Odd Lots - Episode 11: How David Bowie Became a Financial Product

Episode Date: January 19, 2016

When the world lost David Bowie this month, it lost one of modern music's undisputed geniuses. Less well-known is Bowie's contribution to the financial world. In this episode of Odd Lots, hosts Tracy Alloway and Joe Weisenthal speak with David Pullman, the banker who worked with Bowie to develop "Bowie Bonds," which paid investors on the cash flow from the artist's song royalties. This episode covers how these bonds came to be, their lasting\u0010impact on financial markets and what it was like to work with David Bowie.\u0010\u0010Speaking of financial history, in this episode we also talk about the Beige Book, a monthly publication from the Federal Reserve that gives an anecdotal look at the U.S. economy. Joining us are Bloomberg News editor Paul Cox (arguably the father of the Beige Book) and Fed reporter Matt Boesler.See omnystudio.com/listener for privacy information.

Thanks for listening to Oddlots. Follow the show on Amazon Music for more future episodes or just ask Alexa, play the podcast Oddlots on Amazon Music. I feel if our intro music is ill-suited for this episode. Can we play something else? That's better. Okay, welcome to Odd Lots. It's Tuesday, January 19th. I'm Tracy Alloway, executive editor at Bloomberg Markets. And I'm Joe Wisenthall, managing editor of Bloomberg Markets. So the world lost a musical great last week. I am. talking, of course, about David Bowie, who died of cancer at the age of 69. 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. So are we just going to play Bowie music for the next half an hour?

As much as you might like that, no. We are 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. Oh, yeah, Bowie Bonds. So I've heard them a lot, but what are they exactly? So they're 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 1990s. And in fact, Bowie bonds are sometimes known as Pullman bonds. I'm somehow not surprised that the media prefers to call them Bowie Bond. I'm really excited about that. I think it should be a great conversation. One quick note, we're not just going to talk about Bowie Bond. Later in the episode, we're going to be talking about the aptly named Bej Book, seen as one of the most boring economic releases in the world,

but it actually has a fascinating back 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 Bege Book. Let's start. Let's do it. 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. I had a very large catalog of songs that he had fought to. Revert means he was going to sell them? No. Works. They negotiated for make sure they got recapture.

and a reversion of their and then negotiate so hard because most artists that they'll fail they give up their rights to the record masters which is not at all

at typical probably 99.9 9% of all artists don't have the record masters and well you know probably in the back of their minds like this kid is a teenager who'll be nothing in five years

or whenever it would be going forward so big deal if he get back his record masters and you know obviously it was David Bowie and his manager the time we're betting that that would not happened that he had confidence in successful and he took less upfront to be able to to get that, which was, you know, a big statement about as a teenager to show how savvy and the case he was.

I mean, not many teenagers are going to know the word, recapture or a version. So in the 1990s, he still has these master rights to his music, right? And he's trying to decide what to do with them. Correct. So we fast forward to that. And he's deciding what to do with him. And at the time, everyone was coming back to him. and it was also an opportunity, not only that because the record masters,

but he also had a publishing his writer's share. All the rights were coming back to him that he would have 100% 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 was some tax advantages in estate planning. That came up because I was doing transactions with his business manager in other areas of 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 catalog, but that's nice.

You're working on it. Then he realized that David wasn't going to 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 basically a securitization of the future cash flows from the rights to that catalog. Correct. How much has it earned? This is the David's business manager. And at the time, he told me what is earned, and he earned as much what it was earning as

much as a large corporation. So the next question was, did he have three years of financials? They said they had five. I said, were they ordered? He said, yes. I said, are they big big, big six at the time? Which is big four accounting firms at the time? He said, to which I said, I could securitize that, to which his business manager said,

what securitization? And I wanted to correct that only because they got to write the quotes, but in terms of the information, he decided within a split second and said, why haven't we started yet? So he basically, even though this concept of securitization may be 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, investors, other people in the financial markets. He grasped new ideas and concepts and the chance. And wasn't afraid of trying new things. We did the deal in Rocket Seed.

Now, what's interesting the first time and making a decision in a second, not a second, less than a second. There's not a written word 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. Usually new deals, even today they take a year to market.

they were investment grade the final 50s off the U.S. 10-year treasury. And what we did, they were done as a true private placement, so in terms of the deals are confidential proprietories, so 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 a life insurance company because they typically buy long-term investment-grade bonds, and that was a perfect fit for them.

They never got off in full. And what was interesting is, they actually, just ran the actual cover, which is interesting to me, in the article about David Bowie, the cover story that broke. David had done this deal with me, and it got out, which was at the end of 96 and it closed in the beginning of 1997. So at the very end of the year, so the story breaks, and they, quote, these large investors that are in mutual bonds and other asset classes, and they say, are you kidding me?

