Episode 11: How David Bowie Became a Financial Product

This makes us all very very sad. But instead of being sad on this episode, we are going to use it to celebrate Bowie's creative genius. Sorry, just going to play Bowie music for the next half an hour as much as you might like that. No, We're actually going to talk about his financial genius. And what I mean by that is, of course, we are going to talk about Bowie bonds. Yeah, Bowie bonds. So I've heard them

a lot, but what are they exactly? So they are a type of bond, to be specific, a securitization that bundles up future cash flows from the royalties from music rights. And David Bowie was the first to do them, so a pioneer in ways beyond just music and style. Oh, most definitely so. Joining us today from Los Angeles to tell the story of Bowie Bonds is David Pullman. He's the banker who helped create these in the late ninety nineties, and in fact, Bowie Bonds are sometimes known as Pullman Bonds.

I'm somehow not surprised that the media for first to call him Bowie. Um. I'm really excited about that. I think it should be a great conversation. Want to quick note, We're not just going to talk about Bowie Bonds. Later in the episode, We're going to be talking about the aptly named Beige Book, seen as one of the most boring economic releases in the world, but it actually has a fascinating bad history. And just like we'll be talking to the father of Bowie Bonds, will also be talking

to the father of the Beige Book. Right, Bowie Bonds and the Beige Book. Let's start. Let's do it. Yeah, David Pullman, welcome to the show. Let's maybe start at the beginning. Can you tell us how you met Bowie and how these bonds kind of came about? Sure, Initially, Bowie had a very large catalog of songs that he had fought to his manager of the time to revert. Revert means he was going to sell them or no. What happened was David as a teenager and the manager

realized importance of his work. So you negotiated very hard with the record companies to make sure they got recaptured and a reversion of the record masters that he created on his original songs that he started in the sixties, and then continue that going forward, which is extremely rare

for artists on their record masters. And negotiates hard that the for these and he confidence in himself in times because most artists that they'll fail, they give up their rights to the record masters, which is not at all a typical Probably ninety nine point nine nine percent of

all artists don't have the record masters. And you know this publishing and its writers share and they said, well, you know, probably in the back of their minds, like you know, this kid is a teenager, you know, who'd be nothing in five years or whatever it would be going forward, So big deal to get back his record masters.

And you know, obviously it was a David Bowie and his manager at the time, we're betting that that would not happen, that he had confidence himself that he would these be successful, and he took less up front to deal to to get that, which was a big statement about as a teenager, to show how savvy and sophisticated he was. I mean not many teenagers give another word recapture or version. So in the nine nineties, he still has these master rights to his music right and he's

trying to decide what to do with them. Correct, So wet we passed forward to that and he's deciding was doing him and at the time everyone's coming back to him, and it was also an opportunity for David Ticket not only back his record masters, but he also had a publishing administration neal for his publishing, his writers, Shore, every all the rights were coming back to him that he would have a hundred percent control over. Okay, So how did you meet him and come up with this idea?

What happened was at that point when he had all these rights coming back, and there's also some there was some tax advantages and estate planning advantages, David and his business manager were looking to sell his catalog and that came up because I was doing transactions with his business manager and other errors investment banking and as it turned out, he mentioned to me in passing, so I thought, okay, well it's not something we're looking at doing a sales catalogs.

That's that's nice you're working on. Then he realized that David wasn't gonna sell because these were his babies. So this turned out to be a smart move. So instead of selling the entire catalog, what he did was base and what you did was basically a securitization of the future cash flows from the rights to that catalog. Correct.

