So I suppose it is no surprise that the in-crowd is gleeful about the judgment.  It has all of the requisite keywords to invoke the sort of self-satirizing knee-jerk rejectionism that we have come to expect from the cornball neopop blogosphere types that take the time to type these missives (I can be fairly accused of being one of them, too).

But isn’t it time to progress beyond our cliched fear of Microsoft?  The DoJ hurricane blew past their ranch years ago; the company’s dominance in Operating Systems is now respectably challenged by Apple’s OSX and various flavours of Linux (and, if only in vapour, by Google Android); and their web browser is being resoundingly thumped by an influx of not dissimilar offerings from Firefox, Apple, Google, and even Opera.  The Zune is an also-ran MP3 player next to the iPod, and Windows Mobile has become a running joke in the telecom industry while the iPhone has become the dominant player in a little under two years.  The next penny to drop for Microsoft may well be Enterprise apps, with Office and Exchange as the cornerstone.  If someone figures out Shared Calendaring, my friends, that latter jig may be up but soon.

So it’s probably fairer now to conceptualize Microsoft as the aged, embattled warhorse that it is; as bloated and sweaty as its present CEO; both of them a heart seizure waiting to happen.  With billions in the bank it’s hard to feel too sorry for them, but would we be cheering so loudly if the party on the losing end of this patent dispute was any other company?

In recent months the company has been sued by patent holders and licensors over a litany of fairly benign and long-implemented technologies from instant messaging to Windows Update to  its Product Activation System.  Each of these is a clear improvement without which Windows, an already unusable operating system, would be significantly worse.  And so in a worst-case scenario Microsoft is now hampered from delivering you a higher-quality, more innovative product not due to lack of imagination on the part of its engineers, but due to a wellspring of imagination emanating from patent attorneys and their litigious clients.

i4i isn’t strictly a patent troll, but they’re not the original inventors of the technology either.  They are also clearly using this patenet defensively, to prevent Microsoft from encroaching on their market.  This is really an obstacle for anyone who wants to do complex document workflow automation (and lots do).

We actually need for Microsoft to win some of these disputes.  We will all benefit.  Each sets a dangerous precedent that will affect all comers upstream of these cases, and a patent troll armed with a lucrative victory on something so obvious and derivative of open-standards as the ability to edit custom XML is dangerous to the web as a whole and will create a substantial speedbump to innovation.

So maybe just for a while keep your malicious joy in check when reviewing this case.  Microsoft is presently doing the web a favour acting as a breakwater for all of us.  I’ll hold my judgment until we see how they put their own patents in this arena to use (or disuse).

washingtonpost.com

Dissertation Could Be Security Threat Student’s Maps Illustrate Concerns About Public Information

By Laura Blumenfeld Washington Post Staff Writer Tuesday, July 8, 2003; Page A01

Sean Gorman’s professor called his dissertation “tedious and unimportant.” Gorman didn’t talk about it when he went on dates because “it was so boring they’d start staring up at the ceiling.” But since the Sept. 11, 2001, attacks, Gorman’s work has become so compelling that companies want to seize it, government officials want to suppress it, and al Qaeda operatives — if they could get their hands on it — would find a terrorist treasure map.

Tinkering on a laptop, wearing a rumpled T-shirt and a soul patch goatee, this George Mason University graduate student has mapped every business and industrial sector in the American economy, layering on top the fiber-optic network that connects them.

He can click on a bank in Manhattan and see who has communication lines running into it and where. He can zoom in on Baltimore and find the choke point for trucking warehouses. He can drill into a cable trench between Kansas and Colorado and determine how to create the most havoc with a hedge clipper. Using mathematical formulas, he probes for critical links, trying to answer the question: “If I were Osama bin Laden, where would I want to attack?” In the background, he plays the Beastie Boys.

For this, Gorman has become part of an expanding field of researchers whose work is coming under scrutiny for national security reasons. His story illustrates new ripples in the old tension between an open society and a secure society.

“I’m this grad student,” said Gorman, 29, amazed by his transformation from geek to cybercommando. “Never in my wildest dreams would I have imagined I’d be briefing government officials and private-sector CEOs.”

Invariably, he said, they suggest his work be classified. “Classify my dissertation? Crap. Does this mean I have to redo my PhD?” he said. “They’re worried about national security. I’m worried about getting my degree.” For academics, there always has been the imperative to publish or perish. In Gorman’s case, there’s a new concern: publish and perish.

“He should turn it in to his professor, get his grade — and then they both should burn it,” said Richard Clarke, who until recently was the White House cyberterrorism chief. “The fiber-optic network is our country’s nervous system.” Every fiber, thin as a hair, carries the impulses responsible for Internet traffic, telephones, cell phones, military communications, bank transfers, air traffic control, signals to the power grids and water systems, among other things.

“You don’t want to give terrorists a road map to blow that up,” he said.

The Washington Post has agreed not to print the results of Gorman’s research, at the insistence of GMU. Some argue that the critical targets should be publicized, because it would force the government and industry to protect them. “It’s a tricky balance,” said Michael Vatis, founder and first director of the National Infrastructure Protection Center. Vatis noted the dangerous time gap between exposing the weaknesses and patching them: “But I don’t think security through obscurity is a winning strategy.”

Gorman compiled his mega-map using publicly available material he found on the Internet. None of it was classified. His interest in maps evolved from his childhood, he said, because he “grew up all over the place.” Hunched in the back seat of the family car, he would puzzle over maps, trying to figure out where they should turn. Five years ago, he began work on a master’s degree in geography. His original intention was to map the physical infrastructure of the Internet, to see who was connected, who was not, and to measure its economic impact.

“We just had this research idea, and thought, ‘Okay,’ ” said his research partner, Laurie Schintler, an assistant professor at GMU. “I wasn’t even thinking about implications.”

The implications, however, in the post-Sept. 11 world, were enough to knock the wind out of John M. Derrick Jr., chairman of the board of Pepco Holdings Inc., which provides power to 1.8 million customers. When a reporter showed him sample pages of Gorman’s findings, he exhaled sharply.

“This is why CEOs of major power companies don’t sleep well these days,” Derrick said, flattening the pages with his fist. “Why in the world have we been so stupid as a country to have all this information in the public domain? Does that openness still make sense? It sure as hell doesn’t to me.”

Recently, Derrick received an e-mail from an atlas company offering to sell him a color-coded map of the United States with all the electric power generation and transmission systems. He hit the reply button on his e-mail and typed: “With friends like you, we don’t need any enemies in the world.”

Toward the other end of the free speech spectrum are such people as John Young, a New York architect who created a Web site with a friend, featuring aerial pictures of nuclear weapons storage areas, military bases, ports, dams and secret government bunkers, along with driving directions from Mapquest.com. He has been contacted by the FBI, he said, but the site is still up.

“It gives us a great thrill,” Young said. “If it’s banned, it should be published. We like defying authority as a matter of principle.”

This is a time when people are rethinking the idea of innocent information. But it is hardly the first time a university has entangled itself in a war. John McCarthy, who oversees Gorman’s project at GMU’s National Center for Technology and Law, compared this period to World War II, when academics worked on code-breaking and atomic research. McCarthy introduced Gorman to some national security contacts. Gorman’s critical infrastructure project, he said, has opened a dialogue among academia, the public sector and the private sector. The challenge? “Getting everyone to trust each other,” McCarthy said. “It’s a three-way tension that tugs and pulls.”

