue to roll along, with loans floating bigger sales, and sales ballooning bigger financing.

Better fundamental guarantees and protections, otherwise known as regulation, may be the single biggest impediment for the business to boom as an asset class, according to Deloitte. There is no other market for legal insider trading.

Fundamentally though, people like the art market being opaque.

"You have to be an insider," said Gyorgy. "And that is part of the game."

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