What happened was, I will ask some questions how much has it earned this as a David's business manager, And at the time he told me what was earned, and he earned as much what it was earning as much as a large corporation. So the next the question was did he have three years of financials? They said they had five? I said where they already said yes. I said, are they by Big six at the time whould be

big four accounting firms at the time. He said yes, to which I said, I could securitize that, to which his business manager said, what securitization? And I wanted to just correct that only because so they got it right the quotes, but in terms of uh. David, then he got the information in terms of this deal, and he decided within a split second and said, why haven't we

started yet? So he basically, even though this concept of securitization maybe unusual, as soon as it was explained to him that he could sell the cash flows of the songs rather than the songs himself, he instantly understood the appeal of it. Yeah, And what's amazing is he got the concept faster than other investment bankers and ast ors, other people in the financial markets. He grasped new ideas and concepts and was willing to take a chance and was wasn't afraid to fail. And that's why he was

so successful in terms of trying these things. So we went ahead with it. We did a deal in rockets seed. Now what's interesting when when when when David's hearing this for the first time and making a decision to go forward within less than a second, not a second, less than a second. There's no is not a written word in the history of the world prior to that meeting on anyone even thinking about doing this, much less than doing it. What was it like actually going out and

selling these bonds? Because they're brand new things. Lots of people haven't heard about them before. How did you do the sales pitch and who did you end up selling them to? Okay, Well, first of all, during those it's like a couple of months. Usually new deals even today

they take a year of the market. They were investment grade, they were disingul a level rated by multiple rating agencies and the national recognized rating agencies as well, and they were twenty year legal finals, fifteen year expective maturity, and a price off the US ten year treasury the average

life of the bonds. And what we did, they were done as a true private fasting, so that the charms of the deals are confidential proprietories that others couldn't see what the deal was other than the actual the rating agencies and the investors in the bonds. So they went to go to Life Insurance Company because they typically buy long term investing gray bonds and that was a perfect fit for them. They never missed a payment, they never triggered,

they never they paid off in full. And what was interesting is that the first they actually just ran the actual cover, which is interesting to me. In the article about David Bowie, the cover story that broke, uh when David had done this deal with me and they got out, which was at the end of nine six in a close in the beginning of so at the very end of the year. So the story breaks and they quote these large investors that are in music, some bonds and

other asset classes may say, are you kidding me? Are you crazy? And that was that the written reactions when this the first article it comes out. Now what happens when that article runs. It was on the cover that morning at the Wall Street Journal, and we had already placed and had the right of the bonds. No one knew that, and they were already placed. There's already sold. The phone is ringing off the hawk to buy the bonds from the biggest investors in the world at the

institutions that buy asset attacks and one uncarrelated asset. The new assets is uncarlas the stock market risk diversified. So it was the reaction was at that moment I knew that we had really hit something in terms of the reaction was so positive on the market. They weren't going to find out about it. They were going to buy them. How big was the offering It was fifty million dollars

and it is right at the single A level. I want to go back real quickly to the first when you first brought the Bowie bonds to the ratings agencies, because here you were, you had created this new type of product. What kind of questions did they ask since obviously they had never rated one of these excellent questions. Well, we're sitting there with one of the major range and I always k who it was exactly, and we're sitting there and uh, you know, it's it's sad now in

terms of everyone's morning, the death of David Bowie. And now this is almost twenty years ago where this first meeting in right approximately almost almost exactly yet period a few months short of it, so an I llegal final maturity of the deal. So they say, a question comes up, says what happens if David dies? So as he asked the question, and the person of the range was very

stu we worked with on that and other deals. He he thought about it and answer his own question as if he asked so if he was there where business now is just a meeting with us success right now, there's on the deal. You no, we're we're signed. Well, you know it's it's actually it's a good thing. My response was, because there's no new product right now, we won't And then they got you got an understanding that the catalog would soar as it is now in terms

of value and the interest. And then I followed with, but we won't tell David that because David's very young man. So the idea that in terms that they thought about that, in terms of they understood that the royalties would continue and actually increase if something would have happened, they were not. The question was really that a lot of people do ask at the time and even after, we're gonna understand

the concept that it's not tied to the artists. These songs have a life of their own, and separately that it states and airs and successors and a science continue to get the royalties, whether the author of the songs, the artists as songwriter, or any other intellectual proper or

creative assid entry masses is living or not. I question in terms of the structure of the Bowie bond, they paid a regular coupon, would they did the price that they got or that the payment the investors got, did they fluctuate and go up like you know, say, in the event that David had died during the period of the bond and people started buying more and more of his c d s, would the end investor have received

a higher coupon those months? Good question, and you know I do a number interviews on this and I wanted your respected David. I respond to everyone because I want to make sure that you know his legacy has preserved and in the transaction. What was I was uncomfortable with a couple of things that your listeners and view is really good. Is the deal always maintain its invest in

grade rating? The deal deal paid off early as well, so the bonds holders and bonds of time the seven point and I present interest, which was a higher interest rate than US chargeries, which is normal. There was the spread over yours treasures at the time was in the mid hundred basis point range over US treasuries, so the deal was obviously the interest rates were much higher and then that part of time than nineties. So we're looking at spread in the mid hundreds over the U. S