When Gorman and Schintler presented their findings to government officials, McCarthy recalled, “they said, ‘Pssh, let’s scarf this up and classify it.’ ”

And when they presented them at a forum of chief information officers of the country’s largest financial services companies — clicking on a single cable running into a Manhattan office, for example, and revealing the names of 25 telecommunications providers — the executives suggested that Gorman and Schintler not be allowed to leave the building with the laptop.

Businesses are particularly sensitive about such data. They don’t want to lose consumer confidence, don’t want to be liable for security lapses and don’t want competitors to know about their weaknesses. The CIOs for Wells Fargo and Mellon Financial Corp. attended the meeting. Neither would comment for this story.

Catherine Allen, chief executive of BITS, the technology group for the financial services roundtable, said the attendees were “amazed” and “concerned” to see how interdependent their systems were. Following the presentation, she said, they decided to hold an exercise in an undisclosed Midwestern city this summer. They plan to simulate a cyber assault and a bomb attack jointly with the telecommunications industry and the National Communications System to measure the impact on financial services.

McCarthy hopes that by identifying vulnerabilities, the GMU research will help solve a risk management problem: “We know we can’t have a policeman at every bank and switching facility, so what things do you secure?”

Terrorists, presumably, are exploring the question from the other end. In December 2001, bin Laden appeared in a videotape and urged the destruction of the U.S. economy. He smiled occasionally, leaned into the camera and said, “This economic hemorrhaging continues until today, but requires more blows. And the youth should try to find the joints of the American economy and hit the enemy in these joints, with God’s permission.”

Every day, Gorman tries to identify those “joints,” sitting in a gray cinderblock lab secured by an electronic lock, multiple sign-on codes and a paper shredder. No one other than Gorman, Schintler or their research instructor, Rajendra Kulkarni, is allowed inside; they even take out their own trash. When their computer crashed, they removed the hard drive, froze it, smashed it and rubbed magnets over the surface to erase the data.

The university has imposed the security guidelines. It is trying to build a cooperative relationship with the Department of Homeland Security. Brenton Greene, director for infrastructure coordination at DHS, described the project as “a cookbook of how to exploit the vulnerabilities of our nation’s infrastructure.” He applauds Gorman’s work, as long as he refrains from publishing details. “We would recommend this not be openly distributed,” he said.

Greene is trying to help the center get federal funding. (“The government uses research funding as a carrot to induce people to refrain from speech they would otherwise engage in,” said Kathleen Sullivan, dean of Stanford Law School. “If it were a command, it would be unconstitutional.”)

All this is a bit heavy for Gorman, who is in many ways a typical student. His Christmas lights are still up in July; his living room couch came from a trash pile on the curb. Twice a day, Gorman rows on the Potomac. Out on the water, pulling the oars, he can stop thinking about how someone could bring down the New York Stock Exchange or cripple the Federal Reserve’s ability to transfer money.

On a recent afternoon, he drove his Jeep from the Fairfax campus toward the river. Along the way he talked about his dilemma: not wanting to hurt national security; not wanting to ruin his career as an academic.

“Is this going to completely squash me?” he said, biting his fingernail. GMU has determined that he will publish only the most general aspects of his work. “Academics make their name as an expert in something. . . . If I can’t talk about it, it’s hard to get hired. It’s hard to put ‘classified’ on your list of publications on your résumé.”

As he drove along Route 50, he pointed out a satellite tower and a Verizon installation. Somewhere in Arlington he took a wrong turn and stopped to ask for directions. It has always been that way with him. He’s great at maps, but somehow he ends up lost.

-Ian.

—- http://www1.iraqwar.ru/iraq-read_article.php?articleId”11&lang=en

The Real But Unspoken Reasons For The Iraq War – OIL U$ Dollar vs. Euro 08.04.2003 [12:37]

