Nuclear vs. Financial Disasters

Includes: DIA, QQQ, SPY
by: Cam Hui, CFA

Over the weekend, I have been pondering the potential problems at the two Japanese nuclear plants after the 8.9 earthquake on Friday. In the grand scheme of things, any problem seems to be contained and damage is likely to be relatively minor - though the Japanese are by no means out of the woods.

Dr. Josef Oehman, research scientist at MIT, in a blog post comment, believes that "there was and will *not* be any significant release of radioactivity", largely because of the design philosophy:

When designing a nuclear power plant, engineers follow a philosophy called “Defense of Depth”. That means that you first build everything to withstand the worst catastrophe you can imagine, and then design the plant in such a way that it can still handle one system failure (that you thought could never happen) after the other. A tsunami taking out all backup power in one swift strike is such a scenario. The last line of defense is putting everything into the third containment (see above), that will keep everything, whatever the mess, control rods in our out, core molten or not, inside the reactor.

The whole comment is excellent, concise in explaining the fundamentals of the plant's design and what happened. It is well worth reading. Oehman went on to give kudos to Japanese engineering:

The earthquake that hit Japan was 5 times more powerful than the worst earthquake the nuclear power plant was built for (the Richter scale works logarithmically; the difference between the 8.2 that the plants were built for and the 8.9 that happened is 5 times, not 0.7). So the first hooray for Japanese engineering, everything held up.

The Japanese have been expecting the "Big One" for decades so this earthquake was hardly a surprise. They have built much of their infrastructure with a major earthquake in mind. It is therefore a testament to their preparedness that a far more powerful earthquake (8.9) struck Japan and left it with a death toll in the tens of thousands (and much of that was from the tsunami and not the earthquake). By comparison, the 2010 Haiti earthquake was far less powerful (7.0) but produced a death toll of over 300,000.

What about financial earthquakes?
By contrast, the world went through a financial earthquake in 2008 when Bear Stearns and Lehman Brothers collapsed. So it was a shock when I saw Bloomberg report last week that an "International Monetary Fund report shows that regulators haven’t gone far enough in taming potential financial-market excesses since the economic crisis began."

The IMF report stated: "We are at the moment even less well-prepared than when the crisis erupted in 2007." [emphasis mine]

There are macro risks everywhere. Should another financial earthquake occur, it should not be a surprise to anyone.

Have we learned nothing? Where is the redundancy that is found in nuclear power plants? Where is the "defense of depth", or any defense?