http://www.minyanville.com/articles/david-bowie-securitization-loan...


The financial crisis that began in August 2007 had relatively little to do with traditional bank lending…Its prime cause was the rise and fall of "securitized lending," which allowed banks to originate loans but then repackage and sell them out.
-- Niall Ferguson, The Ascent Of Money


The dust is still settling from the great market crash of 2008-09, and we still don’t know exactly who or what to blame. It might have been securitization, but it probably wasn’t David Bowie.

Securitization is the process of taking a group of assets and transforming them into a tradable security. By aggregating them into one large pool, investor risk is, in concept at least, distributed more evenly. Asset-backed securities resemble bonds in that they pay a fixed amount of interest over a specific time period.

These securities can be backed by mortgages, credit card debt, car loans, or anything else that will (theoretically) generate future cash flow.

Like song royalties, for instance.

In 1997, a fellow named David Pullman introduced the world to Bowie Bonds.

Bowie Bonds were securities backed by the future revenues from 25 David Bowie albums -- 287 songs in all -- that David Bowie recorded before 1990.

Pullman arranged to sell $55 million worth of 10-year bonds to Prudential, in what was the first high-profile case of securities backed by intellectual property.

What was in it for Bowie?

Oh, just $55 million upfront, as opposed to waiting for the gradual accumulation of his royalty income to reach that level -- plus, the rights reverted back to him after 10 years.

Prudential (PRU), which bought the entire issue, received the revenues generated by those 25 albums until the principal plus 8% interest was repaid. Pullman, of course, got his cut, as well -- about $6 million.

Some in the British press have accused Bowie Bonds of being the catalyst that brought the entire banking sector down.

Come again?

Yes, the London’s Daily Mirror claims the Thin White Duke (and David Pullman, by association) are responsible for the financial doldrums through which the world has been slogging for the past two years by creating the idea of securitization.

The Mirror makes the case that banks were rendered starry-eyed by this new technique and couldn’t jump on the bandwagon fast enough.

“Let’s make loans, but resell them and get all our money now! Then, we can make more loans with the money we just got back and repeat the whole process again and again until we’ve got more cash than any one person could ever possibly count! Plus, we’ll be laying the risk off to others, so we can’t possibly lose!”

Once in, the gettin’ was good -- banks even bought back some of their own asset-backed securities -- until the gettin’ got bad when the defaults began. That’s when the buyers disappeared and institutions wound up losing bundles on their bundled assets.

Suddenly banks like Citigroup (C), Deutsche Bank (DB), Wells Fargo (WFC), and Bank of America (BAC) didn’t have anything coming in, so they stopped lending. When the banks stopped lending, money got vacuumed out of the economy. With less money floating around, spending dropped, unemployment rose, causing people to spend even less, leading to even fewer dollars getting passed back and forth.

Rinse and repeat as many times as necessary to foment a full-blown recession.

So, is David Bowie actually to blame for the rise and fall of the global economy?

In a word, no. Securitization dates back to 1970, when the Government National Mortgage Association, or “Ginnie Mae,” permitted private financial institutions to bundle a group of GNMA-guaranteed mortgages and sell the bundles as securities.

Rolling Stone magazine quotes a source as saying, “There is no chance in hell that David Bowie inspired banks to package loans into securities, have rating agencies rate them AAA blindly, and sell them off to high-leverage hedge funds.”

In any case, while Pullman and his Bowie Bonds may not have inspired the asset-backed security craze, they did spawn a handful of imitators.

Royalty Advance Funding of Beverly Hills, California, (from their Web site: "There is no minimum or maximum amount that can be advanced. Any songwriter, publisher, composer, or producer is welcome to take advantage of our music royalty/residual advancement service. No questions asked.") announced an arrangement with Lloyd Price Music.

Price, who wrote "Lawdy Miss Clawdy," still collects royalties on the 1952 hit.

Will some of Ziggy’s stardust rub off on Mr. Price?

The state of the music business today doesn’t bode well for his chances.

"Pirates will always find new ways of challenging copyright lawyers," said Alan Dalinka, a partner in Chicago law-firm DLA Piper Rudnick Gray Cary.

Apparently, even people old enough to remember "Lawdy Miss Clawdy” know how to use BitTorrent.