Summary Although completely suppressed in the U.S. media, the answer to the Iraq enigma is simple yet shocking – it an an oil CURRENCY war. The Real Reason for this upcoming war is this administration’s goal of preventing further OPEC momentum towards the euro as an oil transaction currency standard. However, in order to pre-empt OPEC, they need to gain geo-strategic control of Iraq along with its 2nd largest proven oil reserves. This lengthy essay will discuss the macroeconomics of the “petro-dollar” and the unpublicized but real threat to U.S. economic hegemony from the euro as an alternative oil transaction currency. THE REAL REASONS FOR THE UPCOMING WAR IN IRAQ A Macroeconomic and Geostrategic Analysis of the Unspoken Truth By W. Clark wrc92 [at] aol [dot] com “If a nation expects to be ignorant and free, it expects what never was and never will be … The People cannot be safe without information. When the press is free, and every man is able to read, all is safe.” Those words by Thomas Jefferson embody the unfortunate state of affairs that have beset our nation. As our government prepares to go to war with Iraq, our country seems unable to answer even the most basic questions about this war. First, why is there virtually no international support to topple Saddam? If Iraq’s WMD program truly possessed the threat level that President Bush has repeatedly purported, why is there no international coalition to militarily disarm Saddam? Secondly, despite over 300 unfettered U.N inspections to date, there has been no evidence reported of a reconstituted Iraqi WMD program. Third, and despite Bush’s rhetoric, the CIA has not found any links between Saddam Hussein and Al Qaeda. To the contrary, some analysts believe it is far more likely Al Qaeda might acquire an unsecured former Soviet Union Weapon(s) of Mass Destruction, or potentially from sympathizers within a destabilized Pakistan. Moreover, immediately following Congress’s vote on the Iraq Resolution, we suddenly became aware of North Korea’s nuclear program violations. Kim Jong Il is processing uranium in order to produce nuclear weapons this year. President Bush has not provided a rationale answer as to why Saddam’s seemingly dormant WMD program possesses a more imminent threat that North Korea’s active program? Strangely, Donald Rumsfeld suggested that if Saddam were “exiled” we could avoid an Iraq war? Confused yet? Well, I’m going to give their game away – the core driver for toppling Saddam is actually the euro currency, the â,. Although completely suppressed in the U.S. media, the answer to the Iraq enigma is simple yet shocking. The upcoming war in Iraq war is mostly about how the ruling class at Langley and the Bush oligarchy view hydrocarbons at the geo-strategic level, and the overarching macroeconomic threats to the U.S. dollar from the euro. The Real Reason for this upcoming war is this administration’s goal of preventing further OPEC momentum towards the euro as an oil transaction currency standard. However, in order to pre-empt OPEC, they need to gain geo-strategic control of Iraq along with its 2nd largest proven oil reserves. This lengthy essay will discuss the macroeconomics of the “petro-dollar” and the unpublicized but real threat to U.S. economic hegemony from the euro as an alternative oil transaction currency. The following is how an astute and anonymous friend alluded to the unspoken truth about this upcoming war with Iraq… “The Federal Reserve’s greatest nightmare is that OPEC will switch its international transactions from a dollar standard to a euro standard. Iraq actually made this switch in Nov. 2000 (when the euro was worth around 80 cents), and has actually made off like a bandit considering the dollar’s steady depreciation against the euro.” (Note: the dollar declined 15% against the euro in 2002.) “The real reason the Bush administration wants a puppet government in Iraq – or more importantly, the reason why the corporate-military-industrial network conglomerate wants a puppet government in Iraq – is so that it will revert back to a dollar standard and stay that way.” (While also hoping to veto any wider OPEC momentum towards the euro, especially from Iran – the 2nd largest OPEC producer who is actively discussing a switch to euros for its oil exports). Furthermore, despite Saudi Arabia being our ‘client state,’ the Saudi regime appears increasingly weak/ threatened from massive civil unrest. Some analysts believe a “Saudi Revolution” might be plausible in the aftermath of an unpopular U.S. invasion of Iraq (ie. Iran circa 1979) (1). Undoubtedly, the Bush administration is acutely aware of these risks. Hence, the neo conservative framework entails a large and permanent military presence in the Persian Gulf region in a post Saddam era, just in case we need to surround and grab Saudi’s oil fields in the event of a coup by an anti-western group. But first back to Iraq. “Saddam sealed his fate when he decided to switch to the euro in late 2000 (and later converted his $10 billion reserve fund at the U.N. to euros) – at that point, another manufactured Gulf War become inevitable under Bush II. Only the most extreme circumstances could possibly stop that now and I strongly doubt anything can – short of Saddam getting replaced with a pliant regime.” Big Picture Perspective: Everything else aside from the reserve currency and the Saudi/Iran oil issues (i.e. domestic political issues and international criticism) is peripheral and of marginal consequence to this administration. Further, the dollar-euro threat is powerful enough that they’ll rather risk much of the economic backlash in the short-term to stave off the long-term dollar crash of an OPEC transaction standard change from dollars to euros. All of this fits into the broader Great Game that encompasses Russia, India, China.” This information about Iraq’s oil currency is censored by the U.S. media as well as the Bush administration & Federal Reserve as the truth could potentially curtail both investor and consumer confidence, reduce consumer borrowing/ spending, create political pressure to form a new energy policy that slowly weans us off middle-eastern oil, and of course stop our march towards war in Iraq. This quasi “state secret” can be found on a Radio Free Europe article discussing Saddam’s switch for his oil sales from dollars to the euros on Nov. 6, 2000 (2). “Baghdad’s switch from the dollar to the euro for oil trading is intended to rebuke Washington’s hard-line on sanctions and encourage Europeans to challenge it. But the political message will cost Iraq millions in lost revenue. RFE/RL correspondent Charles Recknagel looks at what Baghdad will gain and lose, and the impact of the decision to go with the European currency.” At the time of the switch many analysts were surprised that Saddam was willing to give up millions in oil revenue for what appeared to be a political statement. However, contrary to one of the main points of this November 2000 article, the steady depreciation of the dollar versus the euro since late 2001 means that Iraq has profited handsomely from the switch in their reserve and transaction currencies. The euro has gained roughly 17% against the dollar in that time, which also applies to the $10 billion in Iraq’s U.N. “oil for food” reserve fund that was previously held in dollars has also gained that same percent value since the switch. What would happen if OPEC made a sudden switch to euros, as opposed to a gradual transition? “Otherwise, the effect of an OPEC switch to the euro would be that oil-consuming nations would have to flush dollars out of their (central bank) reserve funds and replace these with euros. The dollar would crash anywhere from 20-40% in value and the consequences would be those one could expect from any currency collapse and massive inflation (think Argentina currency crisis, for example). You’d have foreign funds stream out of the U.S. stock markets and dollar denominated assets, there’d surely be a run on the banks much like the 1930s, the current account deficit would become unserviceable, the budget deficit would go into default, and so on. Your basic 3rd world economic crisis scenario. The United States economy is intimately tied to the dollar’s role as reserve currency. This doesn’t mean that the U.S. couldn’t function otherwise, but that the transition would have to be gradual to avoid such dislocations (and the ultimate result of this would probably be the U.S. and the E.U. switching roles in the global economy).” In the aftermath of toppling Saddam it is clear the U.S. will keep a large and permanent military force in the Persian Gulf. Indeed, there is no “exit strategy” in Iraq, as the military will be needed to protect the newly installed Iraqi regime, and perhaps send a message to other OPEC producers that they might receive “regime change” if they too move to euros for their oil exportsâ¤. Another underreported story from this summer regarding the other OPEC ‘Axis of Evil’ country and their interest in the selling oil in euros, Iran. (3) “Iran’s proposal to receive payments for crude oil sales to Europe in euros instead of U.S. dollars is based primarily on economics, Iranian and industry sources said. But politics are still likely to be a factor in any decision, they said, as Iran uses the opportunity to hit back at the U.S. government, which recently labeled it part of an “axis of evil.” The proposal, which is now being reviewed by the Central Bank of Iran, is likely to be approved if presented to the country’s parliament, a parliamentary representative said.”There is a very