Mt Rainier

Mt Rainier
Mt Rainier

Tuesday, September 1, 2015

Seattle - Tacoma International Airport - Self Organization

I have addressed environmental issues, including climate change and those around the Seattle-Tacoma International Airport, in a variety of blog articles.  These are listed below.

Self organization and complexity are important structures in considering how advanced systems develop.  The region around the Seattle-Tacoma International Airport, among others, is a self organizing environment reflecting environmental factors in the area, including it's Carbon footprint.

Previous blog articles have discussed the environmental issues around the Seattle Tacoma International Airport.  In Seattle-Tacoma International Airport - Environmental Issues
I discuss an FAA study, Aviation and Emissions, a Primer. According to that study, about ten percent (10%) of aircraft emissions, except for carbon monoxide and hydrocarbons occur at ground level or during take off and landing.  However, thirty percent (30%) of carbon monoxide and hydrocarbon emissions from aircraft occur during ground level emissions.

Iron Oxide reacts with Carbon Monoxide, at high temperatures, to produce Carbon Dioxide and Iron.  Does this impact the levels of carbon dioxide in the vicinity of the Seattle Tacoma International Airport (and especially in low lying areas where there may be a pooling or sinking of Carbon Monoxide)?  That is an interesting question, among others, in examining the distribution of the Carbon footprint in Washington State and other areas, and in what form Carbon might appear.
Externalities and Risk - The Seattle-Tacoma International Airport
Seattle-Tacoma International Airport - Environmental Issues
Seattle-Tacoma International Airport - Pollution

Wednesday, August 19, 2015

Our Nuclear Future - Financial Risk and Externalities II

Hanford Facility, Washington

In my last article on the nuclear issue, "Our Nuclear Future, Financial Risk and Externalities",
I discussed Rating Agency Capital Models in the context of nuclear risks such as those posed at Fukushima, Chernobyl and Three Mile Island.

The issue of managing the risks associated with both military and commercial nuclear applications is a vital one, that should interest all of us and speaks to the very concept of externalities and how to manage them in a global world.  In this article I focus on commercial applications.

The Fukushima disaster was impacted by inadequate safeguards.  The tsunami risk was not adequately taken into account in planning where to place the back up generators which could restore power in the event of an interruption of power.  The back up generators were placed at point too near the sea wall protection that left them exposed to the tidal wave action of the large tsunami that hit off Fukushima on March 11, 2011, when an 8.9 magnitude earthquake was experienced.

How do we deal with the risk management issues concerning the financing, construction and operation of nuclear plants, and with the issue of managing nuclear waste from both military and civilian applications?  These issues concern low probability, high risk events, issues that fall outside of the scope of normal everyday events.

The federal government offers nuclear power plants some degree of protection from liability.  These limits on liability, which exist in order to encourage the construction and operation of nuclear plants for power generation purposes, do not do as thorough a job of mitigating risk as they should.  This is because an external party, the federal government, is responsible for the oversight.  In the case of Fukushima, where plants are constructed and operated across national boundaries, the issues become more complex.

The Fukushima Daiichi nuclear power plant was constructed and operated in Japan, by Fukushima General Electric (GE), Boise, and Tokyo Electric Power Company (TEPCO).  The components of the nuclear plant were provided by contractors such as GE,which provided six GE nuclear reactors. Other contractors were also involved. Multi-national resources were employed.  Liability issues are very difficult to ascertain.  It is very probable that the loss of the ability of the generators to provide power after interruption in service due to the tsunami materially impacted the fate of the nuclear material in those reactors and magnified the effect of the event.

Management of these issues across national boundaries presents a serious issue.  How do you price for risk when governments put caps on liabilities?  It is easier for companies to price for risk when the risk is limited!  The incentive for commercial entities to manage risk is reduced when they do not have to absorb the risk of extreme events in either pricing of their products, mitigation of that risk, or the application of design elements to manage that risk. The risk is shifted to the governments.

When all else fails, due to the failure to put in place elements that will mitigate extreme risk, governments have to step in.  At this point, governments must ascertain their own issues of financial accountability and debate among themselves.  This issue is currently unfolding as nuclear radiation emerges from the Fukushima disaster and manifests itself in the ocean, carried by currents, and in the air, as was the case with the Chernobyl event.

Clearly, there must be a better match between potential liabilities and mitigation of risk.  The problem occurs when it becomes financially unfeasible for companies to price for the risk of very low probability, high risk externalities.  The government(s) must retain the capability to regulate.  History has shown that government regulation is difficult in the face of corporate profits.  This was shown in the history of seeking to regulate the ASARCO smelter.

