The Back Room: Silicon Valley Split
This week: the art-market lesson in Silicon Valley Bank’s demise, Canadian art crime runs rampant, big auction losses follow big auction publicity, and much more.
Every Friday, Artnet News Pro members get exclusive access to the Back Room, our lively recap funneling only the week’s must-know intel into a nimble read you’ll actually enjoy.
This week in the Back Room: the art-market lesson in Silicon Valley Bank’s demise, Canadian art crime runs rampant, big auction losses follow big auction publicity, and much more—all in a 7-minute read (2,074 words).
Top of the Market
Shielded From the Fallout
Tim here. The business story of this month has been the speedy collapse of Silicon Valley Bank (SVB) and its impact on the larger financial system. While the sturdy government response should forestall a 2008-style calamity, the greatest lesson for the art trade may be that the traditionalism and exclusivity of our market all but rules out the flash crashes that can now threaten modern banks.
This week’s Gray Market goes long on why and how, but here’s an executive summary for your Friday commute…
What Was SVB, Anyway?
Silicon Valley Bank was, as the name suggests, a popular regional bank based in the San Francisco Bay Area. Founded in 1983, SVB carved out a niche for itself by doing business with early-stage tech startups that larger, older banks often considered too risky to take on as clients.
As some of these startups became unprecedented successes, the bank enjoyed outsized growth in its financial returns and customer base. The Valley’s rampant follow-the-leader mentality helped. Want to be the next unicorn startup or V.C. hero? Then entrust your money to SVB, just like your role models have.
The business plan worked spectacularly during the pandemic. SVB’s deposits soared from $60 billion in 2019 to around $198 billion in Q1 of 2022, according to the Net Interest Substack, as the bank’s tech-centric clients rang up stunning amounts of money. Those gains made SVB the 16th-largest bank in the U.S. at the time of its collapse.
What Went Wrong?
The full story is more nuanced, but here are the broad strokes…
Runaway inflation triggered historically aggressive interest rate hikes. The U.S. Federal Reserve ratcheted up its policy rate from near zero in early 2022 to between 4.5 percent and 4.75 percent in February 2023, the fastest escalation in four decades.
The higher rates squeezed banks system-wide. The core business of banking is “borrowing short to lend long,” a.k.a. borrowing customers’ deposits on a short-term basis at a federally set interest rate, then investing them on a long-term basis in loans and bonds that return a higher interest rate. The Fed’s gonzo rate hikes ballooned all U.S. banks’ costs of borrowing—sometimes pushing those costs past the returns of banks’ previously booked loans.
SVB’s risk managers failed to anticipate or adapt to the new conditions. Every bank’s assets are split between cash (which it keeps on hand for customer withdrawals) and its lending portfolio, which is subdivided between assets it must “hold to maturity” and assets “available for sale.” The sellable assets provide short-term flexibility if more cash is needed, but SVB’s assets were unusually overweighted toward held-to-maturity assets when the Fed began hiking interest rates.
A bad fundraising environment forced startups to burn tons of existing cash. Among them were dozens and dozens of tech companies banked with SVB. Deposits there fell by $33 billion (about 17 percent) between the end of March 2022 and the end of February 2023, per Net Interest, as startups found few opportunities to IPO and few venture capitalists willing to invest privately.
Investors and depositors found out how poorly positioned SVB was and abandoned ship. As more and more SVB customers drew down their deposits for survival, the bank’s cash reserves got dangerously low. This compelled SVB to sell some of its available lending assets at a loss to add cash.
Disclosing this activity led SVB’s investors to take a closer look at its balance sheet. Horror ensued. SVB stock plummeted 60 percent in just one week in March. Then SVB customers began frantically withdrawing funds. The frenzy peaked on March 9, when account holders pulled out $42 billion worth of deposits—the single largest bank run in history.
