The Man Who Sold the World (and caused the credit crunch)

David Bowie's 'back catalogue bonds' may have started the credit crunch

By Evan Davis

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.