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Whoops: SEC Spares Market Makers From `Naked-Short' Sales Ban July 18 (Bloomberg) -- The U.S. Securities and Exchange Commission exempted market makers in stocks from the emergency rule aimed at preventing manipulation in shares of Fannie Mae, Freddie Mac and 17 Wall Street firms. The SEC granted relief for equity and option traders responsible for pairing off orders from a rule that seeks to bar the use of abusive tactics when betting on a drop in share prices. Exchange officials said limits on ``naked-short'' sales would inhibit the flow of transactions and raise costs for investors. ``The purpose of this accommodation is to permit market makers to facilitate customer orders in a fast-moving market,'' the SEC said in the amendment. A reader writes: "that lasted what, 12 hours ?" I don't know, but it certainly clashes with the dramatic news of earlier in the week from the SEC, as the Economist reports: Desperate to prevent more collapses, the main stockmarket regulator has slapped a ban for up to one month on “naked shorting” of the shares of 17 investment banks, and of Fannie Mae and Freddie Mac, the two mortgage giants. Some argue that such trades, in which investors sell shares they do not yet possess, make it easier to manipulate prices. The SEC has also reportedly issued over 50 subpoenas to banks and hedge funds as part of its investigation into possibly abusive trading of shares of Bear Stearns and Lehman Brothers. Naked selling is technically illegal but unenforceable. The fact that it is illegal is a natural extension of contract laws: you can't sell something you haven't got; the reason it is technically easy is that the markets work on delayed settlement. That is, all orders to sell are technically short sales, as all sales are agreed before you turn up with the shares,. Hence, all orders are based on trust, and if your broker trusts you then you can do it, and do it for as long as your broker trusts you. "Short selling" as manipulation, as opposed to all selling, works like this: imagine I'm a trusted big player. I get together with a bunch of mates, and agree, next Wednesday, we'll drive the market in Microsoft down. We conspire to each put in a random order for selling large lumps of shares in the morning, followed by lots of buy orders in the afternoon. As long as we buy in the afternoon what we sold in the morning, we're fine. On the morning of the nefarious deed, buyers at the top price are absorbed, then the next lower price, then the next ... and so the price trickles lower. Because we are big, our combined sell orders send signals through the market to say "sell, sell, sell" and others follow suit. Then, at the pre-arranged time, we start buying. By now however the price has moved down. So we sold at a high price and bought back at a lower price. We buy until we've collected the same number we sold in the morning, and hence our end-of-day settlement is zero. Profit is ours, crack open the gin! This trick works because (a) we are big enough to buy/sell large lumps of shares, and (b) settlement is delayed as long as we can convince the brokers, so (c) we don't actually need the shares, just the broker's trust. Generally on a good day, no more than 1% of a company's shares move, so we need something of that size. I'd need to be very big to do that with the biggest fish, but obviously there are some sharks around: The S&P500 companies with the biggest rises in short positions relative to their free floats in recent weeks include Sears, a retailer, and General Motors, a carmaker. Those driven by morality and striven with angst will be quick to spot that (a) this is only available to *some* customers, (b) is therefore discriminatory, (c) that it is pure and simple manipulation, and (d) something must be done! Noting that service of short-selling only works when the insiders let outsiders play that game, the simple-minded will propose that banning the insiders from letting it happen will do the trick nicely. But, this is easier said than done: selling without shares is how the system works, at its core, so letting the insiders do it is essential. From there, it is no distance at all to see that insiders providing short sales as a service to clients is ... not controllable, because fundamentally all activities are provided to a client some time, some way. Any rule will be bypassed *and* it will be bypassed for those clients who can pay more. In the end, any rule probably makes the situation worse than better, because it embeds the discrimination in favour of the big sharks, in contrast to ones regulatory aim of slapping them down. Rules making things worse could well be the stable situation in the USA, and possibly other countries. The root of the problem with the USA is historical: Congress makes the laws, and made most of the foundational laws for stock trading in the aftermath of the crash of 1929. Then, during the Great Depression, Congress didn't have much of a clue as to why the panic happened, and indeed nobody else knew much of what was going on either, but they thought that the SEC should be created to make sure it didn't happen again. Later on, many economists established their fame in studying the Great Depression (for example, Keynes and Friedman). However, whether any parliament in the world can absorb that wisdom remains questionable: Why should they? Lawmakers are generally lawyers,and are neither traders nor economists, so they rely on expert testimony. And, there is no shortage of experts to tell the select committees how to preserve the benefits of the markets for their people. Which puts the lie to a claim I made repeatedly over the last week: haven't we figured out how to do safe and secure financial markets by now? Some of us have, but the problem with making laws relying on that wisdom is that the lawmakers have to sort out those who profit by it from those who know how to make it safe. That's practically impossible when the self-interested trader can outspend the economist or the financial cryptographer 1000 to 1. And, exactly the same logic leads to the wide-spread observation that the regulators are eventually subverted to act on behalf of the largest and richest players: The SEC’s moves deserve scrutiny. Investment banks must have a dizzying influence over the regulator to win special protection from short-selling, particularly as they act as prime brokers for almost all short-sellers... The SEC’s initiatives are asymmetric. It has not investigated whether bullish investors and executives talked bank share prices up in the good times. Application is also inconsistent. ... Like the Treasury and the Federal Reserve, the SEC is improvising in order to try to protect banks. But when the dust settles, the incoherence of taking a wild swing may become clear for all to see. When the sheepdog is owned by the wolves, the shepherd will soon be out of business. Unlike the market for sheep, the shareholder cannot pick up his trusty rifle to equalise the odds. Instead, he is offered a bewildering array of new sheepdogs, each of which appear to surprise the wolves for a day or so with new fashionable colours, sizes and gaits. As long as the shareholder does not seek a seat at the table, does not assert primacy over the canines, and does not defend property rights over the rustlers from the next valley, he is no more than tomorrow's mutton, reared today....