This dual disaster hit SVB before its leaders could try to raise money from institutional investors to offset the losses. On March 10, SVB was insolvent, and the government swept in to take control of its assets and try to prevent the damage from radiating outward. (Two other regional banks, Signature and Silvergate, collapsed in the days surrounding SVB’s seizure.)
How Does SVB’s Demise Relate to the Art Market?
By Monday, one point of consensus in the financial media was that SVB’s death blow qualified as the first social-media bank run. Although Twitter and other platforms were around in 2008, their user bases have expanded by orders of magnitude since then.
But scale is only part of the story, as Bloomberg’s Matt Levine noted on Monday:
SVB’s depositors, who again are largely tech firms and venture capitalists, are all on Twitter a lot and move in herds; when they noticed that SVB was insolvent-ish they all pulled their money out at once. (“It turned out that one of the biggest risks to our business model was catering to a very tightly knit group of investors who exhibit herd-like mentalities,” an SVB executive told the Financial Times.)
This herd-like behavior among a niche customer base mirrors the core dynamic underlying art-market speculation, too. “Collectors” of young or rediscovered artists’ work often turn into sellers as quickly as SVB’s extremely online investors and depositors turned into liquidators and deserters, especially once larger economic conditions worsen.
Yet one key difference is the efficiency with which these groups can act on their impulses. Modern bank runs can now unfold at hyperspeed thanks to apps that empower customers to move money unassisted, at a moment’s notice, from anywhere. But turning artwork into cash remains a slow, laborious dance that requires at least one willing counterparty.
Selling through a reputable auction house takes, at best, two to three months from initial inquiry to final payment (and usually closer to five or six). That’s assuming the piece sells at all, or the house even agrees to offer it. Consigning to a private dealer can be even slower and more unpredictable.
Advances in e-commerce make it simpler to consign or offer works elsewhere than in the past, but context matters tremendously to results; the easiest places to list an artwork online are, with rare exceptions, unlikely to attract high-quality buyers.
True, art finance and fractional-investment platforms make art more liquid than ever, but both options still demand lengthy due diligence, a middleman, and an end client. Even Masterworks’s secondary market for fractional shares only helps if buyers are ready to pay a user’s chosen resale price.
The two industries diverge when it comes to social media’s accelerating power, too. As Levine noted, Twitter is an always-buzzing hive of tech and venture capital chatter. The small share of the art industry on Twitter includes very few of the equivalent types of market-makers, agenda-setters, or policy-shapers—and no throngs of superfans eager to amplify their voices.
To me, it’s a natural outgrowth of art’s status as an exclusive, niche market, where moving broader public opinion tends to have almost no tangible benefit to the stakeholders doing the pushing. Instead, the art establishment concentrates almost exclusively on Instagram, which has shown much less ability to influence decision-making through viral posting.
The Bottom Line
Even if SVB customers and art pros acted identically on Twitter, the old-school infrastructure of art sales would still stop panic sales from reaching the warp speed of last week’s fatal bank run. That might sound like damning with faint praise. But for once, I genuinely think stasis is doing us more good than harm in the art market, and there’s little reason to expect that to change anytime soon.
