Warning: this is a long digression about, among other things, mortgage finance and royalties securitizations. If the post on Tibet was too much for you, perhaps give this one a miss. See you next week.
David Bowie released a new album and toured three continents in 1997, but this was of little interest to the press when compared to the state of his finances. In February of that year, news broke that Bowie was lending Wall Street his song catalog for $55 million.
At the time, I was working at 2 World Trade Center, writing for a financial industry newsletter. The Bowie story was a rare moment when the public took notice of our obscure world. I recall an editor standing at his cubicle, asking for headline ideas: “Glass-Steagall Spider?” “The Man Who Sold the Bonds?” It helped that the banker organizing the sale, David Pullman, would return a phone call seemingly a minute after it was placed, and was eminently quotable. He was a bull of self-promotion and got great press.
There have been a few misconceptions about the Bowie securitizations over the years. I’ll try to describe, in relatively plain English, what happened.
1) They weren’t “bonds”. While Pullman pushed for reporters to use his (trademarked) “Bowie Bond” name, the Bowie deal was, technically, a privately-placed securitization of music royalties future receivables. This isn’t the “bond” of vague public imagination: a piece of stock paper, issued by the electric company or Sears, that your grandmother kept in the family strongbox along with birth certificates, marriage licenses and Mercury dimes.
What Bowie did begins in home mortgages. Go back to 1969 and buy a house. You make a substantial down payment (20% or more) and get a 15-year or 30-year mortgage, at a fixed interest rate, from a bank. The bank keeps your mortgage on its books. You mail your payment to them each month. The bank sometimes will sell your mortgage, in a portfolio of similar mortgages, to another bank, but that’s often a headache involving reams of paperwork. Home finance is a quiet, modest and “illiquid” world.
In the early Seventies, banks began to pool their mortgages into a new type of security (called a “pass-through”). This made it easier to compile and sell mortgages to investors or other banks; as the name implied, banks just “passed through” mortgage payments to some new owner. A decade later, this concept had mushroomed, mutating into more complex securities, in great part due to a man named Lewis Ranieri, who worked at Salomon Brothers. Ranieri, who allegedly coined the word “securitization” to describe the process and who once boasted that “mortgages are math,” was the first banker to realize the implications of packaging hundreds and thousands of disparate mortgages, dicing them into sections and selling them to investors as high-rated securities. This wasn’t just home finance made easier; this was one of the biggest trading markets in the world. (The book to read is Michael Lewis’ Liar’s Poker.)
A bank could now funnel thousands of its mortgages into various mortgage-backed securities (MBS) and the likes of Salomon Brothers would arrange the MBS into “tranches” (ranks) of quality. The top tranche (rated AAA) would have the most protection if anything went to smash. The lowest tranche was, say, BBB-rated. If you bought that tranche, the issuer paid you a higher interest rate (“the coupon”) for the risk. [Edit: as a commenter on another site pointed out, I blundered earlier in describing the structure: the AAA/BBB etc rating structure was not tied to borrower quality—that is, any losses that the mortgage pools took would simply hit the lowest tranche (BBB) first, and then go up the ladder of tranches,etc.]
Everyone had a stake. Banks took mortgages off their books, reducing their risk, and got all of their money up-front. Bankers could charge higher fees to arrange, package and sell the MBS: Ranieri’s desk was an enormous profit generator for Salomon in the Eighties. Investors had a liquid (they could sell MBS easily, as there was a booming secondary trading market for them) and safe investment, implicitly guaranteed by the federal government (which had its fingers in most mortgages). And mortgage holders got easier credit terms, because banks wanted to make more and more mortgages to create more and more MBS.
So by 1997 mortgage finance had been nationalized (a mortgage made in Schenectady could be pooled in an MBS with a mortgage from Kankakee, with pieces of them owned by a pension fund based in Fresno and a hedge fund in Bermuda) and radicalized. A house was no longer a place in which you merely lived. It was an investment; it was your retirement package; it was an income generator. There were so many varieties of home debt now: no-money-down mortgages; adjustable-rate mortgages; “balloon” mortgages (pay little now, pay a hell of a lot later); “subprime” (i.e., you don’t need a job to buy a house) mortgages.
I wish all our clients were as innovative as David Bowie…David’s ability to embrace new ideas is a testament to his position as a living rock legend.
David Pullman, quoted by Bloomberg, 4 February 1997.
The brilliance of the securitization concept was that it could be applied to seemingly anything, not just mortgages. All you needed was an asset that generated a predictable return over a set period of time. There were a lot of these assets around by now. By the Nineties, Americans had become, quietly and with little fuss, a nation of exuberant debtors. With wages deteriorating or stagnating, for middle-class Americans to keep being middle-class, to put a kid through college or buy a car, meant acquiring more debt. This was now easy. My mother recalled how hard it was to get a Sears credit card in 1971; it was like applying for a passport that you might well be denied. Whereas in today’s mail, I’ve received three offers for no-approval-needed credit cards.
