Blaming Bowie

David Bowie invented the first ever "Bowie Bond", a concept that was copied around the world. Could it be that the world's greatest rockstar sparked the global financial crisis?

As rock and roll goes, it wasn't quite what you'd expect. David Bowie, the master of reinvention who has dominated the music charts for five decades, was making a rare public appearance in April last year. With his son Duncan Jones and his model wife Iman by his side, the 63-year-old walked down the red carpet at the Tribeca Film Festival in New York. As he entered the Tribeca Performing Arts Centre, one "fan" began shouting uncontrollably. "Capitalist xxxx! Capitalist xxxx! Look what you've done? How do you feel now heh?"

Bowie is used to screaming fans, though usually in adulation. From the moment he first burst onto the music scene in April 1969 with the release of Space Oddity, right through the glam rock era of Ziggy Stardust, the Young Americans domination of the USA in the seventies, to his Let's Dance supremacy of dance music in the eighties, there simply is no one to compare to Bowie.

But in the past year Bowie is in danger of leaving behind another legacy - as the man who may have inadvertently sparked the global financial crisis. The theory may sound as fanciful as some of his stage characters but like much of his music, it keeps gaining momentum.

It's quite simple: in 1997, Bowie decided he wanted a huge lump of cash up front. Knowing that his back catalogue of music was guaranteed to generate millions of dollars of income over the next ten years, he issued the first ever "Bowie Bonds". Securitised by the New York investment bank the Pullman Group these bonds were then sold to investors. Effectively, Bowie had taken the royalties to his music in one go while investors would take the income from the bonds over a number of years. Bowie himself collected a cheque for $55m while the financial community looked on in amazement and admiration.

So much admiration in fact, that in addition to stars such as Dusty Springfield, Marvin Gaye and Ashford & Simpson all jumping on the bandwagon, major financial institutions also discovered its potential. Banks followed suit; selling on billions of dollars worth of mortgages to investors. But it wasn't until just over a decade later those banks realised they had gone too far. The mortgages they had sold on were worthless, they sparked the global credit crunch and the entire global financial crisis. Bowie's critics argue that it was the rock star who invented the idea of selling asset-backed securities, a concept that everyone now agrees nearly brought the world to its knees.

The BBC's former economics editor Evan Davies was the first to publicly argue that Bowie is to blame, putting his theories forward last year on the personal finance website thisismoney.co.uk .

So how exactly did it work (or not work)? The original Bowie Bonds were asset-backed securities based on the current and future earnings of 25 albums (287 songs) that Bowie had recorded before 1990. They were quickly snapped up by Prudential Insurance Company of America, who gave investors an interest rate of 7.9 percent.

At the time Moody's Investor Services gave its seal of approval with a triple A-rating while investors were assured that in the extreme case of default, the bondholder would own the masters. In other words, the principle and interest rate were backed by assets that continued to generate more income every year. Bowie for his efforts pocketed millions.

"He [Bowie] thought: ‘I have a lot of money coming in over the next ten years from my back catalogue but I'd rather have the cash now and not have to wait,'" explains Davies. "He produced some bits of paper - Bowie Bonds - and said: ‘Whoever buys these gets my royalties.' It meant he no longer had the money coming in but instead had a lot up front. His investors were guaranteed a decent income. It was a good deal all round."

So good that other artists soon wanted to join in the action. A year later, the Pullman Group launched a $30m bond for Motown songwriting trio Edward Holland, Brian Holland and Lamont Dozzier. Between them, they had written more than 70 Billboard hits including the classic Baby Love. The trend was growing: husband and wife Nicholas Ashford and Valerie Simpson, collected $25m for their back catalogue of 24 songs. Rod Stewart did a $15.4m bond deal with Nomura Capital while Dusty Springfield received $10m.

Even in death stars cashed in. In 2000, nearly a decade after his death, the estate of soul legend Marvin Gaye collected an undisclosed amount for his back catalogue. Two years later, the Pullman Group filed a patent for the idea, naming it the Pullman Bond. The same year creator David Pullman claimed to have created $1bn in transactions.

That though, was just the beginning as Davies explains: "Banks were catching on to the idea. They thought: ‘We have billions out there in mortgages which are going to pay us back very slowly. Why don't we sell those and get the money now?' So the banks started doing what Bowie had done - in a big way," he continues. "It was a complete rebuilding of what a bank does. Normally, a bank borrows from people like you and I, then lends it out.

"But now the bank was lending the money - and selling the loan on elsewhere. For example, a bank loans out £100,000 for a mortgage and does the same for 10,000 people. They've now lent £1bn and will be getting the cash back over the next 25 years. So the bank creates a piece of paper, a security, and says whoever owns it will have the income from the mortgages," he says.

"It then sells the security - effectively the bundle of mortgages - for £1bn to perhaps a pension fund which then has the mortgage income - and the bank has £1bn to lend out again. Everybody is happy: the banks are able to lend more and more as mortgages, and there's a conveyor belt where they lend a billion, receive a billion and sell the mortgages on."

But not everyone was happy for too long. British bank Northern Rock, along with several big US lenders, all fell into the same three traps that the Bowie Bonds had unwittingly created. Firstly, they saw any risk on loans they made as someone else's problem - in effect they handed out mortgages to absolutely anyone who applied.

"They also lent far too much, regularly approving mortgages worth 110 percent of the property valuation. And worst of all, so easy was it to process and profit, they bought back many of the same securities themselves.
"It all went pear-shaped for American securities because the banks had lent to people who couldn't repay them. No one wanted securities, their value plummeted and the banks, having bought so many, lost a lot themselves," explains Davies. "Securitisation was a kind of magic bullet for banks. It looked a fantastic way of making them more profitable with less risk. But they fired this magic bullet at themselves,".

By September 2008, average US house prices had declined by over 20 percent from their 2006 peak. By August 2008, 9.2 percent of all US mortgages outstanding were either delinquent or in foreclosure. By September 2009 this had risen to 14.4 percent.

"It was fashionable when David Bowie did it once. Ten years later it wasn't. Suddenly the banks didn't have any money coming in, so they couldn't lend any more - that's the credit crunch," says Davies.

So is it all Bowie's fault? Not surprisingly, his army of fans have been quick to rally to their hero's support. They argue that the issue is not the concept of securitising the debt but using this process to hide the true risks attached, and also to hide the real value of underlying assets: hardly Bowie's fault or problem. Even the authoritative Rolling Stone magazine weighed in, citing sources that can prove the US Department of Housing and Urban Development created the first ever mortgage-backed security in the early 1970s, meaning that Bowie didn't innovate, he simply copied.

What everyone does agree on is that Bowie's timing couldn't have been better. While at the time it was seen as a stroke of genius, just five years after the bonds were issued, investors were turning decidedly cold. The internet had sparked off music file sharing, resulting in a huge fall in record sales. Why pay for Bowie's album in the shop when you can download it free online? In March 2004, Moody's lowered its rating of the bonds from A3 to Baa3, just one notch above "junk" status.

The formalisation of online music, particularly with Apple's iTunes store, has meant that artists can again benefit financially from online sales, sparking a renewed interest in music bonds. Major record companies such as EMI, which owns more music catalogues than anyone else, went down the securitisation road in 2007 while other record labels are also considering doing the same.

Bowie will no doubt argue that when it comes to music bonds at least, he has been proved right. They are, thirteen years since he first launched them, again seen as valuable. Whether the banks will agree with him remains to be seen.