Nuclear power plants do not arise ex nihilo. They must be financed, built, insured.  How do you finance nuclear power plants?  They can be built with government financing and the government can assume all the risk.  In a commercial enterprise, across national boundaries, private parties can finance nuclear power plants if they have sufficient funds and can insure the risk of loss, either by commercial carriers, government support or by self insuring.

There are many financial instruments that may be available to finance nuclear power plants.  In addition, nuclear power plants require real estate.   A component of a nuclear power plant can conceivably be moved from one site to another, yet the ground below stays, and is subject to the risk of contamination.

It is instructive to look back at the history of Nuclear Power Plant generation in the Northwest.  The situation with Washington Public Power Supply System Bonds is instructive (WPPSS).  An article from discusses this history of one of the largest bond defaults in history.  Five WPPSS power plants were envisioned, and WPPSS power plant 2, the Columbia Generating Station, survives.  The facility is now called Energy Northwest, and produces 12% of the power generated by the Bonneville Power Administration.

A great portion of the Northwest's power supply is generated by hydroelectric sources such as those operating along the Columbia River.

The discussion of financing nuclear power plants rests with a projection of bond default experience over time (default matrices), and how bond ratings emerge through Rating Agency models such as Standard and Poor's, Moody's and A.M. Best.

Clearly, the issue of using bonds to finance nuclear power plants is a critical one, in more than one way.  WPPSS financing has provided an example of the risk of building nuclear plants, financing them, and having companies such as insurers and banks assume the risk of financing them.

Financial institutions take risks when they purchase company bonds.  The construction and operational risks (there are separate bonds for construction and operation) are borne by those that purchase the bonds.  Riskier enterprises are assigned a risk premium that is reflected in the interest rate offered on the bond.  The riskier the enterprise, the higher the interest rate, and the longer it takes the enterprise to retire the bond.  This is basic economics.

Given the history of WPPSS, it is difficult to construct a model for financing nuclear power plant construction.  History has shown that even rating bonds for more ordinary applications, is fraught with risk.  The financial events of 2008 have demonstrated to us how the domino effects of  certain companies being taken down can bring a financial system to the brink.  It is clear that certain financial institutions were allowed fail, while others were bailed out by the government.  Insurer AIG, for example, was bailed out, while Washington Mutual was allowed to fail.  This is a very interesting aspect to investigate, since Chase was left purchasing and holding the assets that Washington Mutual had accumulated over time.

The 2008 financial collapse is another blog article, however it is instructional in how bond defaults can bring down a financial system. Suffice it to say that mortgage backed securities, collateralized mortgage obligations, credit default swaps (CDS's) and collateralized debt obligations (CDO's) played a large role in this collapse. These issues reflected the financial arbitrage reflected in Rating Agency and regulatory agency capital analysis of financial institutions.  The actions that the government took, in deciding which institutions to rescue and which institutions to allow to fail, helped determine the path that would be taken.

Rating Agencies played a large role in the events that unfolded.  I have discussed Rating Agencies in previous articles.

Clearly, nuclear financing issues present complexities beyond those presented by other issues financed by our market system.  There are limits to liability that impact the nuclear arena.  We are left, then, with a cooperative issue impacting the ways in which governmental regulatory agencies can interject themselves into the system and regulate in a manner to mitigate low probability high impact risk.

This takes us again back to the past, and the issues attendant in regulating ASARCO Smelter Emissions and the problems that this issue presented.

These are the issues we face in these times of global warming and climate change, as we consider the risks and benefits of financing nuclear power plants.  Alternative energy sources are discussed in my article "Global Warming and Climate Change - Polar Pioneer" .

We must consider the issues of regulatory government as it is juxtaposed with issues concerning market operations, in dealing with situations that involve low probability, high risk events.  It is clear that unfettered market operations may bring about market collapse through the interrelationships that exist within the structure of markets. It is also clear that government regulation that is not strong enough may not be able to counter the impact of market forces that overrun it, especially considering the profits that can be developed in certain markets.  Furthermore, it is clear that government forces may act in a manner contradictory to public interest by choosing winners and loser, perhaps steered by an array of  predefined values of certain groups.

Can we trust government?  We must have checks and balances.  Do we want government to only have one option, or to offer choices?  I'm in favor of choices, as choices facilitate change, which is needed. Market research has shown that people can tolerate only so many choices; this has been in areas such as bottled peaches, cereal, etc.  Would we ever want our choices in cereals and bottled peaches to govern our choices in power generation and other key areas?  No, however the analogy is instructive.

We need a government strong enough to regulate; the problem in regulation, however, has shown that it is difficult for regulatory agencies to keep up with the profits that can be made from activities under investigation.  This is certainly true in the financial arena where new instruments, especially those employing financial arbitrage, arise in order to present profit opportunities that defy regulation.