The following is either explicitly taken from Stephen Mason (2007), Electronic Signatures in Law, Tottel, 2nd edition; or implicitly builds on that book. The Definition of the Signature A definition of a signature is: a token of the intent of a person to authenticate and give legal effect to a document. This is primarily a restatement of the evidentiary functions, below, but with the addition of two key parts: that there is a token, and that its creation or use signals an intent. Signatures as Evidence of a Function Traditionally, signatures have been described more by their function than by their form, or manifest objectivity. That is because their importance lies more in their function than their form, any token that might give evidence to a signing function can be accepted as a signature. Hence, let's look at function first. There are many functions of a signature. To summarise Mason (2007 pages 21-22): Primary evidence of approval, adoption, binding and legal effect, and significance of a document Secondary evidential functions of identity and role. Secondary evidential functions of non-binding purposes such witnessing, acknowledging, or verification. Cautionary function to the signing person Protective function to the relying person Channelling function to collect previous events into a time, place and document Record keeping to ensure the durability of the record. These functions are complex and varied, and the above only gives a taste. The mental trick here is to consider the the signature as no more than a mere token that is slaved to the wider functions above. Hence the function of the signature is far more important than the form of the token, and this is generally established early on in any protocol. This function then goes on to inform what form of token might be appropriate in the case at hand, but the reverse might not be true. (Cryptographers might recognise a trap-door function: the signing will inform as to the form of the signature, but the form will not necessarily inform as to the function behind the signing.) Classical Tokens of the Act of Signing With that in mind, we can now describe what it is that might be the manifest form of the token that makes up the signature. Classically, a signature is considered to be a customary and individual form of a person's name, inscribed in running-writing by the person on a document. However, this is just a custom, not a rule. In different cases, at varying times, the following have all been accepted as a signature before the courts (Mason, 2007 2.9 - 2.32): a cross like X when marked by the person a thumbprint a number unique in the context an illegible scrawl, or a name in block letters a first name only, a surname only, or initials only a mark made by the pen moved by a second person, but touched by the signatory a name written by an auctioneer of a buying party typewritten name at the top, or other form of letterhead with the name stated the wrong name in the right context a trading name, or a short form of a name "mother" or other nicknames the use of a wax seal, where augmented by a thumbprint or impression. These examples form a fascinating array of possibilities, which reflects the courts' preference to look at the function and wider protocol, rather than any mere token. A brief foray into the use of Electronic Tokens for Signing From that historical position, it should be no difficult leap to consider the following as potentially valid forms of signatures from the electronic world (Mason 2007 Chapter 10): typed name within a document, image of a signature pasted into an electronic document, headers in the email, without any typed name, where part of a 'mosaic' of other emails, 'click-wrap' agreements with a checkbox and 'I agree', typing in a PIN ("personal identification number") (Mason 2007) describes many cases where an email is signed by means as simple as a typed name. For example, in a case in Northern Territory, Australia, an email laying out a separation agreement ended with the words 'Regards, Angus' (Mason 2007 10.6). The judge applied the appropriate electronic signature law (s9 ETA(NT)2000) and said: I am satisfied that the printed signature on the defendant's emails identifies him and indicates his approval of the information communicated, that the method was as reliable as appropriate and that the plaintiff consented to to the method. I am satisfied that the agreement is 'signed' for the purposes of s 45(2). Signing without a Signature Where things get more difficult is why headers to an email would help to signify that a document is signed. In the cases listed (Mason 2007 10.21, 10.24), the courts leaned heavily on a 'mosaic' of emails that authenticated that an exchange had taken place (such as an offer and acceptance in contract law) and that the parties were aware of the import. Thus, the courts accepted that emails could be accepted as signed apparently on the basis of (a) a header including a recognised and familiar email address, and (b) participation in a wider context that made the function and purpose clearly indicate a conclusion of intent. The same logic would apply to faxes and to telexes. Which leads us to an important conclusion on the form of a signature, as opposed to signing; you may take the above to mean that a header is a signature , and indeed the bullet list above suggests precisely that. That is the wrong conclusion. Instead, the courts generally concluded that the emails were signed, resting partly on the identification function of the header, but also on the intent found in the words. They did not designate or declare the header itself to be a form of signature. Hence, it is possible to sign without a signature. In such cases, it can be suggested that any form of the