Are you crazy? And that was the written reaction when it took the first article that comes out. Now, what happens when that article runs, it was on the cover that morning of the Wall Street Journal. And we'd already place it to have the rate of the bonds. No one knew that, and they were already placed. They were already sold. Their phone is ringing off the hook to buy the bonds from the biggest investors in the world at institutions that buy asset tax, and one uncorelated asset, the new asset customers uncorrelated the stock market.

It's diversified. So the reaction was, at that moment, I knew that we had. it 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 $55 million and it was rated 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 before. Excellent question. Well, we're sitting there with one of the major agencies. I knew it was exactly. We were sitting there, sad now in terms of everyone's mourning the death of David Bowie, and now, this is almost 20 years ago, where this first meeting, in 1996, right, approximately,

almost exactly that period, a few months short of it. So, an illegal final majority of the deal. So they say, at questions, if David dies. So as he asked the question, and the person of the range, he was very astute, and we worked with that and other deals, he thought about it and answered his own question as we asked. So if he was, there were a business and that's just a meeting with us, et cetera, and others on the deal, you know, it's actually, it's a good thing. My response was because there's no new product, right?

Now, we won't, and then I followed. They got, he got an understanding that its catalog would soar as it is now, in terms of value and the interest. And then I follow it with, but we won't tell David that, right? Because David's a very young man. So the idea that in terms of they thought about that, in terms of they understood that the royalties would continue and actually increase if something would happen.

They were not. The question was really that a lot of people do ask at a time and even after was you understand the concept that it's not tied to the artist. These songs have a life of their own, that it states and assigns continue to get the royalties, whether the author of the songs, the artist, a songwriter, or any other intellectual property or creative asset and true assets, is living or not. I have a question in terms of the structure of the Bowie Bond.

They paid a regular coupon. 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 CDs, would the end investor have received a higher coupon those months? Good question. I've given a number of interviews on this,

and I want to, you know, irrespect of David, I responded to everyone because I want to make sure that, you know, his legacy is preserved. And in that transaction, what I was uncomfortable with a couple things that your listeners and viewers really get is the deal always maintain its investment-grade rating. The deal paid off early as well. So the bonds holders had bought the bonds at the time of the 7.9% interest, which was a higher interest rate than U.S. treasuries, which is normal.

The spread over U.S. treasuries at the time was in the mid-100 basis treasuries. So the yield was that obviously the interest rates were much higher in that period of time in the 90s. So we're looking at a spread in the mid-hundreds over the U.S. Treasury, and the 10-year treasuries used to price it. So your question is, as more cash flow came in, royalties, the bonds were paying down fast, but separately, now you have more collateral and assets that's worth more over time because our deals were self-liquidating. So the balance is getting lower and lower. The cash reserve we have the deals is getting higher and higher as a portion of the outstanding balance,

and the cashless increase from the royalties, as they are now as example, as with David said, that the royalties will be soaring. So the bondholders now have more collateral and have the securities that actually should have a higher rating. We were capped by the rating of the payer sources in a deal, including companies like EMI at the time that publishing catalog is sold to a joint venture with Sony. But the example is that we're limited just like in transaction with a country, a sovereign debt ceiling. You're limited by a major payer in your deal. So that's where we're limited to the investment rating that we had. But every single deal, including the first deal for David Bowie, the Bowie bond,

every Pullman bond subsequently maintain their investment-grade ratings, never missed the payment, and paid off in full. All right, David, one last question before we let you go. 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 surprised that he became also famous for, in part, becoming a financial market innovator? I mean, I'm, you know, actually, if you look at the news overall, I mean, this is a huge component of how David is remembered. I mean, it was interesting about it, which really stuck out for me. He was the perfect first deal ever with kind. not only just because he was known as an innovator, but how he, your genius is used in terms of, no question he's a genius in terms of his musical abilities, an artist, someone that's going to remember

as if you walk into museums, you see works that are cash flow royalties. The actual about him was he never, 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 it in the world before, and he's not worried.

I'm thinking, you know, 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 Calvulcator press, over 5,000 articles in the magazine. And Dave, which was, I didn't realize that. Going to this deal, my favorite song by him,

not knowing at the time there was his number one, first number one, David understood that, and he gave that to me. Right? He wouldn't do any interviews, which created a vigor of mystique and legend for David on this deal. So I'd just on this deal, David's famous, most artists would want all the attention for themselves. It gives me, in terms of every reporter that calls,

anyone wanted to talk about the deal. Any artist, other famous artists, every single one, he wouldn't talk to anyone about it. That's a good reference. And then my favorite part was you go to the conferences on asset tax securities like the biggest investors in the world on, whether they be the rating agencies, the institution of attorneys that work on the transactions trustees, whoever's 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 I spoke up with the keynote, there are various ones, and there are dozens of 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 today. Thank you. All right, now we're going to turn 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 produce this big document that has things like wage pressures 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 beige book.

