Enron's plan for property-price derivatives market

Canary Wharf: cornerstone

Following on from the post about the ‘predictions market’ & how various attempts to make financial markets in superficially prospective areas have sometimes come unstuck (water; bandwidth, weather): I’d mentioned that just before the Big Collapse, Enron was planning a property-price derivatives market, meaning futures / forwards at the outset, and ultimately options.

The rationale for there being demand for such a thing was this.  Many individual and commercial entities, as well as outright investors, can find they have a lot at stake as regards the variability over time of property prices in general, and the differences between property prices in different regions (technically, a source of ‘basis risk’).  Simple examples at the personal level: someone who hasn’t yet sold their current property but has committed to buying a new one – needs a hedge against prices dropping while they find a buyer.  Someone who needs to move from London to Manchester for a couple of years but expects to return to London thereafter: needs a hedge against London prices outstripping Manchester over that period.  Someone who wants to lock in an attractive price they’ve seen the identical house next door fetching when it sold last week, but doesn’t plan to move just yet: needs a hedge against local prices falling.  Etc etc etc.  

And of course once a market is established, speculators and punters can pile in: unlike weather (see previous post), people often really do have strong opinions about whether the property market is overheated or underpriced.

So how was Enron going to get the show on the road, back in 2001 at the time of the Collapse?  They put some of their best people on it.  Regionally specific price indices already existed – the sine qua non for derivatives.  Key to any market is liquidity, in turn requiring market makers and critical mass: and, with some aspects of derivatives, the ability to cash out into the physical.  They had a strong relationship with the Halifax (then a big property player and publisher of indices) and planned to start with the London commercial (office space) sector – and to ensure physical delivery, as an opening gambit they were going to buy Canary Wharf !

Sadly, we will never know how this would have panned out …

ND