Treasury and the tenure treasurers used to price it. So your question is as more cash flow came in two from the royalties, the bonds were paying down faster, which was better for the investors. But separately, now you have more collateral and assets, it's worth more over time because cycle our deals were self liquidating, so the balance is

getting lower and lower. The cash reserve were having deals is getting higher and higher as a proportion of the outstanding blans and the casuals increasing from the royalties as they are now. As an example, assertated is that the royalties will be soaring, so the bonds holders now have more collateral and having securities that actually should have a

higher rating. We were capped by the rating of the payers or is in a deal, including companies like E M I at the time publishing Catalogust and sold UH to a joint tenship with Sony. But the example is that we're limited just like in the transaction with a country. As sovereign debt dealing, you're limited by the major payer in your deal out there rating. So that's why we're

limited to the investment grading rating that we had. But they every single deal, including the first deal for David Bowie Boye bond, every we maintain their investing grade ratings, never missed a payment and paid off in full. All right, David. One last question before we let you go, Uh, what was it like working with David Bowie? And do you have maybe a fun anecdote from the times when you

were putting these things together? And I just want to also combine with that question, what did David Bowie think about the fact that this musician, he was an artist avant garde? Was he was he surprised that he became also famous for in part becoming a financial market innovator. I mean, I'm you know, actually it makes and it makes sense that if you look at the news overall. I mean, this is a huge component of how David is remembered. I mean it's it's in terms of around

the world, in terms of the press. What it was interesting about it which really stuck out for me, It was he was the perfect person to have for the first deal ever. It's kind not only just because he was known as an innovator, but how he handled himself. He was the word is your genius has used in charms. There's no questions of genius in terms of his music abilities and artists He's someone's gonna remember this. If you walk into museums, you see works that are priceless. That's

what David Bowie is created. But the difference is David bowiees prices, works have casual royalties that come from them, so that's unique. So what is special about him was he never ever question me in terms of whether deal is going to happen or not, how long was taking. He was the most supportive person to work with and he wasn't afraid to fail, which was the key to the success. So I'm doing this deal for the very first time no one's ever done in the world before,

and he's not worried. I'm thinking, though, is this going to be able to happen? Right? And we're doing it and he's not nervous at all. On top of that, the deal happens, there's a cavalcator press, over five thousand articles in the press, radio, TV magazines and David which was you know, I didn't realize that going into this deal. My favorite song by him not knowing at the time there was his number one first number one was same. So David understood that and he gave that to me. Right.

He understood he wouldn't do any interviews, which created a bigger mystique and legend for David on this deal. So I just on this deal, David samus. Most artists would want all the attention for themselves, right, David, It gives me in terms of any report of the calls and one wants to talk about the deal. Any artists, other famous artists at the time that are friends of his asked him talk to David Pullman, every single one. He

wouldn't talk to anyone about it. And then my third part was to go to the conferences on the asset doc stories like the biggest investors in the world on where they be, the raiding agencies, the institution, investors, UH attorneys at work on the transactions, trustees, whoever was there at these conferences, and the thing that was statistical that you could actually securitize with the questions, the very first question.

Every single conference is spoke at with the keynote, various ones, and there are dozens of them over the over where it was did you meet David? Every single conference is the same question. All right, David Pullman, thank you so much for joining us to thank you, thank you. All right. Now we're going to turned to something that most people probably think is far less interesting than David Bowie but I think you should stay with us because there's a

story here that's really fascinating. We're going to talk about the Beige Book, what it is, how it came into being, and where it's going. So the Beige Book is this thing that the FED releases every month where it's basically anecdotal color about the state of the economy from all

the FED districts. So they produced this big document that has things like wage pressure is rising in Kansas, and Broadway theaters in New York are weakening due to the fact that the dollar is strong and keeping tourists away, and shipping is doing really well in the Port of Miami and stuff like this, And it's sort of a very non numerical way of looking at the economy. I generally find it quite interesting, but I guess a lot of people think of it as very very boring. It is.

