Tuesday, January 12, 2016

The bonds that fell to earth. Bowie's part in the financial crisis

Did David Bowie spark the global financial crisis?

It was a question seriously asked after Lehman Brothers collapsed in 2008.

A decade earlier in 1997 he pioneered what came to be called Bowie Bonds. The first was essentially a long-term loan to him in return for the future revenue from the 287 tracks he released before 1990.

He and his financial engineer collected $55 million. The bond holders collected the rights to the income from singles such as Space Oddity, Heroes, Changes and Ashes to Ashes. After 10 years Bowie had to return the $55 million (plus interest) and the bond holders had to return to rights to income from his tracks.

Securitisation, as it was called, had been around for a while, but Bowie showed it could be used for almost anything. By the late 2000s it was being used on an industrial scale to bundle the future income from bad US home loans with the future income from good ones and offload it to unsuspecting investors.

In the new movie The Big Short opening in Australia on Thursday Brad Pitt and Ryan Gosling outline what happened.

Bowie got the better end of his deal.

His bonds were given a AAA credit rating. Prudential Insurance bought the lot. Yet by 2004 they were downgraded to just above junk status. The growth of the internet and body blows to the traditional method of distribution meant his catalogue performed far worse than thought.

He knew it was going to happen.

An early internet service provider (he set up BowieNet at about the time Malcolm Turnbull helped set up Ozemail) he foresaw the arrival of digital downloads and streaming services years before they took off...

Here he is talking to the New York Times in 2002:

"I don't even know why I would want to be on a label in a few years, because I don't think it's going to work by labels and by distribution systems in the same way. 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."

"Music itself is going to become like running water or electricity," he said. "You'd better be prepared for doing a lot of touring because that's really the only unique situation that's going to be left. It's terribly exciting. But on the other hand it doesn't matter if you think it's exciting or not; it's what's going to happen."

Bowie didn't spark the financial crisis. He was ahead of his time in applying to music the techniques that sparked the crisis.

As always, he spawned imitators. To this day a Los Angeles firm called Royalty Advance gives artists a quick cash advance on their royalties. But those artists are unlikely to ever do anything like as well out of securitising the future as Bowie.

A man of his time, and beyond his time, he was a one-off.

In The Age and Sydney Morning Herald