Wet Paint is off this week, but here’s what else made a mark around the industry since last Friday morning…
- TEFAF Maastricht opened in its traditional March slot for the first time since its COVID-shortened 2020 edition, and U.S. museums were especially active early on. (Artnet News)
- Frieze New York (May 17–21) will bring together over 60 galleries from 27 countries at the Shed, with first-time participants including Arcadia Missa (London), Neue Alte Brücke (Frankfurt), and Silverlens (Manila and New York). (Press release)
- The fair formerly known as Fine Arts Paris & La Biennale has rebranded as FAB PARIS. The nascent event, which merged the standalone expos Fine Arts Paris and the Biennale des Antiquaires, will hold its second edition at the Grand Palais Ephémère November 21–26. (Press release)
- Sotheby’s Paris surrealism sale brought in an under-estimate $18 million, a 45 percent dip on the house’s analagous sale last year. (Artnet News)
- Caroline Baker Smith, a former executive in Christie’s trusts, estates, and appraisals division, was appointed senior director of trusts, estates, and private clients at Hindman’s growing office in New York. (Press release)
Artists and Galleries
- Kenny Schachter reported that Gagosian has poached Calvin Marcus from David Kordansky and Honor Titus from Timothy Taylor, and that a slew of art-market heavy hitters joined him at the debut of Beeple’s new HQ in Charleston, South Carolina. (Artnet News)
- Gladstone Gallery joined Thaddaeus Ropac and Luisa Strina in co-representing the estate of Robert Rauschenberg. Gladstone will open its first Rauschenberg solo show in New York in May. (Financial Times)
- Pace and Seoul’s PKM Gallery now jointly represent the estate of Yoo Youngkuk, whose pared-down and abstracted landscapes have rarely been shown outside of South Korea. Pace’s New York flagship will host a solo exhibition of the artist’s work this fall. (ARTnews)
- The Centre Pompidou officially inked a long-discussed (and recently leaked) deal to open a new contemporary art museum on Saudi Arabia’s AlUla cultural site in 2028 or 2029. Days later, insiders said that the Pompidou had “virtually already reached an agreement” to establish another museum branch in Seoul in the fall of 2025. (Press release, Korea JoongAng Daily)
- The Chinati Foundation, the Marfa, Texas-based museum founded by Donald Judd, tapped Caitlin Murray to be its next executive director. Murray was most recently the director of archives and programs at the technically-separate-but-
obviously-related Judd Foundation. (New York Times)
- LACMA has appointed new board members including Boojin Lee, a collector and former Samsung Group and Hotel Shilla executive; Jim Tananbaum, a collector and venture capitalist; and private equity executive Jeff Yabuki. (The Art Newspaper)
Tech and Legal News
- A U.S. district court judge dismissed a lawsuit brought by Libra Max, daughter of ailing Pop artist Peter Max, that sought to replace his court-appointed guardian on grounds of “inhumane and predatory” behavior. (ARTnews)
- Meta is “winding down” Instagram and Facebook’s use of NFTs in order to focus on “creators, peoples, and businesses,” per a statement. The company rolled out a feature to allow certain users to display NFTs on its platforms last May and later allowed certain creators in the U.S. to mint and sell them. (CoinDesk)
- The Denver Art Museum removed the name of deceased former trustee Emma C. Bunker from one of its galleries and returned donations worth $185,000 after determining that she had aided and abetted disgraced antiquities dealer Douglas Latchford. (ARTnews)
“Art fraud is big. It comes right after issues of the illicit drug trade and firearms.”
—Patricia Bovey, the first art historian elected to Canada’s Senate, contextualizing her sense of the enormous scale of criminality around Indigenous works of art in her home country. (CBC)
Work of the Week
Takashi Murakami’s The Castle of Tin Tin (1998)
Seller: Adam Lindemann
Estimate: $1.2 million to $2.5 million
Sold for: $1.6 million
Sold at: Christie’s New York
When veteran dealer and collector Adam Lindemann decided to part ways with roughly three dozen artworks in a dedicated Christie’s auction last week, he insisted he was focused on telling his own collecting story rather than, say, offloading works by artists whose markets were on the downswing.
After scanning the results, we can certainly bring you one collecting story. Lindemann acquired eight works that appeared on the block at public auction—establishing the grounds for us to assess his returns on investment. All we can say is “Ouch!” The biggest loser? Takashi Murakami’s 1998 diptych The Castle of Tin Tin, featuring some of the artist’s signature anime-style cartoons with popping eyes. Lindemann paid $4.3 million for the work when he snapped it up at Sotheby’s New York in November 2012. Last Friday at his Christie’s auction, it sold for a premium-inclusive $1.6 million, a painful 63 percent drop. The actual slope is even steeper when one factors in inflation over the 10-plus-year holding period.
Thanks for joining us in the Back Room. See you next Friday.
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