Photo: Adam Bielawski. Source: Wikipedia
Among the many tributes to musician David Bowie last month after he died was a description of “Bowie Bonds.” These were asset-backed securities issued in 1997 that securitized royalty payments from 25 different albums. Bowie was concerned that the rise of digital music would impinge on music sales, so he “pre-collected” his royalties by using them to secure these bonds.
The bonds paid almost 8% interest—about 1 ½% more than Treasuries at the time. They were an early example of unconventional asset-backed bonds. After they were issued, other novel securities followed. Bonds were secured by all kinds of things: equipment receivables, loans to auto dealers, lottery winnings, even mortgages at 125% loan-to-value. These latest bonds were initially considered lower risk than conventional loans, because they were less likely to be paid off early. In the ‘90s, people were more worried about prepayment risk than credit risk.
By paving the way for eccentric financial instruments, Bowie may have unwittingly contributed to the financial crisis that came a decade or so later. For a long time, analysts were convinced that the security structure around asset-backed bonds was air tight—that it would be almost impossible for these bonds to suffer credit losses. So bankers got more imaginative, eventually issuing sub-prime mortgage loans, Collateralized Debt Obligations (CDOs) secured by the loans, and bonds secured by the CDO payments themselves (CDOs-squared). All this exotic finance ultimately made cut-rate mortgages more available and fueled the housing bubble. When that bubble burst, it brought these structures down with it. Many of these bizarre financial instruments were featured in “The Big Short,” the hit movie about the financial crisis.
Photo: Chelle. Source: Morguefile
David Bowie was an artistic visionary who pioneered electronic music and other genres who also worked as an actor and record producer. He was an active performer for over five decades. Given how prevalent securitization has become, it seems likely that if he hadn’t issued his “Bowie Bonds,” someone else would have pioneered the concept. Still, it’s interesting to consider that Ziggy Stardust might have helped crash the housing market.
Douglas R. Tengdin, CFA
Chief Investment Officer