good chance MPs will agree to this idea …now that the euro is stronger, it is more logical,” the parliamentary representative said.” More over, and perhaps most telling, during 2002 the majority of reserve funds in Iran’s central bank have been shifted to euros. It appears imminent that Iran intends to switch to euros for their oil currency (4) “More than half of the country’s assets in the Forex Reserve Fund have been converted to euro, a member of the Parliament Development Commission, Mohammad Abasspour announced. He noted that higher parity rate of euro against the US dollar will give the Asian countries, particularly oil exporters, a chance to usher in a new chapter in ties with European Union’s member countries. He said that the United States dominates other countries through its currency, noting that given the superiority of the dollar against other hard currencies, the US monopolizes global trade. The lawmaker expressed hope that the competition between euro and dollar would eliminate the monopoly in global trade.” Indeed, after toppling Saddam, this administration may decide that Iran is the next target in the “war on terror.” Iran’s interest in switching to the euro as their standard transaction currency for oil exports is well documented. Perhaps this recent MSNBC article illustrates the objectives of the neo conservatives (5). “While still wrangling over how to overthrow Iraq’s Saddam Hussein, the Bush administration is already looking for other targets. President Bush has called for the ouster of Palestinian leader Yasir Arafat. Now some in the administration⤔and allies at D.C. think tanks⤔are eyeing Iran and even Saudi Arabia. As one senior British official put it: “Everyone wants to go to Baghdad. Real men want to go to Tehran.” Aside from these political risks regarding Saudi Arabia and Iran, another risk factor isactually Japan. Perhaps the biggest gamble in a protracted Iraq war may be Japan’s weak economy (6). If the war creates prolonged oil high prices ($45 per barrel over several months), or a short but massive oil price spike ($80 to $100 per barrel), some analysts believe Japan’s fragile economy would collapse. Japan is quite hypersensitive to oil prices, and if its banks default, the collapse of the second largest economy would set in motion a sequence of events that would prove devastating to the U.S. economy. Indeed, Japan’s fall in an Iraq war could create the economic dislocations that begin in the Pacific Rim but quickly spread to Europe and Russia. The Russian government lacks the controls to thwart a disorderly run on the dollar, and such an event could ultimately force and OPEC switch to euros. Additionally, other risks might arise if the Iraq war goes poorly or becomes prolonged, as it is possible that civil unrest may unfold in Kuwait or other OPEC members including Venezuela, as the latter may switch to euros just as Saddam did in November 2000. Thereby fostering the very situation this administration is trying to prevent, another OPEC member switching to euros as their oil transaction currency. Incidentally, the final “Axis of Evil” country, North Korea, recently decided to officially drop the dollar and begin using euros for trade, effective Dec. 7, 2002 (7). Unlike the OPEC-producers, their switch will have negligible economic impact, but it illustrates the geopolitical fallout of the President Bush’s harsh rhetoric. Much more troubling is North Korea’s recent action following the oil embargo of their country. They are in dire need of oil and food; and in an act of desperation they have re-activated their pre-1994 nuclear program. Processing uranium appears to be taking place at a rapid pace, and it appears their strategy is to prompt negotiations with the U.S. regarding food and oil. The CIA estimates that North Korea could produce 4-6 nuclear weapons by the second half of 2003. Ironically, this crisis over North Korea’s nuclear program further confirms the fraudulent premise for which this war with Saddam was entirely contrived. Unfortunately, neo conservatives such as George Bush, Dick Cheney, Donald Rumsfeld, Paul Wolfowitz and Richard Pearle fail to grasp that Newton’s Law applies equally to both physics and the geo-political sphere as well: “For every action there is an equal but opposite reaction.” During the 1990s the world viewed the U.S. as a rather self-absorbed but essentially benevolent superpower. Military actions in Iraq (90-91′ & 98′), Serbia and Kosovo (99′) were undertaken with both U.N. and NATO cooperation and thus afforded international legitimacy. President Clinton also worked to reduce tensions in Northern Ireland and attempted to negotiate a resolution to the Israeli-Palestinian conflict. However, in both the pre and post 9/11 intervals, the “America first” policies of the Bush administration, with its unwillingness to honor International Treaties, along with their aggressive militarisation of foreign policy, has significantly damaged our reputation abroad. Following 9/11, it appears that President Bush’s “warmongering rhetoric” has created global tensions – as we are now viewed as a belligerent superpower willing to apply unilateral military force without U.N. approval.Lamentably, the tremendous amount of international sympathy that we witnessed in the immediate aftermath of the September 11th tragedy has been replaced with fear and anger at our government. This administration’s bellicosity haschanged the worldview, and “anti-Americanism” is proliferating even among our closest allies (8). Even more alarming, and completely unreported in the U.S media, are some monetary shifts in the reserve funds of foreign governments away from the dollar with movements towards the euro (China, Venezuela, some OPEC producers and last week Russia flushed some of their dollars for euros) (9). It appears that the world community may lack faith in the Bush administration’s economic policies, and along with OPEC, seems poised to respond with economic retribution if the U.S. government is regarded as an uncontrollable and dangerous superpower. The plausibility of abandoning the dollar standard for the euro is growing. An interesting U.K. article outlines the dynamics and the potential outcomes (‘Beyond Bush’s Unilateralism: Another Bi-Polar World or A New Era of Win-Win?’)(10) “The most likely end to US hegemony may come about through a combination of high oil prices (brought about by US foreign policies toward the Middle East) and deeper devaluation of the US dollar (expected by many economists). Some elements of this scenario: 1) US global over-reach in the “war on terrorism” already leading to deficits as far as the eye can see — combined with historically-high US trade deficits – lead to a further run on the dollar. This and the stock market doldrums make the US less attractive to the world’s capital. 2) More developing countries follow the lead of Venezuela and China in diversifying their currency reserves away from dollars and balanced with euros. Such a shift in dollar-euro holdings in Latin America and Asia could keep the dollar and euro close to parity. 3) OPEC could act on some of its internal discussions and decide (after concerted buying of euros in the open market) to announce at a future meeting in Vienna that OPEC’s oil will be re-denominated in euros, or even a new oil-backed currency of their own. A US attack on Iraq sends oil to â,40 per barrel. 4) The Bush Administration’s efforts to control the domestic political agenda backfires. Damage over the intelligence failures prior to 9/11 and warnings of imminent new terrorist attacks precipitate a further stock market slide. 5) All efforts by Democrats and the 57% of the US public to shift energy policy toward renewables, efficiency, standards, higher gas taxes, etc. are blocked by the Bush Administration and its fossil fuel industry supporters. Thus, the USA remains vulnerable to energy supply and price shocks. 6) The EU recognizes its own economic and political power as the euro rises further and becomes the world’s other reserve currency. The G-8 pegs the euro and dollar into a trading band — removing these two powerful currencies from speculators trading screens (a “win-win” for everyone!). Tony Blair persuades Brits of this larger reason for the UK to join the euro. 7) Developing countries lacking dollars or “hard” currencies follow Venezuela’s lead and begin bartering their undervalued commodities directly with each other in computerized swaps and counter trade deals. President Chavez has inked 13 such country barter deals on its oil, e.g., with Cuba in exchange for Cuban health paramedics who are setting up clinics in rural Venezuelan villages. “The result of this scenario? The USA could no longer run its huge current account trade deficits or continue to wage open-ended global war on terrorism or evil. The USA ceases pursuing unilateralist policies. A new US administration begins to return to its multilateralist tradition, ceases its obstruction and rejoins the UN and pursues more realistic international cooperation.” As for the events currently taking place in Venezuela, items #2 and #7 on the above list may allude to why the Bush administration quickly endorsed the failed military-led coup of Hugo Chavez in April 2002. Although the coup collapsed after 2 days, various reports suggest the CIA and a rather embarrassed Bush administration approved and may have been actively involved with the civilian/military coup plotters. (11) “George W. Bush’s administration was the failed coup’s primary loser, underscoring its bankrupt hemispheric policy. Now it is slowly