11 Multidisciplinary talent


What is the common point of connection between David Bowie, knives, and junk mortgages? It is their ability to innovate

Xavier Brun

According to the dictionary of the Spanish Royal Academy of Language, to innovate means to change or alter something, introducing novel aspects. This is a term fully applicable to David Bowie, who introduced an innovation even with his own name. Born with the name David Robert Jones but going beyond this with the stage name of David Bowie, he altered his own name by using one taken from the knives made by Jim Bowie, to produce his own new name as a result. This was because the name David Jones could have been confused with the singer from The Monkees.

But this innovation was not restricted to his stage name, since he even took a complex financial product, broke it down, altered it, and adapted it to his needs.

In 1997 Bowie wanted to buy back the rights to some of his early songs from his old agent. But to do this he needed 55 million dollars. Like any of us, his first thought was to go to his bank and request a loan, use that money to pay the agent, then pay back the loan to the bank in convenient installments. But Bowie went one step further, by taking the rights that he already owned to 25 albums he had written prior to 1990, putting them into a package, and then issuing 10-year bonds. Yes, just like the bonds issued by a sovereign nation, where we invest our money today and they give it back to us after 10 years, along with some annual interest payments. One might think, of course, that a sovereign nation is not the same as David Bowie, since a country can offer a guarantee much more solid than a singer can. Bowie knew this, so for the bonds he issued he stated that the payment guarantee would be the package of the 25 albums, and that the interest to be paid would be the authorship royalties he received from those records.

The artist ended up creating his so-called Bowie Bonds, which were none other than what the bankers call Asset Backed Securities, or ABS. Just to give an idea, the bonds were issued in 1997 with a yield of 7.9% (somewhat higher than the 6.5%  offered for a U.S. Treasury bond), and they were given an A rating from the rating agencies, which would be an excellent grade on a school exam. But as we have seen happen over the last two decades, vinyl records gave way to online music. As a result, the authorship rights for the 25 albums lost a considerable amount of value, and along with this the credit rating for the bonds dropped to BBB, now more like an grade of barely passing.

And what does this have to do with junk bonds? That’s simple: they are the same product. Just replace the Bowie Bond “backed by 25 albums” with “backed by 25 mortgages” and replace the interest rates “guaranteed by authorship rights” with “guaranteed by mortgage payments”, and you will have mortgage-backed securities, some of which ended up turning into junk mortgages.

Perhaps Bowie’s greatest innovation is therefore found not in the bonds themselves, but in changing the financing model for the world of music. Perhaps this could even be called the Bowie model, although only time will tell.

Xavier Brun

Xavier Brun

Director of the Master’s Course in Financial Markets, UPF Barcelona School of Management

Leave a Reply

Your email address will not be published. * Required fields

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

* Required fields