Constitutional issues such as due process and informed consent are bell weather issues in our financial and social system.  The Justice Department has a long storied history in regulating monopoly.  These are all important issues as we consider regulation of markets, intrusion of regulators/law enforcement into markets, and imposition of systems which defy Constitutional rights.

These issues all reflect ongoing issues of climate change and global warming and the effect of the environment on certain populations.

Our Constitutional rights are now under attack and must be defended, especially as regards issues of due process and informed consent.  I have made a thorough examination of the social processes existing in our society today and find material flaws in social systems.

Social systems and the justice system as they currently exist need serious reforms to enforce the Constitutional rights that we hold so dear to us, as do imposed belief systems.

Our Nuclear Future - Financial Risk and Externalities
Our Nuclear Future - Hanford and Spent Nuclear Fuel
Global Warming and Climate Change - "Polar Pioneer" and Arctic Drilling
Chernobyl 25th anniversary 
Energy Choices and Risk
Global Warming and Climate Change-Polar Pioneer
Processing Risk and Uncertainty
Log in the Surf - 8.9 Japan Earthquake (9.0 updated)

Washington Public Power Supply System

Friday, August 7, 2015

Financial Rating Agencies and Risk - Liquidity

Iceberg, Weddell Sea, Antarctica

Updated 9/5/2015:
I took this photograph from the Icebreaker Kapitan Khlebnikov, as we transited the Weddell Sea from the Ice Shelf of Halley Bay to the Antarctic Peninsula.  Antarctica (map) is a land of beautiful desolation, and I was able to capture nature photographs depicting its stunning landscapes and the wildlife that inhabits it.  Many countries have stations in Antarctica and I was honored to be able to visit two of them, Neumeyer (German) and Halley Bay (United Kingdom).  

Icebergs have powerful symbolism, expressing concept in many different venues.  In the maritime sense, they represent hidden risk, as ten percent of the iceberg may be visible, the remaining ninety percent of the iceberg underwater.  The Titanic collided with an iceberg in the mid-Atlantic in 1912 and is an example of risk associated with transiting areas with icebergs.  These powerful metaphors or concepts can also be expressed in other venues, including the financial arena, where risk exists and may be hidden, subject to the impact of financial bifurcation points.  

Chaos theory discusses how financial risk, and bifurcation points can reflect hidden factors which sudden express what we term "Black Swan" risk events as typified by Mohamed A. El-Erian's work.

In the financial arena, these risks reside in financial rating models.  My June, 2015 article, Financial Rating Agencies and Risk, discusses Rating Agency models in the context of jet engines, which operate under a wide range of atmospheric conditions. Similarly, financial vehicles are tested under a wide range of scenarios, by various entities such as Rating Agencies and regulators in a wide variety of fields, including banking and insurance, under different legal constructs and governmental agencies.

As discussed in my article, Financial Rating Agencies and Risk, different Rating Agencies, such as Standard and Poor's and Moody's may reflect their analysis of risk in different ways.  General Electric (GE) is used as an example in my blog article. which discussed Standard and Poor's maintenance of GE's rating in the light of its decision to divest itself of real estate assets and exit its GE Capital Finance arm.  Moody's, however, downgraded GE on its decision, indicating GE was favoring equity investors over creditors.  These rating decisions reflect different decision processes by Rating Agencies, not explicit government agencies.  However these Rating Agencies have considerable impact over the manner in which financial decisions are reflected in the marketplace.

Clearly, there is hidden information which Rating Agencies, and governmental entities, are aware of.  When there is a relationship between Rating Agencies and financial entities, as in the payment of a fee in exchange for a rating service, there is an incentive for the Rating Agency to monitor the actions of the company, as money has changed hands, and participate in the decisions of the company involved.. At some point, however, the economic prospects of the company do not warrant the degree of risk assigned to it, and the Rating Agency may choose to exercise a number of financial tools in order to maintain its credibility in the financial marketplace as a reliable partner in assessing risk.

You see, the Rating Agency has two major clients; one, those purchasing its evaluations of companies, and another, two who pay for its services in order to exchange information, maintain a rating as to its financial soundness, and exchange information in order to do so.  Government agencies are a different entity involved, and they sit and cast a watchful eye over the ability of Rating Agencies to remain impartial; they are also concerned as to the ability that Rating Agencies have to move the markets, and, especially, their ability to impact major market moves that could mask efforts at financial or other types of terrorism.

This is where the increased complexity of emerging financial instruments presents a risk for regulators as they seek to keep up with new financial structures and derivatives such as special purpose vehicles, credit default swaps (CDS) and collateralized debt obligations (CDO's).  The Treasury, certainly, is interested in attack on the financial system.