filtering out that in recent months White Houseofficials met with key coup figures, including Carmona. Although the administration insists that it explicitly objected to any extra-constitutional action to remove Chavez, comments by senior U.S. officials did little to convey this.” “The CIA’s role in a 1971 Chilean strike could have served as the working model for generating economic and social instability in order to topple Chavez. In the truckers’ strike of that year, the agency secretly orchestrated and financed the artificial prolongation of a contrived work stoppage in order to economically asphyxiate the leftist Salvador Allende government.” “This scenario would have had CIA operatives acting in liaison with the Venezuelan military, as well as with opposition business and labor leaders, to convert a relatively minor afternoon-long work stoppage by senior management into a nearly successful coup de grace.” Interestingly, according to an article by Michael Ruppert, Venezuelan’s ambassador Francisco Mieres-Lopez apparently floated the idea of switching to the euro as their oil currency standard approximately one year before the failed coup attempt… Furthermore, there is evidence that the CIA is still active in its attempts to overthrow the democratically elected Chavez administration. In fact, this past December a Uruguayan government official recently exposed the ongoing covert CIA operations in Venezuela (12): “Uruguayan EP-FA congressman Jose Bayardi says he has information that far-reaching plan have been put into place by the CIA and other North American intelligence agencies tooverthrow Venezuelan President Hugo Chavez Frias” “Bayardi says he has received copies of top-secret communications between the Bush administration in Washington and the government of Uruguay requesting the latter’s cooperation to support white collar executives and trade union activists to “break down levels of intransigence within the Chavez Frias administration” Venezuela is the fourth largest producer of oil, and the corporate elites whose political power runs unfettered in the Bush/Cheney oligarchy appear interested in privatizing Venezuela’s oil industry. Furthermore, the establishment might be concerned that Chavez’s “barter deals” with 12 Latin American countries and Cuba are effectively cutting the U.S. dollar out of the vital oil transaction currency cycle. Commodities are being traded among these countries in exchange for Venezuela’s oil, thereby reducing reliance on fiat dollars. If these unique oil transactions proliferate, they could create more devaluation pressure on the dollar. Continuing attempts by the CIA to remove Hugo Chavez appear likely. The U.S. economy has acquired several problems, including as our record-high trade account deficit (almost 5% of GDP), $6.3 trillion dollar deficit (55% of GDP), and the recent return to annual budget deficits in the hundreds of billions. These are factors that would devalue the currency of any nation under the “old rules.” Why is the dollar still strong despite these structural flaws? Well, the elites understand that the strength of the dollar does not merely rest on our economic output per se. The dollar posses two unique advantages relative to all other hard currencies. The reality is that the strength of the dollar since 1945 rests on being the international reserve currency and thus fiat currency for global oil transactions (ie. “petro-dollar”). The U.S. prints hundreds of billions of these fiat petro-dollars, which are then used by nation states to purchase oil/energy from OPEC producers (except Iraq, to some degree Venezuela, and perhaps Iran in the near future). These petro-dollars are then re-cycled from OPEC back into the U.S. via Treasury Bills or other dollar-denominated assets such as U.S. stocks, real estate, etc. The “old rules” for valuation of our currency and economic power were based on our flexible market, free flow of trade goods, high per worker productivity, manufacturing output/trade surpluses, government oversight of accounting methodologies (ie. SEC), developed infrastructure, education system, and of course total cash flow and profitability. While many of these factors remain present, over the last two decades we have diluted some of these “safe harbor” fundamentals. Despite imbalances and some structural problems that are escalating within the U.S. economy, the dollar as the fiat oil currency created “new rules”. The following exerts from an Asia Times article discusses the virtues of our fiat oil currency and dollar hegemony (or vices from the perspective of developing nations, whose debt is denominated in dollars). (13) “Ever since 1971, when US president Richard Nixon took the dollar off the gold standard (at $35 per ounce) that had been agreed to at the Bretton Woods Conference at the end of World War II, the dollar has been a global monetary instrument that the United States, and only the United States, can produce by fiat. The dollar, now a fiat currency, is at a 16-year trade-weighted high despite record US current-account deficits and the status of the US as the leading debtor nation. The US national debt as of April 4 was $6.021 trillion against a gross domestic product (GDP) of $9 trillion.” “World trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy. The world’s interlinked economies no longer trade to capture a comparative advantage; they compete in exports to capture needed dollars to service dollar-denominated foreign debts and to accumulate dollar reserves to sustain the exchange value of their domestic currencies.To prevent speculative and manipulative attacks on their currencies, the world’s central banks must acquire and hold dollar reserves in corresponding amounts to their currencies in circulation. The higher the market pressure to devalue a particular currency, the more dollar reserves its central bank must hold. This creates a built-in support for a strong dollar that in turn forces the world’s central banks to acquire and hold more dollar reserves, making it stronger. This phenomenon is known as dollar hegemony, which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in dollars. Everyone accepts dollars because dollars can buy oil. The recycling of petro-dollars is the price the US has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973.” “By definition, dollar reserves must be invested in US assets, creating a capital-accounts surplus for the US economy. Even after a year of sharp correction, US stock valuation is still at a 25-year high and trading at a 56 percent premium compared with emerging markets.””The US capital-account surplus in turn finances the US trade deficit. Moreover, any asset, regardless of location, that is denominated in dollars is a US asset in essence. When oil is denominated in dollars through US state action and the dollar is a fiat currency,the US essentially owns the world’s oil for free. And the more the US prints greenbacks, the higher the price of US assets will rise. Thus a strong-dollar policy gives the US a double win.” This unique geo-political agreement with Saudi Arabia has worked to our favor for the past 30 years, as this arrangement has raised the entire asset value of all dollar denominated assets/properties, and allowed the Federal Reserve to create a truly massive debt and credit expansion (or ‘credit bubble’ in the view of some economists). These current structural imbalances in the U.S. economy are sustainable as long as: 1)Nations continue to demand and purchase oil for their energy/survival needs 2)The fiat reserve currency for global oil transactions remain the U.S. dollar (and dollar only) These underlying factors, along with the “safe harbor” reputation of U.S. investments afforded by the dollar’s reserve currency status propelled the U.S. to economic and military hegemony in the post-World War II period. However, the introduction of the euro is a significant new factor, and appears to be the primary threat to U.S. economic hegemony. More over, in December 2002 ten additional countries were approved for full membership into the E.U. In 2004 this will result in an aggregate GDP of $9.6 trillion and 450 million people, directly competing with the U.S. economy ($10.5 trillion GDP, 280 million people). Especially interesting is a speech given by Mr Javad Yarjani, the Head of OPEC’s Petroleum Market Analysis Department, in a visit to Spain (April 2002). He speech dealt entirely on the subject of OPEC oil transaction currency standard with respect to both the dollar and the euro. The following exerts from this OPEC executive provide insights into the conditions that would create momentum for an OPEC currency switch to the euro. Indeed, his candid analysis warrants careful consideration given that two of the requisite variables he outlines for the switch have taken place since this speech in early 2002. These vital stories are discussed in the European media, but have been censored by our own mass media (14) “The question that comes to mind is whether the euro will establish itself in world financial markets, thus challenging the supremacy of the US dollar, and consequently trigger a change in the dollar’s dominance in oil markets. As we all know, the mighty dollar has reigned supreme since 1945, and in the last few years has even gained more ground with the economic dominance of the United States, a situation that may not change in the near future. By the late 90s, more than four-fifths of all foreign exchange transactions, and half of all world exports, were denominated in dollars. In addition, the US currency accounts for about two