signature is absent, as there is no token in particular. Once again we must thrash this horse; it is the act and function of signing the document that is at issue, not the form of any signature. Indeed there may appear no tangible or identifiable form or token that can be designated as a signature. What Fails to be a Token of Signing Equally important then is to investigate what forms have been found not to be a signature. Tantalisingly, Mason (2007, Chapter 2) drifts from signing across to sealing , or the use of a traditional seal. These older customary marks come in several forms, being wax with impression of some pattern, a pre-printed patterned paper circle pasted on a document, or a physical impression made over a document with a crimping tool. Curiously, the use of a seal is separate and distinct to signing; it seems to be based on customs and laws that certain documents such as Wills & Last Testaments should be sealed as well as signed. Consider the following illustrative quotes: "that sealing is signing, I am not convinced; for sealing identifies nothing; it carries no character ... and most seals are affixed by the stationers, who prepare the paper." Sir John Strange, (Mason 2007 page 58). "It is true that one piece of wax may serve a number of people, if each of them impress it himself, or one for all, but the proper authority, or in the presence of all, .." Lord Denman CJ, (Mason 2007 page 60). "Now, whether the mark is made by a pen or by some other instrument cannot make a difference, neither can it in reason make a difference that a fac-simile of the whole name was impressed on the will instead of a mere mark or X." Sir C. Creswell, (Mason 2007 page 73). Hence, sealing is not signing, nor is signing, sealing. Then, the presence or absence of the (impression of a) seal then is not enough for the court to decide a document was or was not signed (which, again, is a different question as to whether it is sealed). A court will look for other clues to help that determination. For example, in the USA, use of a Japanese seal, or "chop", has been accepted as signing a commercial contract (Mason 2007 2.36). I would speculate (Mason does not) that the court incorporated the customs of Japan into its analysis, where the chop is traditionally used in the signing function. In contrast, a seasonal greeting paper seal, containing the words "Merry Christmas. American Red Cross, 1912 Happy New Year." was accepted for a will, as the seal was also manually inscribed with the initials of the testator (Mason 2007 2.36). The writing of the testator's initials, by pen, was evidence that the testator was intending to sign the document. Note that I stress the case law on use of seals for two purposes: sealing is in Mason as not always being accepted automatically as signing (although cases went both ways), and because of the similarity between seals and electronic signature devices. What would make a good Signature We can now move to create a set of requirements that capture the above. A good mechanism for signing would include these features: identifies the signatory, indicates an intent, identifies the entire document, or to paraphrase Sir William Grant, "authenticates the instrument so as to govern the whole instrument" (Mason 2007 10.22), and and is appropriate for the function so being intended. Conclusions for Electronic Signatures In summary, the fundamental need is to understand and interpret the act of signing before any discussion of the form of signature can take place. By considering the functions needed, we can also understand why forms are so varied. By considering how courts aim to identify intent, and do not stress form, we can also consider how systems might be built to meet that goal. Casting an eye to the above requirements, it can be easily seen then that electronic signatures, and their narrow siblings, digital signatures, only succeed well at the first requirement: to identify the signatory. Especially, digital signatures fail to establish intent in any reliable sense, and their ability to identify an entire instrument is easily broken (c.f., Ricardian Contracts). Finally, as form follows function, and as purposes of signing vary tremendously, severe doubt is cast on any one form being a catch-all or universal method. Thus, contemporary technological discussions that discuss mechanisms of signatures are built on a foundation of sand. Treat with care any such discussion. Afterword There endeth this poor scribe's attempt to define signatures and signing. Why do I need this? Other than the general joy of wisdom, I wish to examine whether a digsig can form part of the function of signing. Obviously, some people have sold this as a done deal; painfully, the english common law will likely have no truck with their intentions, as I hope is outlined above. It seems that the presence of a digsig will likely be ignored by courts in many cases, simply because it is poor evidence of intent. That controversy aside, what should a wayward supplier of digsigs do? What would a CPS need to state if it were to rule on the use of digsigs in an evidentiary fashion? Is a digsig a signature and can its presence provide any useful evidence of intent? Or, are they mere "authenticators", cryptographically-sound evidence of documents unchanged, with no intent in mind? If they are not signatures, what could be used as signatures? And, how would you describe a protocol that would allow all of these things to work together? Two Caveats: I'll change this article if better wordings turn up. Defining signatures and signing is a work-in-progress. Secondly, this article assumes the English common law approach, and does not cover the European or civil-law approach. That should be done as well....