So today, any debt that you owe any institution is likely packaged somewhere in a securitization. Your student loans: securitized. Your credit-card debt: securitized. Your home-improvement loan: securitized. Your car lease: securitized. And so on. Writing about this was my job. On down weeks, we would speculate about which market sector would be next: Shipping returns? Drug patents? Highway project finance? Baseball park revenues? And, thanks to David Bowie, music royalties.
The “Bowie Bond” negotiations happened in late 1996. Pullman recalled to Bowie’s biographer Marc Spitz that it was a clandestine process, involving having to get everyone from [possibly? see comments] Bowie’s ex-wife Angela to his former manager Tony Defries to sign off on some aspect of the project. While Pullman says the idea was his, Paul Trynka’s bio speculates that Bowie’s new financial manager, William Zysblat, was also heavily involved in its creation. By January 1997, the deal was assembled and pre-sold.
Bowie was fairly unusual among rock stars in that he owned both his master recordings and most of his music copyrights. His current arrangements were expiring, and normally he would’ve just signed another distribution agreement with a label and/or a song publisher. Instead, Zysblat and Pullman determined that a securitization would give him far more money up-front.
So Bowie, with Pullman’s bank Fahnestock as his representative, packaged 287 of his copyrights and recordings, from “Space Oddity” and”Life on Mars? to “Ashes to Ashes” and “Sound and Vision,” into a security.* Every crumb of income that the songs generated—royalties from broadcast and performance, record sales, commercial use, licensing in films–would now go into a “special purpose vehicle” that would in turn give regular payments to whoever bought the bonds. To entice investors, the bonds paid a 7.9% rate of interest, which was higher than the 10-year Treasury note (6.37% at the time).
”This was a very good deal, offering a superior return compared to the risk,” said Rick Matthews, a spokesman for Prudential. ”And because it was the first, you’re going a higher rate than the next.”
“Bowie’s Latest Hit,” New York Times, 21 February 1997.
2) You could never have owned them. Once the news broke, some Bowie fans thought they could own a Bowie Bond: imagine, the next time you heard “Let’s Dance” on TV, you’d receive 1/2,344th of its royalties. They never had a chance. It’s not as though the Bowie Bonds were bid on by traders on the floor of the New York Stock Exchange or were available on E-Trade. The bonds “changed hands” once. The securitization was issued by Fahnestock’s computer and purchased, in its entirety, by the computer of the Prudential Insurance Co. of America. Prudential held onto the bonds for their whole lifetime.
3) They (probably) were a good investment. In 2004, the rating agency Moody’s Investors Service downgraded the Bowie bonds (to Baa1, a step above “junk” status). This was not due to anything Bowie had done but because by 2004 the music industry was up the creek, and any investment tied to music royalties looked like a bet gone badly wrong.
Yet this downgrade only would’ve been a problem had Prudential wanted to sell its bonds, as they were now considered to be of lesser credit quality. As far as we know, Prudential didn’t. Instead, the Bowie bonds sat in Prudential’s coffers, generating who knows how much in terms of royalty payments for a decade. It’s likely his royalties decreased in the early 2000s, but Bowie was never in any remote danger of losing his songs.
The absolute transformation of everything that we ever thought about music will take place within 10 years, and nothing is going to be able to stop it. I see absolutely no point in pretending that it’s not going to happen. I’m fully confident that copyright, for instance, will no longer exist in 10 years, and authorship and intellectual property is in for such a bashing…Music itself is going to become like running water or electricity. So it’s like, just take advantage of these last few years because none of this is ever going to happen again.
Bowie, interview by Jon Pareles, New York Times, 9 June 2002.
4) They may never happen again (probably). Bowie’s sense of timing was uncanny here: 1997 was the ideal moment to issue these securities. Wall Street and the music industry were fat and happy. The labels were making billions by selling $17 CDs via armies of Tower Records and Sam Goody’s. Every few years a catalog artist like Bowie reissued his old albums in boxed sets or in remastered special editions. It was a never-ending stream of revenue, and already the industry was imagining how to get people to buy their old records yet again: SACD? Blu-Ray? The next year, Shawn Fanning started Napster.
(This reminds me, indirectly, of a conference I attended around 2000. One discussion was about how, as the United States was quickly paying down its federal budget deficit, there could be no need for the government to issue new Treasury notes. This would be a problem, as other bonds were priced off Treasurys. What could replace them? The Chairman of the Federal Reserve, speaking via satellite, suggested one idea would be to use Ford and General Motors corporate debt as a pricing peg. Why not? What could be steadier than the American automakers?)
The Bowie securitizations did kick off a small wave of similar deals in the late Nineties: James Brown, Holland-Dozier-Holland, Ashford and Simpson. But the implosion of the music industry post-Napster, coupled with the lack of prospects for future top-name securitizations (the likes of the Beatles and the Stones couldn’t do it, as their catalogs were tied up with the likes of Michael Jackson and Allen Klein), meant that the deals dried up. And the worst excesses of securitization, of course, helped dynamite the global economy in 2008, from which it’s hardly recovered. The Bowie Bond was supposed to herald the future but it now seems like a relic from a shattered world (so, very Bowie).