thirds of all official exchange reserves. The world’s dependency on US dollars to pay for trade has seen countries bound to dollar reserves, which are disproportionably higher than America’s share in global output. The share of the dollar in the denomination of world trade is also much higher than the share of the US in world trade. Having said that, it is worthwhile to note that in the long run the euro is not at such a disadvantage versus the dollar when one compares the relative sizes of the economies involved, especially given the EU enlargement plans. Moreover, the Euro-zone has a bigger share of global trade than the US and while the US has a huge current account deficit, the euro area has a more, or balanced, external accounts position. One of the more compelling arguments for keeping oil pricing and payments in dollars has been that the US remains a large importer of oil, despite being a substantial crude producer itself. However, looking at the statistics of crude oil exports, one notes that the Euro-zone is an even larger importer of oil and petroleum products than the US.” “From the EU’s point of view, it is clear that Europe would prefer to see payments for oil shift from the dollar to the euro, which effectively removed the currency risk. It would also increase demand for the euro and thus help raise its value. Moreover, since oil is such an important commodity in global trade, in term of value, if pricing were to shift to the euro, it could provide a boost to the global acceptability of the single currency. There is also very strong trade links between OPEC Member Countries (MCs) and the Euro-zone, with more than 45 percent of total merchandise imports of OPEC MCs coming from the countries of the Euro-zone, while OPEC MCs are main suppliers of oil and crude oil products to Europe.” “Of major importance to the ultimate success of the euro, in terms of the oil pricing, will be if Europe’s two major oil producers ⤔ the United Kingdom and Norway join the single currency. Naturally, the future integration of these two countries into the Euro-zone and Europe will be important considering they are the region’s two major oil producers in the North Sea, which is home to the international crude oil benchmark, Brent. This might create a momentum to shift the oil pricing system to euros.” “In the short-term, OPEC MCs, with possibly a few exceptions, are expected to continue to accept payment in dollars. Nevertheless, I believe that OPEC will not discount entirely the possibility of adopting euro pricing and payments in the future. The Organization, like many other financial houses at present, is also assessing how the euro will settle into its life as a new currency. The critical question for market players is the overall value and stability of the euro, and whether other countries within the Union will adopt the single currency.” Should the euro challenge the dollar in strength, which essentially could include it in the denomination of the oil bill, it could be that a system may emerge which benefits more countries in the long-term. Perhaps with increased European integration and a strong European economy, this may become a reality. Time may be on your side. I wish the euro every success.” Based on this important speech, momentum for OPEC to consider switching to the euro will grow once the E.U. expands in May 2004 to 450 million people with the inclusion of 10 additional member states. The aggregate GDP will increase from $7 trillion to $9.6 trillion. This enlarged E.U. will be an oil consuming purchasing population 33% larger than the U.S., and over half of OPEC crude oil will be sold to the EU as of mid-2004. This does not include other potential entrants such as the U.K., Norway, Denmark and Sweden. I should note that since this speech the euro has been trading at parity or above the dollar since late 2002, and analysts predict the dollar will continue its downward trending in 2003 relative to the euro. Further, if or when the U.K. adopts the euro currency, that development could provide critical motivation for OPEC to the make the transition to euros. It appears the final two pivotal items that would create the OPEC transition to euros will be based on if and when Norway’s Brent crude is re-dominated in euros, and when the U.K. adopts the euro. Regarding the later, Tony Blair is lobbying heavily for the U.K. to adopt the euro, and their adoption would seem imminent within this decade. Again, I offer the following information from my astute acquaintance who analyzes these matters very carefully regarding the euro: “The pivotal vote will probably be Sweden, where approval this next autumn of adopting the euro also would give momentum to the Danish government’s strong desire to follow suit. Polls in Denmark now indicate that the euro would pass with a comfortable margin and Norwegian polls show a growing majority in favor of EU membership. Indeed, with Norway having already integrated most EU economic directives through the EEA partnership and with their strongly appreciated currency, their accession to the euro would not only be effortless, but of great economic benefit. As go the Swedes, so probably will go the Danes & Norwegians. It’s the British who are the real obstacle to building momentum for the euro as international transaction & reserve currency. So long as the United Kingdom remains apart from the euro, reducing exchange rate costs between the euro and the British pound remains their obvious priority. British adoption (a near-given in the long run) would mount significant pressure toward repegging the Brent crude benchmark – which is traded on the International Petroleum Exchange in London – and the Norwegians would certainly have no objection whatsoever that I can think of, whether or not they join the European Union.” Finally, the maneuvers toward reducing the global dominance of the dollar are already well underway and have only reason to accelerate so far as I can see. An OPEC pricing shift would seem rather unlikely prior 2004 – barring political motivations (ie. motivations of OPEC members) or a disorderly collapse of the dollar (ie. prolonged high oil prices due to Iraq war causes Japanese bank collapse)- but appears quite viable to take place before the end of the decade.” In otherwords, around 2005, from an economic and monetary perspectivem, it will be logical for OPEC to switch to the euro for oil pricing. Of course that will devalue the dollar, and hurt the US economy unless it begins making some structual changes – or use its massive military power to force events upon the OPEC states… Facing these potentialities, I hypothesize that President Bush intends to topple Saddam in 2003 in a pre-emptive attempt to initiate massive Iraqi oil production in far excess of OPEC quotas, to reduce global oil prices, and thereby dismantle OPEC’sprice controls. The end-goal of the neo-conservatives is incredibly bold yet simple in purpose, to use the “war on terror” as the premise to finally dissolve OPEC’s decision-making process, thus ultimately preventing the cartel’s inevitable switch to pricing oil in euros. How would the Bush administration break-up the OPEC cartel’s price controls in a post-Saddam Iraq? First, the newly installed regime (apparently a U.S. General for the first several months) will convert Iraq back to the dollar standard. Next, with the U.S. military protecting the oil fields, the Bush junta will undertake the necessary steps to rapidly increase production of Iraq oil, quintupling Iraq’s current output – and well beyond OPEC’s 2 million barrel per day quota. Dr. Nayyer Ali offers a succinct analysis of how Iraq’s underutilized oil reserves will not be a “profit-maker” for the U.S. government, but it will serve as the crucial economic instrument used by the Bush junta to leverage and hopefully dissolve OPEC’s price controls, thus causing the neo conservative’s long sought goal of collapsing the OPEC cartel (15): “Despite this vast pool of oil, Iraq has never produced at a level proportionate to the reserve base. Since the Gulf War, Iraq’s production has been limited by sanctions and allowed sales under the oil for food program (by which Iraq has sold 60 billion dollars worth of oil over the last 5 years) and what else can be smuggled out. This amounts to less than 1 billion barrels per year. If Iraq were reintegrated into the world economy, it could allow massive investment in its oil sector and boost output to 2.5 billion barrels per year, or about 7 million barrels a day. Total world oil production is about 75 million barrels, and OPEC combined produces about 25 million barrels. What would be the consequences of this? There are two obvious things. First would be the collapse of OPEC, whose strategy of limiting production to maximize price will have finally reached its limit. An Iraq that can produce that much oil will want to do so, and will not allow OPEC to limit it to 2 million barrels per day. If Iraq busts its quota, then who in OPEC will give up 5 million barrels of production? No one could afford to, and OPEC would die. This would lead to the second major consequence, which is a collapse in the price of oil to the 10-dollar range per barrel. The world currently uses 25 billion barrels per year, so a 15-dollar drop will save oil-consuming nations 375 billion dollars in crude oil costs every year.” “The Iraq war is not a moneymaker. But it could be an OPEC breaker. That however is a long-term outcome that will require Iraq to be successfully reconstituted into a functioning state in which massive oil sector investment can take