I sure want to know more: Giants have very strange sexual behaviour where the male has a metre-long muscular penis that he uses a bit like a nail gun and shoots cords of sperm under the skin of the female's arms and she carries the sperm around with her until she is ready to lay her big jelly mass of...

By Mitchell & Webb....

Did you know that, in some jurisdictions, police can inject midazolam into suspects to subdue them? "There is no research guideline. There is no validated protocol for this. There's not even a clear set of indications for when this is to be used except when people are agitated. By saying that it's done by the emergency medical personnel, they basically...

Together with Tadayoshi Kohno, Steve Gribble, and three of their students at the University of Washington, I have a new paper that breaks the deniable encryption feature of TrueCrypt version 5.1a. Basically, modern operating systems leak information like mad, making deniability a very difficult requirement to satisfy. ABSTRACT: We examine the security requirements for creating a Deniable File System (DFS),...

They do: Hobby groups throughout North America have cracked supposedly unbeatable locks. Mr. Nekrep, who maintains a personal collection of more than 300 locks, has demonstrated online how to open a Kensington laptop lock using Scotch tape and a Post-it note. Another Lockpicking101.com member discovered the well-publicized method of opening Kryptonite bike locks with a ball-point pen, a revelation that...

If you read the last few days' posts on the crisis market sometimes but erroneously known as Banking (and you should check up on Lynn's comments on CDOs to see more detail) then you might be forgiven for thinking that the job of the regulators is to ride into town and clean up all the dirty games: subprime, CDOs and toxic mortgages. It could be that way, but the truth is more complicated. The Bear Stearns affair is illustrative of the dilemmas. At one level, it's just another dirty chip in a card game where seedy reputations are being made, and dirty cards are being played, to mangle the metaphors. At another level, it is indicative that the problem is far more systemic than just another failed bank to be rescued. In short, this story was about a major bank in the US that very nearly folded its cards. At the time, Bear Stearns went through its "Barings moment" when the bad news of its impending bankrupcy turned up late Friday. By next Monday, however, instead of collapsing, a white knight rescuer in the form of Goldman Sachs JP Morgan, a top-tier investment bank, turned up to offer a charitable price of $2 per share. Bear-Stearns itself was major because it handled the biggest chunk of securities settlement. That is, the boring back-office task of swapping money for shares, or owners for owners, depending on how you look at it. Which brings to mind that if the major back-end settlement bank failed, this could clog the markets. Can you say systemic risk ? Alan Greenspan can say that with authority, and this was what prompted his fabled rescue of another major player, LTCM (for Long Term Capital Management) back in the late 1990s. When LTCM was rescued from its too-big-to-comprehend positions, the financial world sucked much breath between collective teeth. Weren't we supposed to be passed the notion of rescuing failed financial players? Wasn't the Barings failure a wake-up call that we should take our risks and carry them too? Was LTCM really that big? In the event, Alan Greenspan proved to be the supreme player of poker: The Fed didn't spend any money on the deal, and instead fingered the banks who were to share the risk. A strong implication was that the big financial players (such as Morgan and Goldman) were in deep for the profits, and they should pay up for the losses. History suggests that he more or less got it right, or right enough, even to the extent of a few rebels who short-sold him and had to be punished later on. For LTCM, the collective breath was slowly let out as the news and rumours trickled in as to how deep it was. Because of its core role in settlements, Bear Stearns may have been the same, or maybe not. The financial brethren collectively drew breach in, but early fears of systemic risk were quickly replaced by cries of "rip-off!" Just exactly how did Goldman Sachs JPMorgan manage to engineer a bargain-basement price for a key player and competitor? After some huffing and puffing, the price went up to $10, which tells us something about the real value