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FORBES: Could 'Bowie Bonds' Provide The Groundwork To Ease The Student Loan Crisis?
http://www.forbes.com/sites/jonhartley/2016/01/11/david-bowies-bowie-bond-contribution-to-financial-innovation-and-clearing-regulatory-hurdles/
Could 'Bowie Bonds' Provide The Groundwork To Ease The Student Loan Crisis?
Jan 11, 2016 @ 07:00 PM
By Jon Hartley, Contributor
I write about macroeconomics, markets and economic policy.
David Bowie, the legendary British rocker, died Sunday after an eighteen month battle with cancer. The artist, while known for his famous rock anthems, is also known within financial circles as a financial innovator for being the first artist to securitize his future earnings in what has famously become known as “Bowie Bonds.” First issued in 1997, David Bowie partnered with Wharton educated banker David Pullman to issue $55 million of bonds that represented the first instance of securitizing earnings associated with intellectual property, an important milestone in financial innovation (for better or for worse) with many implications for financial regulatory policy.
The Historical Importance of ‘Bowie Bonds’ In Financial Innovation and Securitizing Intellectual Property
The original $55 million “Bowie Bonds” 1997 issue originally earned a Aaa Bond Rating from Moody’s and were privately sold to Prudential with a ten year maturity (the bonds were always held by Prudential Insurance and were never made available to the public). At the time, with RollingStone magazine in 1997 naming Bowie as the U.K.’s wealthiest rocker with an estimated net worth of $917 million and a lucrative record deal with EMI, the credit rating likely made sense to Prudential and Moody’s at the time. The rise of Napster and pirated music at the time was unforeseen.
With the ultimate rise of internet piracy and online streaming in the 2000s, royalties from Bowie albums and the rest of the music industry were hit hard, forcing Moody’s to cut the “Bowie Bond” rating in 2004 to Baa3, only one level above junk. Nonetheless, the original 10-year Bowie bond was paid off in full at maturity in 2007.
<>
At its best, securitizing David Bowie’s royalties open the doors to novel finance concepts like Income Sharing Agreements (ISAs), where college students could pledge their future earnings as an alternative to taking out significant amounts of student debt, which now total at over $1.2 trillion in the U.S. ISAs were an idea originated by Milton Friedman in 1955 in his essay “The Role of Government in Education” and explored more recently in an AEI report for its potential as a solution which could help mitigate the student loan crisis.
However, many legal scholars have argued that for ISAs to go mainstream, they require additional legal and regulatory clarity. This spurred Sen. Marco Rubio (R-FL) and Rep. Tom Petri (R-WI) in 2014 to introduce the “Investing in Student Success Act,” legislation that would reduce regulations to “broaden the use” of ISAs.
One could very well argue that David Bowie laid the intellectual first steps in coming up with a novel solution to today’s student debt crisis through securitizing his own future income stream. With the ongoing 2016 Presidential cycle, we will see how much candidates borrow from Bowie in support for ISAs as they release their plans to reform higher education affordability.
The Brixton district of London in July 2015 released a special 5-pound Brixton pound note as part of its alternative currency
meant to support local commerce. (Photo Credit: This Ain’t Rock ‘N’ Roll Creative Studios / Brixton Pound)
Could 'Bowie Bonds' Provide The Groundwork To Ease The Student Loan Crisis?
Jan 11, 2016 @ 07:00 PM
By Jon Hartley, Contributor
I write about macroeconomics, markets and economic policy.
David Bowie, the legendary British rocker, died Sunday after an eighteen month battle with cancer. The artist, while known for his famous rock anthems, is also known within financial circles as a financial innovator for being the first artist to securitize his future earnings in what has famously become known as “Bowie Bonds.” First issued in 1997, David Bowie partnered with Wharton educated banker David Pullman to issue $55 million of bonds that represented the first instance of securitizing earnings associated with intellectual property, an important milestone in financial innovation (for better or for worse) with many implications for financial regulatory policy.
The Historical Importance of ‘Bowie Bonds’ In Financial Innovation and Securitizing Intellectual Property
The original $55 million “Bowie Bonds” 1997 issue originally earned a Aaa Bond Rating from Moody’s and were privately sold to Prudential with a ten year maturity (the bonds were always held by Prudential Insurance and were never made available to the public). At the time, with RollingStone magazine in 1997 naming Bowie as the U.K.’s wealthiest rocker with an estimated net worth of $917 million and a lucrative record deal with EMI, the credit rating likely made sense to Prudential and Moody’s at the time. The rise of Napster and pirated music at the time was unforeseen.
With the ultimate rise of internet piracy and online streaming in the 2000s, royalties from Bowie albums and the rest of the music industry were hit hard, forcing Moody’s to cut the “Bowie Bond” rating in 2004 to Baa3, only one level above junk. Nonetheless, the original 10-year Bowie bond was paid off in full at maturity in 2007.
<>
At its best, securitizing David Bowie’s royalties open the doors to novel finance concepts like Income Sharing Agreements (ISAs), where college students could pledge their future earnings as an alternative to taking out significant amounts of student debt, which now total at over $1.2 trillion in the U.S. ISAs were an idea originated by Milton Friedman in 1955 in his essay “The Role of Government in Education” and explored more recently in an AEI report for its potential as a solution which could help mitigate the student loan crisis.
However, many legal scholars have argued that for ISAs to go mainstream, they require additional legal and regulatory clarity. This spurred Sen. Marco Rubio (R-FL) and Rep. Tom Petri (R-WI) in 2014 to introduce the “Investing in Student Success Act,” legislation that would reduce regulations to “broaden the use” of ISAs.
One could very well argue that David Bowie laid the intellectual first steps in coming up with a novel solution to today’s student debt crisis through securitizing his own future income stream. With the ongoing 2016 Presidential cycle, we will see how much candidates borrow from Bowie in support for ISAs as they release their plans to reform higher education affordability.
The Brixton district of London in July 2015 released a special 5-pound Brixton pound note as part of its alternative currency
meant to support local commerce. (Photo Credit: This Ain’t Rock ‘N’ Roll Creative Studios / Brixton Pound)
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