Pimp Your Finances

According to the UK publication Mirror, David Bowie is to blame for the credit crunch and global recession.  Yes, that David Bowie.

In the article, BBC Today host Evan Davis claims that Bowie gave banks a dangerous idea when he sold the rights to future royalties in 1997.  The move was the first of its kind for a musician, or any intellectual property holder for that matter.

Bowie had a large catalog of songs that were guaranteed to get airplay – and thus royalties – for the next few decades.  Instead of waiting for the money to trickle in, he wanted it up front.  To get it sooner, Bowie issued and sold $55 million worth of 10 year bonds that were backed by the royalty revenue of his first 25 albums.  The bonds offered a high yield of 7.9%, but not without risk.  They are currently only one level above junk status.

The act of packaging and selling future revenue is known as securitization.  According to Davis, Bowie pioneered it and his success inspired banks to do the same.  But instead of using songs to back their securities, they used mortgages.  They bundled them together and sold them to investors for an immediate return on the future mortgage payments.  This allowed banks give out more loans.

Space Oddity or economic assassin? You be the judge

As banks started selling mortgages instead of holding them, their lending standards lowered, and eventually borrowers started defaulting.  This sent the value of securities plummeting, leaving banks holding tons of bad mortgages.  The rest is history (or at least we wish it was…).

So is Bowie to blame?  The answer is a resounding no.  According to Wikipedia, it was actually the US Department of Housing and Urban Development that created securitization back in February, 1970.  And even if banks were inspired by Bowie’s success, it is not his fault that banks decided to sell packages of questionable loans, or that credit agencies blindly gave them the highest rating possible, or that investors and hedge funds blindly bought them.

While Davis was correct in his brief summary of the mortgage meltdown, he was completely off base in blaming Bowie.  But then again, this isn’t really surprising considering the source.  As I write this, some of the Mirror’s front page headlines are “Drunk woman rides 10 miles on mobility scooter” and “No more freak show shots of Verne Troy in costume”.