here. Just maybe, the regulators have now moved to ask those questions: BOSTON, July 16 (Reuters) - Dozens of hedge funds and broker dealers are scrambling to send reams of e-mails and trading records to U.S. regulators probing suspected stock price manipulation, several sources at hedge funds said. The U.S. Securities and Exchange Commission recently sent subpoenas to more than 50 firms concerning trading in investment banks Bear Stearns, which was rescued in March, and Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research), whose shares have been hurt badly by rumors about its financial health, said four sources, who have seen the documents but were not authorized to speak about them publicly. Among those receiving subpoenas was investment bank Goldman Sachs Group Inc (GS.N: Quote, Profile, Research) and prominent hedge fund firms SAC Capital Advisors LLC and Citadel Investment Group. All three were named in a recent article about the Bear collapse in Vanity Fair. Is this good news? On the surface, it sounds like hard dealing. Finally, the regulators are riding into town. Hip hip hooray! But a few things are disquieting, and cheers may be premature. Firstly, the regulators were already in on the deal, so they were already in-the-know. If they are now investigating a game they were in on, this looks no good: Either they were duped, or they were players. Secondly, the SEC has no particularly good reputation for these sorts of investigations (remember Lazio, mutual funds, etc?). It is an agency that is thought to be understaffed, under-missioned, under-enforced and generally turns up to the party after the barn has burnt to the ground. Indeed, perhaps minded by the SEC's record as a political hired-gun, Congress is musing on the possibilities of a UK-style super-regulator, and/or handing that power to the Federal Reserve. Thirdly, subpoenas are a two-edged sword. Although they might feed information to the issuer of the subpoena, they also shut down the information for anyone else. It's as simple as the players saying to everyone and anyone "we have no comment on running cases;" they've been handed a get-out-of-jail card at least as far as investigative reporting goes. Likewise, the subpoena is a club that can just as easily be wielded within an investment bank or hedge fund as against any outsider; it's a licence to martyr any whistleblower who might accidentally have a momentary attack of morals. Not only that, the information is now likely to be locked down within the SEC's investigation department, which would typically protect it fiercely for several years in a real investigation, and as long as it takes for the heat to die down in a political paid-favour. Fourthly, of the investigations I have seen, the good ones are done quietly, with surgical strikes for information. A subpoena is sent only after other tools have been exhausted because it raises the stakes in the game so high. To send 50 out at once is about as surgical as carpet-bombing. The overall sense then remains. The Bear Stearns affair smells, and rumour has it that the Brothers Lehman were seen washing at the same laundry. Who else? IndyMac? It might be a coincidence, but there is no end to the bad news for the USA Federal investigative and regulatory arms in recent years. Which brings us to the point of the article, and the lesson as to why financial cryptographers read and understand the financial markets. The financial regulators promote a model of independent and fair regulation, but this is simply not the case. Briefly, sometimes, we experience periods in history where regulators do strive to stand apart and to regulate lightly and fairly. For the benefit of more than the incumbents. But more often than not, the regulators are the best heeled but least well-equipped players in a rigged game, always on the back foot, and operating to a steady series of political favours which will generally make matters worse. With the retirement of Greenspan, and the political assassination of Spitzer, the USA markets are now normalising towards a stability of chaos. For financial cryptographers, then, it is important to understand that the structure of the market is dominating, and the regulators are players in that structure, not fair policemen, or designers of that structure. Enter that game at your peril, and if you do, understand it better than they do. Addendum: of course, not getting the names right doesn't help understanding at all... JP Morgan bought Bear Stearns, not Goldman Sachs....