A company does not exist in a vacuum; it exists within a financial structure of ever increasing complexity, reflecting not only national considerations, but a world economic milieu of globalization that impacts its decisions, as nations develop and industries expand, contract and relocate or adopt new methodologies such as outsourcing.  Externalities are always a consideration, and this this issue is discussed in my blog article of the same name.

This brings us back to the iceberg and the hidden factors. GE presents an interesting case study as we look to parse the actions of Standard and Poor's and Moody's in their rating of GE.  My blog article, Our Nuclear Future - Financial Risk and Externalities briefly discusses the issue of the six nuclear plants designed by GE, which were part of the Fukushima Daiichi Nuclear Site's design.  The interesting question is the use of ratings in conjunction with the use of chaos theory and bifurcation points to bring down the economy and financial system.

There are specific provisions (options) in financial agreements that allow a company to take action in the case of certain events such as ratings downgrades.  This puts a particular onus on Rating Agencies who have access to company information; it also presents a challenge to companies being rated as they seek to understand the processes which rating agencies use to rate their companies.

The interesting question in analyzing GE in the light of its departure from GE Capital, which finances GE engines, and from real estate, is its liquidity position and its exposure to risk from liquidity events in the light of the various risks that its operations faces.

Indeed, liquidity is an important consideration in analyzing a company's financial soundness.  An example where liquidity events have taken down companies is General American Insurance, where exposure to risk from institutional investors brought down the company.  General American had high exposure to funding agreements, which allowed policyholders to exercise a put option (withdraw funds without penalty) upon the adverse action of Rating Agencies. The construction of funding agreements involved mark to market issues and the use of put options in mutual funds (7 day put options).  Moody's downgraded General American's insurance financial strength rating from A3 to Ba1 on August 9, 1999.

The interesting question with the actions of Standard and Poor's and Moody's with regards to GE is the divestiture of the GE Capital financing arm and the Real Estate assets; both of these events seem to reflect a move to better match projected assets and liabilities by increasing liquidity, potentially in the light of anticipated liabilities.  These are the hidden, or unknown issues that confront regulators.

Why discuss GE?  With issues of climate change and global warming, jet engines, which operate under a wide range of atmospheric conditions utilize various fuels for combustion under a wide degree of parameters representing different aspects of aviation usages, including private, commercial and government use. My blog article on the Polar Pioneer discusses these issues in the light of exploration and drilling for petroleum products in the Arctic. The availability of fuel and the mode of combustion and types of engines employed will always be an important characteristic of any decision process as we analyze our future options.

Many people have contributed to the issues discussed in these blog articles and I express my appreciation to them and to their contributions.

Liquidity issues are important factors in assessing financial risk.  They represent one category of risk among others that can reflect bifurcation points which can impact the economy.  Organization structure is also important, as indicated by the Barings Bank issue where Nick Leeson was involved on both sides of the house, trading and operations. - Risk Lightbox



Rating Agencies:

General American Insurance:


Tuesday, August 4, 2015

Our Nuclear Future - Financial Risk and Externalities

Hanford Site, Washington

In my blog article, Our Nuclear Future - Hanford and Spent Nuclear Fuel, I discussed energy issues, focusing on risks associated with nuclear power plants. and including the risks associated with spent nuclear fuel.

Risks associated with oil drilling are discussed in my article about the Polar Pioneer, 
Global Warming and Climate Change - "Polar Pioneer" and Arctic Drilling.  These risks increase as oil consumption and resources are impacted by peak oil considerations.

Nuclear power plants also pose financial risk.  I address this issue in my blog post,
Energy Choices and Risk.  This issue is a matter of continuing investigation as we look towards issues of financial risk management, and the costs  imposed on society and individuals as discussed in my blog article Externalties.

In my blog article, Financial Rating Agencies and Risk, I discussed Rating Agency Capital models, using a conceptual model of jet engines as an analogy.  Fuel and energy are important components of growth and development, and the ability to test a jet engine for the proper mix of fuels that permit combustion under a wide range of situations provides a useful model to compare to the type of modeling required for financial stress testing.  In that article, I discussed General Electric (GE)'s Ratings in light of its decision to exit its GE Capital finance arm and divest itself of real estate assets.

