First his penthouse, now a $1bn loan against his art collection – is Steve Cohen strapped for cash?

Is our friend Steve “Stevie” Cohen struggling in the old readies department at the moment? He has had some heavy legal bills in recent months and of course a painful fine of hundreds of millions of dollars (without admitting any “wrongdoing” – work that one out!)

SAC Capital was recently renamed now Point 72 (a reference to their address) and was described by their “good friends” the Squid (aka Goldman’s stacks), as a “great counterpart. We had presumed they meant this in the provision of trading commissions that keeps the merry go round of back scratching and self-enrichment amongst a certain ethnic fraternity of the financial markets going! It seems however that Stevie is an even better counterpart, as we shall see…

The company, amazingly, paid approximately $1 billion in annual commissions and other fees to investment banks during the last few years. We would hazard a guess that that is the reason why The Squid is coming to SAC’s rescue in lending, as part of a consortium, a cool $1bn against Stevie’s personal art collection. Perhaps he’s strapped for ready cash as although on paper he is worth several billion, it does strike us as odd that he is also trying to offload his $100m+ NY penthouse too.

While the details on the amount of the loan are not known, what is known is that it is backed by Cohen’s fine art collection said to worth in excess of $1 billion and which includes Picasso’s “Le Reve” and a few Matisse’s bronze sculptures. These kind of loans that are backed by fine art are growing in popularity. While fine art may be an invaluable asset it is, however, also an illiquid one, deriving its value from varying perceptions over time and not from its potential to derive any income stream – a bit like gold and silver I guess!

Ever innovative though, investment bankers have found a new way of monetising fine art by packaging loans against the asset – a sort of reverse subprime loan. The benefit for the owners of the fine art is that they draw liquidity against it. For the investment bankers, they of course see an opportunity for fee generation as art has, historically, been uncorrelated with the broader stock market. Problem is that in the last 6 years, it has also grown dramatically in value as a consequence of Q.E. and now is fully correlated with the equity market.

It doesn’t take a genius to work out that if the LTV (loan to value) supplied to these billionaires is too high and the interest rate too low to compensate for the risk, that should the equity market turn tail and take the fine art market with it (signs last week are that this is already happening with a failed Sotheby’s art auction) then the one’s left holding the baby will be the bankers (unless they have taken additional stock collateral and that’s a whole new ball game!)

Scant details we have seen reveal that the loan rates offered are as low as 250 basis points (no risk, remember?). We’d like to be on the buying side of CDS’s that payout on a default, hey there’s an idea – well go to The Squid and sell the idea to them!

We guess that many of the credit lines that Cohen had open to him for years have just expired. Numerous of the banks no doubt were weighing the risks of dealing with a company which has had its reputation battered in recent years with insider dealing cases right left and centre. That doesn’t seem to be an issue for Goldman Sachs anyway…

We are now eagerly awaiting Point 72’s latest returns stats to see if they can continue to achieve the 30% returns of the past while the rest of the hedge fund spectrum en bloc continues to struggle to generate any alpha whatsoever. Only time will tell, but if they really were trading on privileged information, the prior 30% returns level will be like a mirage.

No doubt also that in a few years we will see these very same investment bankers selling fine-arts-backed securities to Wall Street investors, all with a AAA seal attributed by rating agencies in a desperate attempt to offload sour loans!