He’s always been a trendsetter. But could David Bowie have caused the latest fad sweeping the nation – the credit crunch?
It may sound like a ridiculous question, but it’s not as mad as it seems.
Even when it comes to finances Bowie leads the way – and back in 1997 he did something called “securitisation”.
He thought, “I have a lot of money coming in over the next 10 years from my back catalogue, but I’d rather have the cash now and not have to wait”.
He produced some bits of paper – Bowie Bonds – and said “whoever buys these gets my royalties”.
It meant he no longer had the money coming in but instead had a lot up front. His investors were guaranteed a good income. It was a good deal all round.
And the banks were catching on to the idea. They thought, “We have billions out there in mortgages which are going to pay us back very slowly. Why don’t we sell those and get the money now?”
So the banks started doing what Bowie had done – in a big way.
It was a complete rebuilding of what a bank does. Normally a bank borrows from people like you and I, then lends it out.
But now the bank was lending the money – and selling the loan on elsewhere.
For example, a bank loans out £100,000 for a mortgage, and does the same for 10,000 people. They’ve now lent £1billion and will be getting the cash back over the next 25 years.
So the bank creates a piece of paper, a security, and says whoever owns it will have the income from the mortgages.
It then sells the security – effectively the bundle of mortgages – for £1billion to perhaps a pension fund, which then has the mortgage income – and the bank has £1billion to lend out again.
Everybody is happy: the banks are able to lend more and more as mortgages, and there’s a conveyor belt where they lend a billion, receive a billion and sell the mortgages on.
Northern Rock were the market leaders in the UK for this kind of thing.
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But then it started to go wrong. As the banks were selling the loans, any bad risk became someone else’s problem. So the banks didn’t have to worry so much who they were lending to. Problem number two was it wasn’t just their standards that dropped – the banks just lent far too much.
And thirdly the banks looked at these securities and said, “these are so good we want to buy some ourselves”. Having got rid of a lot of loans and risks, they ended up buying them back in.
It all went pear-shaped for American securities because the banks had lent to people who couldn’t repay them.
No one wanted securities, their value plummeted and the banks, having bought a lot, lost a lot themselves.
Securitisation was a kind of magic bullet for banks. It looked a fantastic way of making them more profitable with less risk. But they fired this magic bullet at themselves.
They became too dependent on it and then the investors decided they didn’t like securities because they didn’t know what was in them and the loans were often bad.
No one wanted to buy securities even if the securities were pretty good – which Northern Rock’s were.
It was fashionable when David Bowie did it once. Ten years later it wasn’t.
Suddenly the banks didn’t have any money coming in, so they couldn’t lend any more – that’s the credit crunch.
Now the economy is in a vicious circle. The banks loan less, so the economy has money sucked out of it. With less money there’s less spending and job losses which cause less spending, and the vicious spiral continues downwards.
So how do we get through the credit crunch? The obvious thing to do is pump more money into the banking system, from the Bank of England or the Government.
Or the Government can guarantee loans to encourage lending because the banks are so fearful about doing so.
So far in return for shares in the bank, the Government has given them more capital but probably not quite enough.
The truth is the most sensible thing for people to do is be a bit cautious with money at the moment.
But it would be nice if we all tried not to be too cautious, because if everybody saves simultaneously, it causes a tidal wave which will drown the economy.
Evan Davis presents The City Uncovered, BBC2, Wednesday, 9pm.
Uhmmmm.... surely David Bowie is not the very first person to sell long-term interest in something that off regularly in exchange for a lump sum payment?
Innovative he is but, come on!
Incidentally, did anyone buy Bowie Bonds and are they still worth anything?