I mean, people say, well, it's perfectly named the Beisian and it's funny. The reason I got interested this is back in December, I was thinking that a really good novelty sort of holiday gift or Christmas gift for a banker would be an old physical copy of the Beija Book. Because now of course, everyone just looks at it electronically.

I was reading about the history of the Beige Book, and I discovered something fascinating on the Wikipedia page, which is that the Beige Book didn't always used to be released to the public, and it wasn't until the mid eighties when a Wall Street Journal reporter named Paul Cox asked the Federal Reserve to make the Beige Book public. Imagine a life without the Beige Book. And what's even cooler is that Paul Cox now works for Bloomberg and sits about two rows away from us in the newsroom.

And so I and I was like, oh my god, we worked two rows away from a celebrity, the father of the Beijia Book, the men without whom this report would never have seen the light of day. And now I want to get the story. Look, there aren't too many people walking among us they can say if it weren't for me, this economic data point would be relieved. It's something to be proud of, all right. So we

have Paul Cox here with us today. We also have Bloomberg Economics reporter Matt Bosler, who's going to be talking a little bit about how people use the Beige Book. Today some twenty five years later. All right, let's get started. That's so we're here with Bloomberg News as Paul Cox, Hello, how are you doing? And we're also here at Bloomberg Economic reporter Matthew Bosler. I thank you both so much for joining us. So, Paul, you are the father of the Beige book. Explain to us how you got into

this position. What were you doing at the time. It's always fun to go back and relive your wins, and this, this was this was a good win. UM I was a reporter for Dow Jones News Service and based in Washington, was part of their economic policy team. UM. There in Washington, I was based at the Treasury Department, and you cover the economic indicators. You cover Treasury by on issue once and that sort of thing, but also Federal reserve and

monetary policy. At some point one of my editors decided we should write previews for Federal Open Market Committee meetings or curtain raisers as they call them in the business. So already this is kind of weird because we think of a preview for an f o MC decision as just standard. Everyone always writes a preview. But that wasn't always the case that this was something that got hyped up. Well, they were previews like you did. But just like now that I'm an editor in Bloomberg and I lean on

my reporters to break news. Um, my editors then leaned on me to break news, and I was under pressure to get more than that, get scoops, if you will,

And that's how this came about. So and gathering for one of those curtain raisers, I was talking to a FED official on background, of course, and we were sort of bantering back and forth, and he was doing his best to not tell me anything, and I sort of jokingly said, well, well, can can you give me the Blue Book, which is the internal staff monetary policy recommendations and he said no. I said, okay, how about the

Green Book? And the Green Book is the Internal Economic Forecast and he said no. I said how about the Beige Book? And he goes, there's a pause, and he said, let me think about that, and we continued our conversation and hung up. A couple of days later, he called me back and he said, we've decided to give you the Beige Book. Now you know, the Beige Book is the summary of economic conditions and the twelve Federal Reserve banks.

It's not everything, but it's something. That day, a courier showed up at the Treasury Department and dropped off envelope with my name on it, and I opened it up and there it was the Beige Book. So what had they actually been using that book for before it was kind of public? Well, I believe for as long as the Federal Reserve has been in business and FMC meetings that they always they have twelve regional banks that are full of smart economists who interface with the local banks,

the business communities and have this wealth of knowledge. And I understand that in the past they would give their information to their president, he would come to the f MC meeting and they would in essence read it out. M Arthur Burns, I believe from history, decided that that was kind of a waste of time, and so he asked, could you summarize that and put it in a document and sent it in and we'll we'll compile this into a book and distribute it before the meeting so everybody

can digest it. It was a speed process and thus was born the Beige Book. But it was it was one of those private documents until that day. And I just want to make something clear. This is literally a book with a beige cover. So when you talked about the Blue Book and the Green Book, these were books documents that were handed out internally, and they had the they were of different colors. Well, I never got my hands on the blue Book of the Green book. I'm