The actions of Rating Agencies Standard and Poor's and Moody's are interesting in light of the issues concerning Fukushima and the use of six GE nuclear reactors in the Fukushima Power Plant.
Our Nuclear Future - Hanford and Spent Nuclear Fuel
Global Warming and Climate Change - "Polar Pioneer" and Arctic Drilling
Chernobyl 25th anniversary 
Energy Choices and Risk
Global Warming and Climate Change-Polar Pioneer
Processing Risk and Uncertainty
Log in the Surf - 8.9 Japan Earthquake (9.0 updated)

Peak Oil

Sunday, July 12, 2015

Israel and Akiva Tor

Potato Latkes with Apple Compote

I attended a talk given by Akiva Tor, Israeli Northwest Consul General, San Francisco Consulate, given November 3, 2010.  It was very interesting to hear Mr. Tor speak regarding the very compelling issues in the Middle East.  Mr Tor was very earnest in seeking to work with the American government to deal with common areas of interest.  Mr Tor spoke regarding the necessity of maintaining Israel's national security and hoped to find a way to ease the emergent problems in the settlements.

Mr Tor is now Director for Special Projects, Israel Ministry of Foreign Affairs.  An article in discusses his term as Northwest Consul General.  Mr Tor has an interesting background and his service has ranged from involvement in the community, to film screening sessions, to museum openings.

What interests me most about Mr Tor's stint as Northwest Consul General, is his involvement in aiding U.S. government interests in divesting in companies which do business with Iran.  As the articles states, lawmakers had already passed a bill mandating that CalPERS and CalSTRS, (State Pension Funds) "divest from companies doing business with Iran. However, compliance and enforcement had been lax".

I find the issue of divestment very interesting and compelling.  I understand well the fiduciary issues that confront plan sponsors. Indeed, fiduciary responsibility in pension funds is a compelling issue to many retirees.

 This issue is very important in pension plans where the Pension Benefit Guaranty Board (PBGC) operates as a U.S. Government Agency.  The Pension Benefit Guaranty Board Annual Report for 2014 depicts its operation.  The PBGC provides coverage for private sector single employer and multi-employer plans.

Washington State's Pension Plans have had issues with KKR and WAMU. according to this article in the Seattle Times. Recently, KKR settled fees with the SEC that has impacted the Washington State pension system, as well as others.

Indeed, it is interesting to note the cascade which erupted from the chain of failures in 2008.

This takes us back to the issue of Mr Tor and divestment.  For the individual investor who wishes to invest in stocks, the issue of what to invest in has particular meaning. Some products may be repugnant to certain investors and those investors may wish to avoid stocks or mutual funds that include them. This is called "social investing".  This is becoming increasingly difficult in today's society when conglomerates operate to market many products, some of which a particular investor might find distasteful.

The issue of divestment as a financial tool is an interesting one in today's society worthy of additional study as the method of divestment is being used by more and more groups, generating more and more difficult problems of attribution.

In an increasingly complex society, many of these issues cross boundaries and become caught up in the intricate issues of global warming and climate change which confront nations across boundaries.

Congressional Budget Office - The Risk Exposure of the Pension Benefit Guaranty Corporation
Pension Benefit Guaranty Corporation - Wikipedia
Seattle Times - State's Pension Fund Bets Big on Private Equity
Pension and Investments  - Settlement of Charges with SEC over Fees
State's Pension Plan Bets Big on Private Equity - Seattle Times

Washington Mutual (WAMU)

Saturday, July 11, 2015

Our Nuclear Future - Hanford and Spent Nuclear Fuel

Hanford Site, Washington

This nation depends on nuclear energy for a great deal of it's power generation.  Indeed, as we see the Polar Pioneer take off for marginal Chukchi Sea, we note the difficulties faced by our declining resources and the issue of Peak Oil.

How can a world which depends on energy to operate gain power generation resources when there are so many demands, both by developed countries who have already built up a large demand for resources, and by developing nations, in areas such as Africa and Asia, where demands for energy resources will increase with industrialization and commercialization.

I have already discussed some of the issues posed by the Polar Pioneer in my recent blog article. It is clear that there are many risks in oil drilling as we seek to drill at greater and greater depths, in locations where the risk is greater, such as the Chukchi Sea between Alaska and Russia, and engage in practices such as fracking which present their own risks.

My previous blog article, "Energy Choices and Risk", following the Fukushima Disaster on 3/11/2011, discusses some of the emerging risks. Hydroelectric power is a major source of energy which meets much of the energy generation needs in the Pacific Northwest.  Climate change and global warming impact the generation of hydroelectric power and water resources.  Declining glaciers and mountain snow impact climate change and global warming through a positive feedback mechanism as the lower snow pack decreases the albedo through lower reflectivity in the mountain snow pack.

Alternative energy choices are increasingly being considered.  These include biofuels, wind power and solar power.  Can these alternative energy sources meet the bulk of our needs for energy consumption? They can help mitigate the demand for energy but cannot completely fill it. Would filling the planet's surface with wind generators disturb our meteorological balance?  Would over use of solar panels mean that solar energy is diverted into household appliances rather than photosynthesis? To what extent can we generate energy without disturbing other entities within our environment, beyond a de minimus impact?  We do not know the answers to many of these questions.