It’s horrible, it’s gross, it’s obscene. It turns his music into a commodity. It’s like [Bowie] could be a water company or gas company.
Dustan Bruce (Chumbawumba), quoted in People, 20 July 1998.
The bourgeoisie cannot exist without constantly revolutionizing the instruments of production, and thereby the relations of production, and with them the whole relations of society…All fixed, fast-frozen relations, with their train of ancient and venerable prejudices and opinions, are swept away, all new-formed ones become antiquated before they can ossify. All that is solid melts into air…
Marx, Communist Manifesto.
There was much ado about Bowie’s financing at the time. Some wrote the deal up as another innovation by rock’s equivalent to Nicola Tesla; some even found tying Wall Street to rock and roll had sex appeal (see Linda Davies’ Something Wild, a 2001 novel in which the heroine investigates if the rock star securitizing his assets has a dark secret in his past). Others mocked Bowie for being a sell-out, a shill of the highest order: see the gruesome prose of Mark Steyn (“Once upon a time, rock stars weren’t rated by Moody’s. They were moody.”). The deal was yet another way the Baby Boom generation had failed, yet another sign of rock ‘n’ roll gone corporate. It was gross and tasteless. How much more money did Bowie need, anyway?
And yes, it crumbles the spirit to look back through the thick catalog of Bowie songs—their happy inspirations, their twists of composition; the tone of Mick Ronson’s guitar, the sonic density of Dennis Davis’ kick drum; all of the distractions and karaoke heroics and fantasies that this music has given to countless people—and to know that this messy human ambition was reduced to a tradeable commodity. That a computer at Prudential tracked and collated the royalties of “Changes” as it did a pool of credit-card obligations by American Express. A moment in someone’s life (a song that David Bowie wrote on a piano in Haddon Hall, one afternoon in 1971, and recorded on tape with two now-dead fellow musicians) had been abstracted, had been reduced to a piece of a piece of a synthetic compilation of debts.
There’s another take on the story. A young man in Britain is a talented songwriter but is unable to manage himself and remains oblivious to finance. He acquires a manager and signs a typically egregious rock ‘n’ roll contract, in which the manager has, outright, 50% ownership of the singer’s catalog for a decade, and will retain ownership of a smaller portion of that (on a sliding scale, reportedly) for decades thereafter.
The young man grew older. He became a parent. He had a costly split from his manager. He moved to Switzerland to reduce his taxes. He had a costly split from his wife. He married again, he would have another child. Now he was 50. How long could he keep at his racket? The papers had wanted him gone years before. So he and his financial adviser devised a scheme. He would give away the royalties to his songs for a decade in exchange for a considerable pile of money. As much as half of which, some $27 million, reportedly would buy out his old manager for once and for all. Then he (and his children) would finally and wholly own his songs.
Consider the course Bowie took in the years that he worked, indirectly, for Prudential. He performed his older songs more. He supervised new releases of his old CDs in 1999 and various 30th Anniversary reissues in the early 2000s. He recorded an album where he reworked his obscure Sixties compositions (though his label shot it down). He played 83 shows in 1997 and from 2002 to 2004, he toured almost ceaselessly, racking up over 150 dates, to the apparent detriment of his health.
And around 2006, the bonds matured and his songs returned to him, and now to him alone. By then he’d stopped recording and playing live. He had (temporarily) retired; you could say that he’d earned it.
Released February 1997.
* As it was a private deal and had no prospectus, it’s never been revealed which songs were in the package. I’m assuming that Bowie’s co-compositions, including “Fame,” “Breaking Glass,” much of the Berlin-era Eno-Bowie instrumentals, the Tin Machine stuff and the immortal “Too Dizzy,” were not part of the securitization, due to the complication of having to get a co-author’s approval, but who knows.
“Bowie Bonds” are trademarked by Pullman & Co.
James Damron and Joseph Labbadia, “Comments on Music Royalty Securitizations,” Duff & Phelps Special Report, September 1999.
Karen Richardson, “Bankers Hope for a Reprise of ‘Bowie Bonds’,” Wall Street Journal, 23 August 2005.
Jennifer Sylva, Comment, Bowie Bonds Sold for Far More Than a Song: The Securitization of Intellectual Property as a Super-Charged Vehicle for High Technology Financing, 15 Santa Clara Computer & High Tech. L.J. 195 (1999). (Sylva must have been a fan: one subhead is a play on “Sweet Thing/Candidate”)
Paul Trynka, Starman; Marc Spitz, Bowie.
Top to bottom: Starman gets star on Hollywood Blvd., February 1997; Pullman promo, 1999; chart of the beanstalk-like growth of the ABS market, 1990-2001 (Bond Market Association); Bowie bond schematics (via Dr. Martin Kretschmer’s 2001 paper here); Brixton’s 10-pound Bowie note; cover of Linda Davies’ Something Wild, 2001; Bowie and Goldie acquire working capital in Everybody Loves Sunshine (aka BUSTED), 1998.