only told that that's what color they are. But the Beige Book was in fact beige. It was about twenty pages long and mostly pros, not a lot of numbers, but it was good information and I wrote a pretty good story off it. And you know, of course, my competitors were furious. Um. I took great fun as a good reporter for the Associated Press named Marty Krutzinger. Hey Marty, um that when I would scoop him, he would come over, because we at twenty ft apart, he would come over

and kick my chair. A few times. I got a chair kick out of that one. So so, what did your first story actually say about the Paige Book. Well, I believe at the time that um, that was when you know, Paul Volker had run interest rates up to very high and they were in the process of ringing inflation out of the economy. But hoping not to do

you know, too much, too much damage to it. And I believe at the time it showed sort of slightly better economic conditions, which led them to believe that they can continue on this path of of you know, keeping interest rates high and trying to get inflation back to where it was supposed to be. So now every month when the Beige Book comes out, it's something people know that the Beige Book comes out. News organizations like Bloomberg

get ready to read the headlines very quickly. At what point did this go from something that a few reporters got to oh, today's Beige Book day, let's pay attention. Well that was a surprise to me because I was on that beat. I went on to some other things. I eventually left Washington and did other things. And it was just at that time of the policy was if you wanted and ask for it, they would give it to you. But it was it wasn't an economic indicator,

as you will. It was sometime many years later I either saw the listing of this week's economic indicators in the Wall Street Journal or heard somebody on radio or TV saying, and this week is coming out, And I was like, Huh, when did that become an economic indicator? But it did, So I want to bring in a med Bosler into the conversation. Met you covered the economy, you cover the FED. One of the things that you always look at is the Beije Book. So as an

economic indicator, what do you look at? How do you digest it? Well, it's interesting because it's not hard economic data, right, and it gets sort of it's lots of an it's a it's a book of anecdotes, right, So it's interesting. It sort of colors all of the numbers that you work with every day and look at, you know, and it kind of gives you a regional perspective on what's happening in the economy, you know, not just um, you know,

total agg get consumption or whatever. But here's what's happening in the Boston district, or here's what's happening in the

Philadelphia district or whatever. Um. And now it seems like the biggest thing that people do with it is they try to do like linguistic or textual analyzes, you know, sort of if you remember a few years ago, when we had those really bad winters, we would count the number of times the word weather appeared in the Beige Book, and that was like the big thing that everybody wanted

to see. There wasn't much more to it than that, and um, I was just putting together, Um, just before this recording, I was looking at the number of times that the word dollar has showed up in the Beige Book recently. And so if you go back to summer, often there were literally no mentions of the word dollar in the Beige Book, and now as of the latest Beige Book, there were twenty one mentions of the word dollar.

So it's really you know, all over the thing now talking about different regional you know, manufacturing getting hurt by this strong dollar recently. So so now we even have indexes or indices based on the Beige Book, right, trying to translate the Beige Book into actual numbers. Yeah, exactly. So that's like the same sort of textual analysis, but

it's a little more sophisticated. There's one um that Stone and McCarthy Research Associates puts together, And basically the way they do it is they look for words like expanding, contracting, growing, slowing, and they sort of have different scores for each of those words, and then they average them, you know, they add them all up and average them together, and they sort of come up with this Beige Book Activity index

they call it that. If you look at it kind of does look like a lot of other economic data series, which is pretty interesting that you know, you would get that out of it. Pull What is it amusing to you that this document that you just got on physical paper that was couriered to you is now this thing

that people are diving into a deep textual analysis. It does, but it's I guess I put it in the category of the economy matters, and the economy matters and the FED matter and it was just that, you know, you you work hard at something and you think you're making a difference. Um, sometimes you get a lot of feedback, sometimes you don't. But it's yes. Bottom line is that

it was one of one of those successes. And I would like to think that if you if you press hard on this craft and get information about the economy, it all works. Paul, you brought us a photograph, right was this showing uh that shows the Treasury press room from that era, and it's a picture of Donald Reagan who was the Treasury secretary under Ronald Reagan, wh what occasionally stopped by and talked to us. It was it was a different era in terms of um uh security