 I have discussed issues of low probability, high impact risks in conjunction with Three Mile Island, Chernobyl and Fukushima in my blog article "Energy Choices and Risk".

While large scale accidents see significant press coverage (and they should), those who have studied, researched or worked in the nuclear industry have compelling stories about how exposures have impacted their lives in many ways.  Many others, through occupational exposures not directly related to the nuclear industry may also have been impacted in many ways and to various degrees.

However, occupational exposure is not the whole story; many others, in various walks of life, have been exposed to radiation or other environmental risk in a number of ways.  These individuals may include family members of those having occupational exposure, those living in down wind areas, those transiting through areas with exposure, and those who may be handling product that might have some radiological contamination, and many more. It is clear that those with non-occupational exposures must be cared for just as those with occupational exposures are cared for. The impact of radiation on the populace is an externality issue.

Radiation released into the atmosphere is carried downwind; radiation released into water is carried with the currents.  Radiation released into materials is carried with those materials. Radiation will follow its decay path, which varies with the radionuclide.  One may consider bananas, which are high in potassium, and carry the naturally radioactive element Potassium 40 at low levels.  Every time we carry bananas from the store to our home we carry some (low level) amount of radioactivity with us.  Believe it or not, radiation from bananas is expressed as a "banana equivalent dose", about 0.1 micro-sievert, at least on Wikipedia.

The impact of exposure to radiation is a serious one involving physiological and psychological issues.

Dr Yuri Yablokov's work, "Consequences of the Catastophe for People and the Environment" is an extensive body of work by the Russian Scientist who reported to Mikhail Gorbachev. Dr Yablokov has provided probably the most complete body of work relating to the impact of Chernobyl on people and on the environment.

The Marshall Islands is but one example of an area where nuclear testing has impacted residents. Sixty years later there are still impacts as indicated by this article in The Guardian.

Nevada and New Mexico have a history of atomic testing where test sites and downwind areas have been impacted..  My article on the site of the first atomic test, the initial Trinity nuclear test in New Mexico, discusses these issues.

There are a garden variety of risks along a risk spectrum surrounding the use of nuclear energy.  Risk studies for the Indian Point Reactor at Buchanan, New York, consider a variety of factors: This study takes into account information from the Chernobyl and Fukushima events.

Wikipedia lists some incidents at Indian Point Reactor. To what degree have radiation incidents at Indian Point impacted the surrounding industries and the neighboring communities?  To what extent was a gypsum plant just south of the Indian Point Reactor exposed by incidents at Indian Point?  This is a matter for further investigation.  Gypsum is used in many applications, including in wallboard. Could radioactivity could have traveled from a point of origin in Buchanan, New York, via trucks, trains, vessels or aircraft to residential and commercials interiors: bedroom, kitchen and bathroom walls all over the world?  Can we know the answer to these questions? Certainly we would need to answer these questions in assessing future risks where industrial and other activities are carried about in areas contiguous to nuclear facilities.

According to the Indian Point Report: "Also note that these calculations were performed for a hypothetical accident at only one of Indian Point’s two operating reactors, and the accident scenarios did not involve radiation release from the spent fuel pools, unlike for Fukushima, which was a multi-unit accident with damage to spent nuclear fuel storage. " states one section of the document.

A continuing issue is the handling of spent nuclear fuel.  This is an increasing issue as the amount of spent nuclear fuel, especially that containing plutonium, increases.

A March 18, 2011, article in the Seattle Times discusses the use of MOX plutonium fuel at Hanford.

Nuclear waste may be stored, for example at Tank Farms, for example, at Hanford Tank Farms, or in Dry Cask Storage or at deep geological repositories such as the Carlsbad Waste Isolation Storage Plant in New Mexico.  Yucca Mountain was designated as a deep geological depository for the storage of high level nuclear waste and spent nuclear fuel.

Nuclear waste can be processed in various ways, for example via vitrification at the Vitrification Plant at Hanford and potentially transported elsewhere for long term storage.  The storage and processing of spent nuclear fuel has thus been the subject of extensive debate.  Many of these storage methods involve keeping the isotopes in their original processed state, so that many long lived isotopes are stored in what is an accumulating storage of spent nuclear fuel.

Nuclear fuel can also be processed in a reactor.  This processing allows for isotopes with higher levels of radioactivity, to be processed down their decay chain, reducing the level of radioactivity while producing power, and thus reducing the level of radioactivity in the spent fuel that has to be stored.  This methodology, which is referred to in the March 18, 2011 article in the Seattle Times, has its own risks.  Risks include the risk of nuclear accident while reprocessing the fuel, escape of containment and risks involved in transporting the nuclear spent fuel from the sites at which it is being processed to the sites where it is reprocessed (Hanford Power Plant).

