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Fukushima and Derivatives Meltdowns

CAMBRIDGE – Financial commentators have likened Japan’s earthquake, tsunami, and nuclear catastrophe to derivatives’ role in the 2008 financial meltdown. The resemblance is clear enough: each activity yields big benefits and carries a tiny but explosive risk. But the similarity between the two types of crisis ends where preventing their recurrence begins.

For the Fukushima nuclear-power plant, a 1,000-year flood and ordinarily innocuous design defects combined to deprive the reactors of circulating water coolant and cause serious radiation leaks. In financial markets, an unexpected collapse in real-estate securities and design defects in the derivatives and repo markets combined to damage core financial institutions’ ability make good on their payment obligations.