place.” The American people are largely oblivious to the economic risks regarding President Bush’s upcoming war. Not only is Japan’s economy at grave risk from a spike in oil prices, but additional risks relate to Iran and Venezuela as well, either of whom could move to the euros, thus providing further momentum for OPEC to act on their “internal discussions” and switch to the euro as the fiat currency for oil. The Bush administration believes that by toppling Saddam they will remove the juggernaut, thus allowing the US to control Iraqi’s huge oil reserves, and finally break-up and dissolve the 10 remaining countries in OPEC. This last issue is undoubtedly a significant gamble even in the best-case scenario of a quick and relatively painless war that topples Saddam and leaves Iraq’s oil fields intact. Undoubtedly, the OPEC cartel could feel threatened by the Bush junta’s stated goal of breaking-up OPEC’s price controls ($22-$28 per barrel). Perhaps the Bush administration’s ambitious goal of flooding the oil market with Iraqi crude may work, but I have doubts. Will OPEC simply tolerate quota-busting Iraqi oil production, thus delivering to them a lesson in self-inflicted hara-kiri (suicide)? Contrarily, OPEC could meet in Vienna and in an act of self-preservation re-denominate the oil currency to the euro. Such a decision by would mark the end of U.S. dollar hegemony, and thus the end of our precarious economic superpower status. Again, I offer the astute analysis of my expert friend regarding the colossal gamble this administration is about to undertake: “One of the dirty little secrets of today’s international order is that the rest of the globe could topple the United States from its hegemonic status whenever they so choose with a concerted abandonment of the dollar standard. This is America’s preeminent, inescapable Achilles Heel for now and the foreseeable future. That such a course hasn’t been pursued to date bears more relation to the fact that other Westernized, highly developed nations haven’t any interest to undergo the great disruptions which would follow – but it could assuredly take place in the event that the consensus view coalesces of the United States as any sort of ‘rogue’nation. In other words, if the dangers of American global hegemony are ever perceived as a greater liability than the dangers of toppling the international order (or, alternately, if an ‘every man for himself’ crisis as discussed above spirals out of control and forces their hand). The Bush administration and the neo conservative movement has set out on a multiple-front course to ensure that this cannot take place, in brief by a graduated assertion of military hegemony atop the existent economic hegemony. The paradox I’ve illustrated with this one narrow scenario is that the quixotic course itself may very well bring about the feared outcome that it means to preempt. We shall see!” Under this administration we have returned to massive deficit spending, and the lack of strong SEC enforcement has further eroded investor confidence. Regrettably, the flawed economic and tax policies and of the Bush administration may be exacerbating the weakness of the dollar, if not outright accelerating some countries to diversify their central bank reserve funds with euros as an alternative to the dollar. >From a foreign policy perspective, the terminations of numerous international treaties and disdain for international cooperation via the UN and NATO have angered even our closest allies. Lastly, and despite President Bush’s attempt to use the threat of applying military force to OPEC producers who may wish to switch to the euro for their oil payments, it appears their belligerent neo conservative policies may paradoxically bring about the dire outcome they hope to prevent – an OPEC currency switch to euros. The American people are not aware of such information due to the U.S. mass media, which has been reduced to a handful of consumption/entertainment and profit-oriented conglomerates that filter the flow of information in the U.S. Indeed, the Internet provides the only source of unfiltered “real news.” Synopsis: It would appear that any attempt by OPEC member states in the Middle East or Latin America to transition to the euro as their oil transaction currency standard shall be met with either overt U.S. military actions or covert U.S. intelligence agency interventions. Under the guise of the perpetual “war on terror” the Bush administration is manipulating the American people about the unspoken but very real macroeconomic reasons for this upcoming war with Iraq. This war in Iraq will have nothing to with any threat from Saddam’s old WMD program. This war will be over the global currency of oil. Sadly, the U.S. has become largely ignorant and complacent. Too many of us are willing to be ruled by fear and lies, rather than by persuasion and truth. Will we allow our government to initiate the dangerous “pre-emptive doctrine” by waging an unpopular war in Iraq, while we refuse to acknowledge that Saddam does not pose an imminent threat to the United States? We seem unable to address the structural weakness of our economy due to massive debt manipulation, unaffordable 2001 tax cuts, massive current account deficits, trade deficits, corporate accounting abuses, unsustainable credit expansion, near zero personal savings, record personal indebtedness, and our dependence and over consumption of cheap Middle Eastern oil. How much longer can we reliably import our oil from middle eastern states that dislike or despise us because of our biased foreign policy towards Israel? Lastly, we must bear in mind Jefferson’s insistence that a free press is our best, and perhaps only mechanism to protect democracy, and part of today’s dilemma lies within the U.S. media conglomerates that have failed to inform the People. Regardless of whatever Dr. Blix finds or doesn’t find in Iraq regarding WMD, it appears that President Bush is determined to pursue his “pre-emptive” imperialist war to secure a large portion of the earth’s remaining hydrocarbons, and then use Iraq’s underutilized oil to destroy the OPEC cartel. Will this gamble work? Undeniably our nation may suffer not only from economic retribution, but also from increased Al-Qaeda sponsored terrorism as well. Will we stand idle and watch CNN, as our government becomes an international pariah by discarding International Law as it wages a unilateral war in Iraq? Is it morally defensible to deploy our brave but naÃve young soldiers around the globe to enforce U.S. dollar hegemony for global oil transactions – via the barrel of their guns? Will we allow imperialist conquest in the Middle East to feed our excessive energy consumption, while ignoring the duplicitous overthrowing of a democratically elected government in Latin America? Shall we accept the grave price of an unjust war over the currency of oil? We must not stand silent and watchour country become a ‘rogue’ superpower, relying on brute force, thereby forcing the industrialized nations or OPEC to abandon the dollar standard – thus with the mere stroke of a pen – slay the U.S. Empire? Informed citizens believe this administration is pushing us towards that dire outcome. Remaining silent is not only misguided, but false patriotism. This need not be our fate. When will we demand that our government begin the long and difficult journey towards energy conservation, the development of renewable energy sources, and sustained balanced budgets to allow real deficit reduction? When will we repeal of the unaffordable 2001 tax cuts to create a balanced budget, enforce corporate accounting laws, and substantially reinvest in our manufacturing and export sectors to move our economy from a trade account deficit position back into a trade account surplus position? Undoubtedly, we must make these and many more painful structural changes to our economy if we are to restore our “safe harbor” investment status. Ultimately we will have to make sacrifices by reducing our excessive energy consumption that we have become accustomed to as a society. It is imperative that our government also begins economic and monetary reforms immediately. We must adopt our economy to accommodate the inevitable competition to the dollar from the euro as an alternative international reserve currency and oil transaction currency. The Bush administration’s seemingly entrenched political ideology appears quite incompatible with these necessary economic reforms. Ultimately We the People must demand a new and more responsible administration. We need leaders who are willing to return balanced, conservative fiscal policies, and to our traditions of engaging in multilateral foreign policies while seeking broad international cooperation. It has been said that all wars are fought over resources or ideology/religion. It appears that this administration may soon add “currency wars” as a third paradigm. I fear that the world community will not tolerate a U.S. Empire that uses its military power to conquer sovereign nations who decide to sell their oil products in euros instead of dollars. Likewise, if President Bush pursues an essentially unilateral war against Iraq, I suspect the historians will not be kind to his administration. Their agenda is clear to the world community, but when will U.S. patriots become cognizant of their modus operandi? “If you tell a lie big enough and keep repeating it, people will eventually come to believe it.” “The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.” – Joseph Goebbels, German Minister of Propaganda, 1933-1945 END OF ESSAY