These risks include many of the same issues discussed above regarding the Indian Point plant. There are longer terms risks as well, which involve how to use the potential energy stored in the radionuclide's decay chain; whether it should be used immediately to generate power or whether it should be put back in the ground to be available for later use, or whether there is some planetary need relating to global warming and climate change that should dictate its usage.  That is a matter of continuing discussion.  There is a considerable continuum of risk involved in studying this issue of nuclear waste.

Dr Yablokov's work on Chernobyl illustrates this risk in a very powerful way.  Many areas could potentially be impacted, including the Palouse of Washington, the Seattle Area, and the Washington and Oregon Coasts.

I heard Dr Yablokov speak on "Chernobyl 25 Years Later: Lessons Learned" on March 28, 2011 at the University of Washington, at Kane Hall about his experiences dealing with that nuclear disaster. It was quite an experience.

Nuclear power plants also pose financial risk.  I address this issue in my blog post,
Energy Choices and Risk.  This issue is a matter of continuing investigation as we look towards issues of financial risk management, and the cost of externalities as imposed on society and individuals.

Washington Coast
Oregon Coast

Hanford - Use of Plutonium Fuel
Indian Point Energy Plant
Marshall Islands Nuclear Testing Legacy
Consequences of the Catastrophe for People and the Environment - Dr Yablokov
Seattle Times - Plutonium Fuel Could be Used at Hanford Power Plant

Indian Point Energy Center
Hydraulic Fracturing
Banana Equivalent Dose
Carlsbad Waste Isolation Storage Plant
Yucca Mountain Nuclear Waste Depository
Chernobyl 25th anniversary 
Energy Choices and Risk
Global Warming and Climate Change-Polar Pioneer
Processing Risk and Uncertainty
Log in the Surf - 8.9 Japan Earthquake (9.0 updated)

Nuclear Regulatory Commission - Dry Cask Storage

Monday, June 22, 2015

Financial Rating Agencies and Risk

Pratt and Whitney J-58 Engine, Lockheed SR-71 Blackbird,
Museum of Flight, Seattle, Washington

How will a recent settlement of a Justice Department suit against Standard & Poor's Rating Agency impact the Rating Agency's assessment of companies that it rates?  With many companies having calendar year financial year ends, this is an emerging question as the various Rating Agencies reviews ratings.

The Justice Department is investigating Moody's Rating Service. The Moody's and Standard and Poor's suits are related to fraud in mortgage backed securities.  Mortgage backed securities experience contributed significantly to the financial crisis of 2008.  The U.S. Justice Department worked with State Agencies in filing the suits.

A recent example of the impact of credit ratings is shown by Standard & Poor's affirmation of General Electric's Credit Rating at AA+ in the wake of its earlier announcement to exit its GE Capital Finance arm and divest itself of real estate assets, as reported in Marketwatch.

Meanwhile, Moody's Investor Service downgraded GE on that decision, concerned about favoring equity investors over creditors. GE Capital has a history of aviation financing, as well as an interest in the future of aviation, as in supersonic flight.

It is interesting to note the responses of the two Rating Agencies in this particular case, in the light of Justice Department investigations and emerging circumstances in the financial markets.  What does the future hold in store?

In addition to the financial circumstances surrounding GE, and in particular, GE Capital, it is interesting to consider that jet engines might serve as a useful metaphor for emerging issues in the financial sector, and for Rating Agencies in particular.

A number of years have passed since the financial crisis of 2008.  In a previous blog article on August 22, 2011, I discussed the downgrade of  United States Long Term Sovereign Credit from AAA to AA+.  In this article I discuss some of the issues involving Rating Agency and other capital models.
Capital models are complex analytic models designed to measure the soundness of institutions.   The U.S. Justice Department has been evaluating a number of rating agencies to assess their impact on the financial markets and their adequacy in measuring company risk.

Generally, capital models look at total capital available and compare it a risk based capital measurement.  The risk based capital measurement is a formula based on the risks a company assumes in its various lines of business, assigning weighting capital factors to measure important items such as asset risk, insurance risk, asset liability/matching risk, business risk and other factors.  These types of measurements vary considerably between different types of business.  Depending on the use of the capital model, the structure of the model and the types of metrics used, the factors, and the analysis will differ considerably from institution to institution.

Rating Agencies serve to provide information to investors that help them decide whether to invest in a company.  Thus the analysis of a rating agency focuses on issues of financial soundness, potential for growth, and a wide variety of issues that are of interest to potential investors, in both debt and equity securities.  Rating Agencies include such agencies as Standard & Poor's, Moody's, A.M. Best and Fitch.