and access to people and things like that. But I decided I brought that along. I found out my basement cleaning out some boxes. So Paul's in the back of this photo rocking some very very eighties hair with a mustache and sunglasses. They're they're just tinted glasses. But I've I've long since gone to contact lenses. So what's the what's the Beige Book showing these days? Well, modest to

moderate growth, subdued wage growth. Um. You know, that's one of the things that's kind of funny, is the only place you really see wage growth these days is in the Beige Book because it hasn't really come through and like the hard, hard data yet. But even in this latest Beige Book that we got last week, didn't really show much in the way of a lot of wage pressure.

But it is interesting because you know, sometimes that's like you get those anecdotes like, um, you know this district, this particular sector in this district, you know, there was some signs of increasing wage pressures, but just not enough to like move the needle in terms of like the whole economy. Well, you're kind of you you're on a in a different role. You're an editor, you're on a more markets focused beat. Do you still check out the

Beige Book each month? Absolutely is that. I'm on the team that covers treasuries and foreign exchange and what the Fed does is a is a huge factor on that and just you know, we looked at it as it's sort of this combination thing where employment is pretty good, we're almost at full employment depending on your definition. But as Matt was pointing out rightly that you know, the wage pressure hasn't come. There's no inflation, and that was one of the other things that the Fed wanted to

see in justifying continued wage increases. So as we walk up to this January f MC meeting, it gives you a piece of information to try to discern what's the Fed going to do along with all the other market participants were keeping close touch with. Plus you're the father of the Beige Book. You have to you know, check in on your baby, right, no doubt. Do you get real quickly do you get do you think every time it comes out? Do you think about that or have you.

You've gotten used to it. I've gotten used to it is that, you know, depending on what role is obviously in this role at Bloomberg, I'm a little closer to it than I was. I've done some other things. I um was, you know, sort of more of an Internet generalist and some other things. I work for, some things called newspapers. You guys have heard of newspapers, right, Okay? Yeah, some thing that even I had were the responsible for an economic data point. Even decades later, I would be

pointing that out to people. But I didn't know about that until I saw I went and looked at the Wikipedia entry for beige book and I saw your name. Otherwise I never would have known. I'll speak to my marketing department about that, all right, Paul Cox of Bloomberg News, Matt Bosler, thank you guys so much for joining. Thank you, thank you. Okay, Well, that was Bowie, Bonds and beige Books. So I guess our theme for this episode was really

alliteration the letter B. Yeah. I love both of those conversations, and I love you know. I still it is absolutely amazing from just from the Bowie perspective that he was this huge innovator and it's not just in terms of music or sort of musical securitizations, but all kinds of intellectual property securitizations, which became a key corp of finance. He was an important player in well so as a

finance journalist. I will say Bowie gave birth to uh particular subset of bonds called esoteric A b s, which bundled together all sorts of things like restaurant franchises and the rights to comic strips like Peanuts, And they are genuinely God's gift to structured finance journalists so people, because people must love any headline with them of course, of course.

And then on the Beige Book, I thought it was really interesting just to think back to a period of time when those you know, all those anecdotes weren't public and no one was really clamoring for them. It was a totally different market and just the idea of getting an economic release in physical paper having to then scan through it. Now, people, I think, when they think of any kind of economic data or a FED statement, they just think of it as basically coming from coming out

of magic, out of their computer screens. But at one point people actually had to go go get it and look at it and then type something up. And it wasn't nearly so automated. Of course, now they're all these quantitative approaches, which is funny, but in the not that long ago, really it was a much more physical thing to get this data. That's right, Okay, Well, another episode of Odd Lots has passed us by. I am Tracy Alloway,

Executive editor of Bloomberg Markets. I'm on Twitter at Tracy Alloway, and I'm Joe wi isn't Thal, Managing editor of Bloomberg Markets. You can follow me on Twitter at the Stallard. Thank you for listening and see you next week. Joe and I are very proud of our new podcast, Odd Lots, but we are also very proud of Bloomberg's other growing suite of original podcast all designed to help you navigate the complexities of business, financial markets, and the global economy.

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