By LESLIE EATON
Michael Jordan may be the best
basketball player in history. He may have more trophies and rings and sneaker
contracts than any man on the planet. He may even, as Fortune magazine has just
calculated, have contributed $10 billion to the global economy over the last decade.
But he has not yet made the big leap
that, if Wall Street has its way, is in the future for all sorts of athletes and artists:
the leap from marketable commodity to tradable security.
Almost everyone and everything seems to
be turning into securities these days. Frank Thomas, the White Sox slugger, is
working on a deal with SPP Hambro Securities to earn investors a stake in his future
earning. Dusty Springfield, the 1960’s pop singer, is cooking up something with
Prudential Investments. The songwriting team of Holland, Dozier and Holland, who
penned such Motown hits as “Stop! In The Name Of Love,” just sold $30 million of
securities backed by their royalties (their investment banker says the bond got an A
rating from Moody’s Investors Services).
Entertainers is the least of it.
Wall Street is securitizing virtually everything that produces a predicable stream of
cash. Typhoon insurance. Tax liens. Loans for used cars and fraternity
houses. Fax machine leases. Unused airline tickets. Movies yet to be
made. Even defunct power plants.
The alchemy by which Wall Street turns
stuff into securities varies. The old-fashioned method is the stock offering, which
has been used by a number of sports teams. But there are risks for celebrities who
go public: both Debbie Reynolds’s casino and Wilt Chamberlain’s restaurant chain
bombed in the stock market.
Then there are derivatives, so called
because their prices are derived from the value of something else, like an index or a
security or a commodity. Some involve relatively straightforward bets on things like
the price of soybeans or Microsoft shares. The infamous variety – like the ones
that got Orange County, Calif., in trouble – often involve wagers so arcane as to be
inexplicable. In the works are derivatives that let investors bet on the temperature
or rainfall in a geographic region.
But the really big idea on Wall Street
today is securitization, which began with home mortgages in the 1980’s. Banks
had made a lot of them and wanted to sell them, but to whom?
Then someone had a bright idea. If
Wall Street put together a whole bunch of mortgages, the bundles would look almost like
traditional bonds. They would be relatively safe investments, because even if one
borrower defaulted, there would be plenty of others still paying. Bond buyers, like
mutual funds, pension funds and amateur investors, jumped on these mortgaged-backed
securities.
This led to a creative burst on Wall
Street. If securities could be made out of mortgage, why not car loans, credit-card
receivables, business loans or bad debts?
Right now, a number of firms on Wall
Street are trying to securitize consumers’ electric bills. The goal is to lower
utilities’ borrowing costs, creating savings that can be passed on to consumers, said
Joseph S. Fichera, an investment banker at Prudential Securities, “It’s like
refinancing your mortgage,” he said
The newest and sexiest twist involves
using streams of income from entertainers. In the first such deal, the rock star
David Bowie sold $55 million of bonds last year backed by his anticipated royalties.
Creating such deals has proved harder
than many investment bankers predicted, and the securities have been so complicated that
they are offered only to professional investors. Nonetheless, several Wall Street
firms have set up entertainment subsidiaries, like one at Nomura that raised money for Rod
Stewart.
David Pullman, the investment banker who
successfully sold the Bowie and Motown deals, says he has more up his sleeve. Film
libraries, television syndications, literary estates – all could be turned into
securities, says Mr. Pullman, a managing director at Fahnestock & Company, a New
York-based securities firm.
Mr. Pullman said ticket sales at sports
stadiums were another possibility for securitization. Individual athletes’
earnings are trickier because their contracts contain too many outs like morals clauses,
he said. But he added, “We could do it if they had no cut contracts or
endorsements.”
One of the few who might qualify is
Michael Jordan, of course. If Fortune is right, he’d be rated a triple-A.
Stockbrokers will be standing by to take your call.
NEW YORK TIMES June 7, 1998