Rating Agencies perform valuations of companies. Rating Agencies will provide a rating for a company based on data readily available through public sources.   However, in order to have a comprehensive financial evaluation, Rating Agencies typically require a fee to be paid which will enable the company under valuation to interact with the Rating Agency, allowing it greater access to information obtained by the Rating Agency and more sharing of information.

Rating Agency models will differ from models used by regulators to assess financial soundness.  For example, state insurance commissioners who regulate financial soundness of insurance companies will also model risk based capital.  Their analysis,  however, is focused more on solvency issues than indicators of growth to potential future investors. This is because state guarantee funds, which insurers pay into, are regulated by the states. State guarantee funds provide some funds according to regulation to certain classes of policyholders in the event of insolvency. The downside risks and upside benefits are different for regulators versus the various classes of investors interested in a company.

Because the focus of capital models vary widely according to the use for which they are intended, they tend to produce different types of results.  Regulatory models might be established through cooperation between certain government or quasi-government-private bodies that seek to promote some degree of uniformity (.e.g. the National Association of Insurance Commissioners - NAIC).

Private Rating Agency models by such major players in the system such as Standard & Poor's, Moody's, A.M. Best and Fitch will vary because each of these rating agencies are seeking to gain business by rating companies and each has developed its own model. This is called competition. Thus when a company is evaluated by rating agencies, their rating may vary between different rating agencies.  This is because different rating agencies will weight various activities differently than others.

Rating agencies have a considerable amount of power to impact the way in which a company is viewed in the marketplace.  The specific metrics and factors used by a rating agency to judge a company may impact whether a company gains or loses business and may influence a company's decisions.  An action by a rating agency to downgrade a company may result in the company losing a considerable amount of business, and even cascade that company to failure.

There is a certain psychology at work in companies dealing with rating agencies.  Because companies have an opportunity to gain a more favorable rating by interacting with a rating company if they pay a fee to have a more comprehensive analysis, the two entities are now bound by some sort of cooperative relationship (symbiosis) whereby it is in the interest of the rating agency to keep getting the fee.  The rating agency, however,to ensure its credibility, needs to report adverse conditions that may lead to failure of the rated company at some point.  Thus the rating agency is on the horns of a dilemma, whereby it must at some point act to ensure the credibility of its ratings.

However Rating Agency models are just that, models, and models may not take into account all the protective factors that companies use to ensure continued operation.  Rating Agency models reflect the biases of those who engineered them and may reflect psychological factors such as confirmation bias and cognitive dissonance.

The ability of a Rating Agency to cascade a company downhill towards failure,  into the hands of investors ready to swoop it up at bargain prices, may hinge on the use of specific metrics and factors which are keyed towards certain predetermined models or results.

A Rating Agency model, like the companies it rates, are very complex models.  Perhaps a jet engine is a suitable metaphor, in terms of complexity, in considering how such models operate in an ever complex world where problems such as climate change and global warming loom ever larger. My recent blog articles on the Polar Pioneer and Seattle-Tacoma International Airport discuss some of these issues which may impact aviation.

A jet engine such as the Pratt and Whitney J-58 engine, operating in conjunction with the titanium-skinned aircraft itself, a SR-71 Blackbird, needs to be able to operate in a range of atmospheric conditions reflecting different atmospheric pressures, levels of oxygen and carbon dioxide, and under various heat constraints and mechanical stresses.  The pilot's own physiological and psychological stressors are of paramount importance in such an environment, which includes exposure to a variety of environmental hazards, in various feedback modes.

It is in this context that we consider Rating Agency models not simply as a static model based on year end performance or occasional interaction with companies they rate but also a dynamic model that must take into account many complex factors and interactions in an environment where physiological and psychological stress tests, as experienced by test pilots, operating in a real environment may be the most dangerous elements, especially when so many unknown factors must be taken into account.

Many companies perform complex modeling analyses to stress test their operations under a range of potential situations.  The question is how Rating Agency models reflect the balance of risks and who, in this complex society is actually directing the emergence of results.

These are all very significant issues as we live in an interconnected society, perched on a bifurcation point of climate change and global warming, that has impacts on many sectors of the society, and, in fact the planet.  Externalities and systemic risk are major factors in our ever changing society as we address issues that go beyond individuals, corporations and governments.

Fuel and energy sources are important factors in a global economy, issues that affect many on a personal scale, in many ways that many not suspect, due to their ever increasing complexity. Rating Agencies, and their impact on society are but one of a number of factors influencing the outcomes of these very important issues as we tackle these significant problems.