Mystified by how 'sub-prime' debt engulfed Wall Street's smartest and now threatens the wider global economy? BigMac points to the Telegraph's comic strip, which might help explain how the story started: The credit crisis explained in black and white. Click to Telegraph for full comic strip... Also see The Economist on Freddie and Fannie: it's turtles all the way down!...

This is an excellent paper by Ohio State political science professor John Mueller. Titled "The Quixotic Quest for Invulnerability: Assessing the Costs, Benefits, and Probabilities of Protecting the Homeland," it lays out some common send premises and policy implications. The premises: 1. The number of potential terrorist targets is essentially infinite. 2. The probability that any individual target will be...

Tomorrow, in Australia. EDITED TO ADD (7/16): More news....

Trusted insiders can do a lot of damage: Childs created a password that granted him exclusive access to the system, authorities said. He initially gave pass codes to police, but they didn't work. When pressed, Childs refused to divulge the real code even when threatened with arrest, they said. He was taken into custody Sunday. City officials said late Monday...

In a response to yesterday's post on the fall of the US dollar, Gunnar points out that incentives being out of alignment is no stranger to the banking world: Interestingly enough Charlie Munger identified much the same themes (not all the particulars) way back in Wesco Financial's 1990 letter: Granting the presence of perverse incentives, what are the operating mechanics that cause widespread bad loans (where the higher interest rates do not adequately cover increased risk of loss) under our present system? After all, the bad lending, while it has a surface plausibility to bankers under cost pressure, is, by definition, not rational, at least for the lending banks and the wider civilization. How then does bad lending occur so often? It occurs (partly) because there are predictable irrationalities among people as social animals. It is now pretty clear (in experimental social psychology) that people on the horns of a dilemma, which is where our system has placed our bankers, are extra likely to react unwisely to the example of other peoples' conduct, now widely called "social proof". So, once some banker has apparently (but not really) solved his cost-pressure problem by unwise lending, a considerable amount of imitative "crowd folly", relying on the "social proof", is the natural consequence. Additional massive irrational lending is caused by "reinforcement" of foolish behavior, caused by unwise accounting convention in a manner discussed later in this letter. It is hard to be wise when the messages which drive you are wrong messages provided by a mal-designed system. In order to understand what is going on in the market for banks, I think there is something that is extremely important to bear in mind. And this is: banks are no longer in banking In other words, it is more or less a myth these days that banks engage in banking, so whatever we think about banking, we shouldn't apply it to banks. How can this be? Well, let's get the theory straight: The concept of banking is this: A market in which intermediaries borrow from the public on demand and lend to the public at term. So, these intermediaries take on a risk between "demand deposits" and "term loans" that is captured in the interest rates and is protected by security. Etc etc. "Term" here means a long time, long enough such that there is no easy way to predict the economic future. This is a highly significant risk, and what causes banking to be different. However, with the invention of securitization in the 1970s or so, while the intermediaries (sometimes known as banks) still borrowed from the public on demand, and created loans at term, they then went on to sell those term loans to the public. Banks are no longer lending at term, or more precisely are no longer exposed to the ramifications of term, themselves. They therefore enter into these term loans at little risk to themselves. Hence, although they are still styled as banks, and are regulated as "in banking", they are not actually engaging in the trade of banking. To be doing banking, you must engage in both sides of the equation; that special risk by being on both sides is the reason for the special subsidy and regulation of banking. Securitization removes that risk. Hence, banks are now encouraged to do as many loans as possible, without worrying about the term risks. That is someone else's problem. Do I hear subprime ? So while Charlie Menger's comment that there is a herd effect and a sociological effect that drives bad lending, the answer is much simpler. There is no dilemma, as banks don't need to lend wisely, they simply aren't at risk. Having said that, it is going to take another decade or so for regulators and the public to wake up to this state of affairs. The banking subsidy is a licence to make money, and no bank wants to lose such a franchise, especially now that they've got out of the risky business of banking. It'd be a crime to let the easy money go!...

