Thursday, August 07, 2008

When money falls from the sky

Deals in commodities of the abstract sort
Buys them in bulk but then he sells it short
Talent, genius, love / even signs of affection
He floods the market / there's no price protection
And when his master plan is unfurled / there stands
A handsome bid / on the weather systems of the world

~Andrew Bird, "Banking on a Myth"
Mysterious Production of Eggs (02005)

A few months ago I saw on DVD the documentary Enron: The Smartest Guys in the Room, about the late U.S. energy company (dir. Alex Gibney, 02005; if you missed it there's an excellent review here). One of the strongest impressions it left was of the ingenuity of the company's financial schemes -- such as "mark to market" accounting -- perceptions of which may reasonably run the gamut from clever, through audacious, to downright fraudulent. (Since it includes some murky, moral territory, it isn't always easy to say where one category ends and the next begins.) Part of Enron's inventiveness was manifested in pioneering weather derivatives, which allow traders to reduce risks associated with the unpredictability of weather conditions. (Conceptually related is the recent emergence in financial markets of catastophe bonds, or "cat bonds" for short, which do not necessarily pertain to weather events, but certainly can -- such as the Thames river flood bond issued by German insurer Allianz in 02007; I wrote about it then at the Long Now blog.)

Today, I came across this report on a similar instrument available through an online provider; currently limited "to accredited investors with a minimum net worth of $1 million" but perhaps, in due course, to become available more widely.

As businesses contemplate losing massive amounts of money from events like droughts and hurricanes, WeatherBill hopes to carve out a market in the growing field of weather-related risk-management products, offering what are essentially weather futures contracts to companies with an internet-era twist. The contracts pay off automatically without any kind of claims process based on objective weather measurements like the inches of rain a given area receives.
[...]
"Our business has all sides of risk—we've got customers wanting rain, drought, heat waves, frost, no frost. We even have people who want hurricanes," says [founder David] Friedberg.

~Chris Colin, "Doing Something About the Weather, Financially at Least", Portfolio.com (at Wired.com), 7 August 02008

There's something terribly fascinating, I find, about the commodification of natural processes, this gaming of life's details via insurance and financial instruments. I don't know if Andrew Bird, author of the elegant lyric at the top, had former Enron CEO Jeff Skilling in mind when he penned "Banking on a Myth". But there's an air of dramatic, even mythic resonance here, in the cavalier exploitation of complex systems for short-term gain. As Lester Pimentel's insightful review of the Enron doco notes: "[Former Enron exec Ken] Lay and Skilling are classic tragic characters: incredibly intelligent men felled by their own hubris."

I'm just experimentally putting pieces together for consideration here, not mounting a fully ramified argument; but I'd be really interested to know what others think.

2 comments:

sportsbabel said...

Together with the recent attempts in China to modify the weather for the 2008 Olympics, I think we are looking at a brave new world of "market manipulation".

stuart candy said...

Sean, good to hear from you again. Busy times over at Sportsbabel , I'd imagine, with the Olympics underway...

Anyway, you make a good point about the manipulation of weather. I thought it was pure sci-fi when I read Michael Crichton's sub-par climate change thriller-cum-rant State of Fear a few years ago. But in the meantime it's gone mainstream. Two days ago PRC's official Xinhua press agency claimed successful rain dispersal measures for the opening ceremony ("Beijing disperses rain to dry Olympic night"). Similarly to the question of culpability for climate change (addressed here recently), if these interventions are effective and become more commonplace, I wonder how the legal framework might deal with ensuing challenges -- conspiracy to cause a tornado, rainwater theft, and malicious sunburn in the second degree.

Then again, maybe the market will solve all that, too.

Anyone wanna buy some thunderclouds from New Haven, Connecticut? We have extra.