And it's funny. The reason I got interested in 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 beige book because now, of course, everyone just looks at it electronically. Right. 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 use to be released to the public. And it wasn't until the mid-80s 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 thought, so we have to bring him in. And I was like, oh my God, we work two rows away from a celebrity, the father of the beige book, the man 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 that can say, if it weren't for me, this economic data point would be released. That'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 25 years later. All right, let's get started. So we're here with Bloomberg News as Paul Cox. Hello. How you doing?

And we're also here with Bloomberg economic reporter Matthew Bosler. Hey, guys. 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 was a good win. I was a reporter for Dow Jones News Service based in Washington.

It was part of their economic policy team. There in Washington, I was based at the Treasury Department, and you cover the economic indicators, you cover Treasury, bond issuance 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 Moken 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 FOMC 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, 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 in 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, 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 was a pause. And he said, let me think about that. And we continued our conversation and hung up. A couple 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 12 Federal Reserve Banks. It's not everything, but it's something that day a courier showed up at the Treasury Department and dropped off an 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 at FOMC meetings, that they always, they have 12 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 FOMC meeting and they would, in essence, read it out. 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 send it in? And 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 one of those private documents until that day.

And I just want to make something clear. This was 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 were of different colors. Well, I never got my hands on the blue book or 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 20 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. I took great fun as a good reporter for the associate at press name Marty Crutzinger. Hey, Marty, when I would scoop him, he would come over because we sat 20 feet apart. He would come over and kick my chair a few times. I got a chair kick out of that one. So what did your first story actually say about the page book?

Well, I believe at the time that that was when Paul Volcker had run interest rates up to very high, and they were in the process of wringing inflation out of the economy, but hoping not to do 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, 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. is Bejewok 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 asked for it, they would give it to you, but 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 Matt Bozler into the conversation. Matt, you cover the economy. You cover the Fed. One of the things that you always look at is the beige 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 anecdotes. Yeah, 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, you know, total aggregate 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. And now it seems like the biggest thing that people do with it is they try to do, like, linguistic or textual analyses, 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 I was just putting together 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 of 2014, there were literally no mentions of the word dollar in the beige book. And now, as of the latest beige book, there were 21 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 the strong dollar recently. 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 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. Paul, 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, this 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 matters. And it was just that, you know, you work hard at something and you think you're making a difference. Sometimes you get a lot of feedback. Sometimes you don't. But it's, yes, bottom line is that it was one of those successes. And I would like to think that if you press hard on this craft and get information about the economy, it all works. Paul, you brought us a photograph, right? I did.

What was this showing? That shows the Treasury Press Room from that era, and it's a picture of Donald Regan, who was the Treasury Secretary under Ronald Reagan, who would occasionally stop by and talk to us. It was a different era in terms of security and access to people and things like that. But I just brought that along. I found it in my basement cleaning out some boxes. So Paul's in the back of this photo rocking some very, very 80s hair with a mustache and sunglasses.

They're just tinted glasses, but I've long since gone to contact lenses. So what's the beige book showing these days? Well, modest to moderate growth, subdued wage growth. 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 in like the 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, 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.

Paul, you're kind of, you're 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? Oh, absolutely, is that I'm on the team that covers treasuries in foreign exchange, and what the Fed does is a huge factor on that. And just, you know, we looked at it as it's sort of this combination thing where employment's 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 26th, 27th, FOMC 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 we're 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 gotten used to it? I'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 was sort of more of an internet generalist and some other things. I worked for some things called newspapers. You guys have heard of newspapers, right? A lot of time. Those also used to be physical, right? Okay, yeah.

Because I think that if I 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 Bejewok 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 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 core of finance, he was an important player in. Well, so as a finance journalist, I will say Bowie gave birth to a particular subset of bonds called esoteric ABS, which bundle together all sorts of things like restaurant franchises and the rights to comic strips like peanuts. And they are genuinely a God's gift to structured finance journalists. So thank you, David Bowie.

Because people must love any headline with that kind of stuff. Of course. And then on the beige book, I thought it was really interesting just to think back to a period of time when 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 or 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 out of magic out of their computer screens. But at one point, people actually had to go get it and look at it and then type something up and it wasn't nearly so automated. Of course, now there are all these quantitative approaches, which is funny. but not that long ago, really, it was a much more physical thing to get this data. That's right.

Okay. Well, another episode of Oddlots has passed us by. I am Tracy Alloway, executive editor of Bloomberg Markets. I'm on Twitter at Tracy Alloway. And I'm Joe Wisenthall, managing editor of Bloomberg Markets. You can follow me on Twitter at the stall. Thank you for listening and see you next week. Joe and I are very proud of our new podcast Oddlots,

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