The U.S terrorist watch list has hit one million names. I sure hope we're giving our millionth terrorist a prize of some sort. Who knew that a million people are terrorists. Why, there are only twice as many burglars in the U.S. And fifteen times more terrorists than arsonists. Is this idiotic, or what? Some people are saying fix it,...

By a California court: The designer, Carter Bryant, has been accused by Mattel of using Evidence Eliminator on his laptop computer just two days before investigators were due to copy its hard drive. Carter hasn't denied that the program was run on his computer, but he said it wasn't to destroy evidence. He said he had legitimate reasons to use...

Oil, geopolitics, those pesky Russians, irrational Bay Area exuberance, the drums of war, Sir Alan's folly, the cheeky Chinese, the conceit of monetarism, or, that inept circus known as the Bush Administration? We all know the dollar is collapsing, but what we don't know is (a) why, and (b) where to? JPM sent news last month of the latest RBS brief that says, in brief, to hell in a handbasket: The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks. "A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist. A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets. Heady stuff! The essential problem is that the US economy, and/or the government, and/or the Americans, has overspent. The old story is the inflation one: too many dollars washing around causes too much investment, and then a little inflation, and a little more and a little more and a lot more ... until the government decides to put the brakes on because the lenders want more than can be returned. But the brakes take a few years to change the pace, and a few more years of pain and a few more years of rebuilding. By the time all the damage is repaired, we have forgotten where it came from, so nobody really believes this stuff anyway, and we're ready to live the good times again! It's our turn! Hysteresis being a wonderful thing, we enter what is quaintly called the Austrian Business Cycle, and the economy bounces around like a yoyo from generation to generation. Except: supposedly with the death of Keynes and the rise of the Austrians and the new enlightened central banking age, we were supposed to be passed all that. What went wrong? That is what is flumoxing the fundamentalists amongst us. What we know is that we've never been here before, and like other complicated stories, there are *many factors*. Here's my attempt at listing the forces: 1. The 1990s Internet/tech boom caused a massive jolt to business, in effect a "productivity shock" albeit upwards. Productivity was kicked upwards in those areas effected. This released additional value into other areas, which had the effect of releasing additional investment into other areas. In a sense, the overall effect was inflationary, because the existing money stock was being used more effectively. 2. Because of the climb in productivity, the economy grew rapidly. This meant an increased demand for money, which central banks were happy to accomodate. However, because of the release of value, this also had the effect of increasing the supply of money. More inflation. 3. Around 2000, when most households in the USA had acquired their obligatory new-age accessory, the PC, the wheels came off the Internet boom. Which should have been expected to put an end to the general boom in the economy. Predictably, Alan Greenspan boosted up money creation to soften the blow. 4. In comes Bush: "Cry Havoc! and let slip the dogs of war!" Which unleashed the wildcats of spending. Well, maybe..., opinions might be divided on what the causes where, but the fact remains that this President has doubled the national debt of USA from 2001 to now, and that's one big achievement that we can all be proud of. 5. Which, as war talk inevitably does, leads to the observation that certain countries were targetted, and nobody has any clue what the metric was. If you know, please write in, with evidence if possible. Which, more importantly, resulted in an explosion of that old disease: Fear, Uncertainty and Doubt. In this case, monetary FUD meant that those who *might* be targetted worried about their over-dependency on that ultimate class of financial oil: the dollar. Gold went up . . . . 5.b Sometime around 2002-2003, countries started shifting out of the dollar. Slowly. Gently. Pretending not to. Refer to cartel and game theory to understand the theatre here. Either way, the shine was off, especially for those at the nexus of confusion: Islamic, oil-exporting, non-USA trade partners such as Libya, Iran, Iraq. 6. Which was extraordinarily lucky for Europe, as just around the right time, the Euro burst into life, giving a currency of impeccable (Bundesbank) anti-inflation credentials. The Bundesbank was located in Frankfurt. The ECB is located in Frankfurt, too. This is no accident. So, countries found it relatively easy to justify shifting a large part of their reserves to Euros. Slowly, Gently, Pretending Everything But. 7. Which meant all this dollar surplus went washing back to the US, at around the same time as the Bush administration was borrowing more, spending more, warring more. It may never be officially confirmed, but the Fed was on the case by 2003, and managing the process of absorbing a more than normal homeward bound flow of dollars. Not a happy picture. Monetarily speaking, although the tech boom was over, the money boom carried on, and there wasn't a darn thing the Fed could do about it, because those darn foreigners insisted on buying real assets in paper dollars. Hello, housing boom. 8. The dollar went down. Consistently, from around 2001. Which would have been fine, all things being equal, as this just means we buy less Airbuses, more Boeings, etc, until it all balances out. 9. However, as the dollar was the trading currency of the world, things were decidedly not equal. By fiat of Bretton Woods, as it were. Monetary policy has never really considered wholesale redemptions by the world's customers, so it was an open question as to what would happen. In this case, those wiley Europeans, those cunning Chinese, those devilish Japanese, and even the happy go lucky Aussies ... all decided to *help the Fed*. And, help in this case, turned out to be letting their currencies go down as well. Which means, they issued more money, and inflated under the umbrella, while the Fed was swallowing more, while the Bush administration was borrowing more. In essence, this meant the real corrections were delayed and hidden, because the currency markets were more or less in balance. 10. Not so real assets: Gold went up. Housing boomed. Dollars went down, and the other nationals went downish, enjoying the chance, because they won profit by their favour to the Fed. And, what happens when everyone inflates at the same time? 11. Commodities first, but then foodstuffs, and finally ordinary stuff went up in price. Tech stuff still continued going down because the tech machine was still rolling, if not booming. Stuff that was made in the new wunderfabrik of China went down in price, as that vast empire of cheap labour opened up. In sum, nobody noticed that the central banks, all of them, were stealing the bounty of the lowering dollar, the tech productivity shock, and the China export trade. So much for the vaunted anti-inflation reputations. 12. Hence, in short summary, the military expenditures took over from the tech bubble. The dogs-of-war chased dollar-holders who went scurrying across to the Euro, creating a dollar bubble which underwrote the housing bubble. All hard assets boomed around the western world. Everything boomed in the US, except fiscal balance. 13. Which all came to a close when the oil shock hit. The shock was triggered by the boys-own adventures of Bush and his chums in the great game (a euphemism for interference and manipulation in the Middle East). However, be careful: we have to factor in around 50 years of manipulation of the oil supply industry, which caused an imbalance waiting to collapse. This supply-side manipulation can be seen in new oil fields like Alaska, there is so much oil washing around there that some say that if it were fed to the US market, the prices would drop to around zero and Kissinger's fabled contracts with the sheikhs would collapse. Which would collapse the dollar. Apparently, if there's anything that Washington fears more than an open market in Middle Eastern democracy, it is an open market in oil. 14. Never minding the source of the shock, it was the straw that broke the camel's back: Cash that was previously washing around from other sources was sucked up by the new demands on oil (which feeds into practically every other sector of the physical goods economy) and this caused the investment, housing and other booms to break. Then, the fundamentalists (those traders who believe in long term trends and numbers) started to take a good hard look at the real numbers, and people got scared. "Withdraw from everything!" ... Fundamentalists knew the USA economy was out of balance in around 2000, when the tech bubble burst ... something should have happened then, but to our surprise, nothing much happened (unless you had a tech job, that was pretty dire). What caught us out is how many other factors were involved, how deep the USA trap was, and how long it took for these huge, massive imbalances to come home to roost. If it is any comfort, this is going to be as well studied as the Great Recession, for the same reasons: the monetary authorities and the governments got it all wrong. Here we are, staring at recession. It's hard to recommend what to do, but it should be to reduce dependency on the US dollar, anyway you can. Whatever you have in mind, do it quickly....

Last week's dramatic rescue of 15 hostages held by the guerrilla organization FARC was the result of months of intricate deception on the part of the Colombian government. At the center was a classic man-in-the-middle attack. In a man-in-the-middle attack, the attacker inserts himself between two communicating parties. Both believe they're talking to each other, and the attacker can delete...

Impressive. Be sure to watch the video....

From his blog: Future presidents can learn a lot from all this -- do exactly what the Bush Administration did! If the law holds you back, don't first go to Congress and try to work something out. Secretly violate that law, and then when you get caught, staunchly demand that Congress change the law to your liking and then immunize...

The popular media conception is that there is a coordinated attempt by the Chinese government to hack into U.S. computers -- military, government corporate -- and steal secrets. The truth is a lot more complicated. There certainly is a lot of hacking coming out of China. Any company that does security monitoring sees it all the time. These hacker groups...