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Background Information on Hydrocarbons To understand hydrocarbons and how we got to this desperate place in Iraq, I have listed four articles in the Reference Section from Michael Ruppert’s controversial website: ‘From the Wilderness.’ Although some of Ruppert’s articles are overwrought from time to time, their research detailing the issues of hydrocarbons, and the interplay between energy and the Bush junta’s perpetual “war on terror” is quite informative. Other than the core driver of the dollar versus euro currency threat, the other issue related to the upcoming war with Iraq appears related to the Caspian Sea region. Since the mid-late 1990s the Caspian Sea region of Central Asiawas thought to hold approx. 200 billion barrels of untapped oil (the later would be comparable to Saudi Arabia’s reserve base)(16). Based on an early feasibility study by Enron, the easiest and cheapest way to bring this oil to market would be a pipeline from Kazakhstan, through Afghanistan to the Pakistan border at Malta. In 1998 then CEO of Halliburton, Dick Cheney, expressed much interest in building that pipeline. In fact, these oil reserves were a *central* component of Vice President Cheney’s energy plan released in May 2001. According to his report, the U.S. will import 90% of its oil by 2020, and thus tapping into the reserves in the Caspian Sea region was viewed as a strategic goal that would help meet our growing energy demand, and also reduce our dependence on oil from the Middle East (17). According to the French book, The Forbidden Truth (18), the Bush administration ignored the U.N. sanctions that had been imposed upon the Taliban and entered into negotiations with the supposedly ‘rogue regime’ from February 2, 2001 to August 6, 2001. According to this book, the Taliban were apparently not very cooperative based on the statements of Pakistan’s former ambassador, Mr. Naik. He reports that the U.S. threatened a “military option” in the summer of 2001 if the Taliban did not acquiesce to our demands. Fortuitous for the Bush administration and Cheney’s energy plan, Bin Laden delivered to us 9/11. The pre-positioned U.S. military; along with the CIA providing cash to the Northern Alliance leaders, led the invasion of Afghanistan and the Taliban were routed. The pro-western Karzai government was ushered in. The pipeline project was now back on track in early 2002, well, sort… After three exploratory wells were built and analyzed, it was reported that the Caspian region holds only approximately 10 to 20 billion barrels of oil (although it does have a lot of natural gas) (16). The oil is also of poor quality, with high sulfur content. Subsequently, several major companies have now dropped their plans for the pipeline citing the massive project was no longer profitable. Unfortunately, this recent realization about the Caspian Sea region has serious implications for the U.S., India, China, Asia and Europe, as the amount of available hydrocarbons for industrialized and developing nations has been decreased downward by 20%. (Globalestimates reduced from 1.2 trillion to approx. 1 trillion) (18, 19). The Bush administration quickly turned its attention to a known quantity, Iraq, with it proven reserves totaling 11% of the world’s oil reserves. Our greatest nemesis, Bin Laden, was quickly replaced with our new public enemy #1, Saddam Hussein… For those who would like to review the impact of depleting hydrocarbon reserves from the geo-political perspective, and the potential ramifications to how this may ultimately create an erosion of our civil liberties and democratic processes, retired U.S. Special Forces officer Stan Goff offers a sobering analysis in his essay: ‘The Infinite War and Its Roots’ (20). Likewise, for those who wish to review the unspeakable evidence surrounding the September 11th tragedy, the controversial essay “The Enemy Within” by the famous American writer Gore Vidal offers a thorough introduction. Although published in Italy and a major UK newspaper, The Observer, you will not read Gore Vidal’s controversial essay in the U.S. media. Note: Gore Vidal’s latest book, ‘Dreaming War’ features this as the opening essay (21). Finally, ‘The War on Freedom” by British political scientist Nafeez Ahmed asks disconcerting questions about the 9/11 tragedy (22). FOOTNOTES (1)London, Heidi Kingstone, ‘Middle East: Trouble in the House of Saud’ (January 13, 2003) http://www.jrep.com/Mideast/Article-0.html (2)Recknagel, Charles, ‘Iraq: Baghdad Moves to Euro’ (November 1, 2000) http://www.rferl.org/nca/features/2000/11/01112000160846.asp (3)Gutman, Roy & Barry, John, Beyond Baghdad: Expanding Target List: Washington looks at overhauling the Islamic and Arab world (August 11, 2002) http://www.unansweredquestions.net/timeline/2002/newsweek081102.html (4)’Economics Drive Iran Euro Oil Plan, Politics Also Key’ (August 2002) http://www.iranexpert.com/2002/economicsdriveiraneurooil23august.htm (5)’Forex Fund Shifting to Euro,’ Iran Financial News, (August 25, 2002) http://www.payvand.com/news/02/aug/1080.html (6)Costello, Tom, ‘Japan’s Economy at Risk of Collapse’ (December 11, 2002) http://www.msnbc.com/news/845708.asp?0cl=cR (7) Gluck, Caroline, ‘North Korea embraces the euro’ (December 1, 2002) http://news.bbc.co.uk/1/hi/world/asia-pacific/2531833.stm (8) ‘What the World Thinks in 2002 : How Global Publics View: Their Lives, Their Countries, The World, America’ (2002) http://people-press.org/reports/display.php3?ReportID5 (9) ‘Euro continues to extend its global influence’ (January 7, 2002) http://www.europartnership.com/news/02jan07.htm (10) Henderson, Hazel, ‘Beyond Bush’s Unilateralism: Another Bi-Polar World or A New Era of Win-Win?’ (June 2002) http://www.hazelhenderson.com/Bush’s%20unilateralism.htm (11) Birms, Larry & Volberding, Alex, ‘U.S. is the Primary Loser in Failed Venezuelan Coup,’ Newsday (April 21, 2002) http://www.coha.org/COHA%20_in%20_the_news/ Articles%202002/newsday_04_21_02_us__venezuela.htm (12) ‘USA intelligence agencies revealed in plot to oust Venezuela’s President,’ (Dec 12, 2002) http://www.vheadline.com/0212/14248.asp (link now dead) (13) Liu, Henry C K, ‘US Dollar hegemony has got to go,’ (Asia Times, April 11, 2002) http://www.atimes.com/global-econ/DD11Dj01.html (14) ‘The Choice of Currency for the Denomination of the Oil Bill,’ Speech given by Javad Yarjani, Head of OPEC’s Marketing Analysis Department (April, 2002) http://www.opec.org/NewsInfo/Speeches/sp2002/spAraqueSpainApr14.htm (15) Dr. Ali, Nayyer, ‘Iraq and Oil,’ (December 13, 2002) http://www.pakistanlink.com/nayyer/12132002.html (16) Pfeiffer, Dale, ‘Much Ado about Nothing — Whither the Caspian Riches? ‘ (December 5, 2002) http://www.fromthewilderness.com/free/ww3/120502_caspian.html (17) Ruppert, Michael, ‘The Unseen Conflict,’ (October 18, 2002) http://www.fromthewilderness.com/free/ww3/101802_the_unseen.html (18) Jean Charles-Briscard & Guillaume Dasquie, ‘The Forbidden Truth: U.S.-Taliban Secret Oil Diplomacy, Saudi Arabia and the Failed Search for bin Laden’, Nation Books, 2002. (19) Ruppert, Michael, ‘Colin Campbell on Oil.'(October 23, 2002) http://www.fromthewilderness.com/free/ww3/102302_campbell.html (20) Golf, Stan, ‘The Infinite War and its Roots,’ http://www.fromthewilderness.com/free/ww3/082702_infinite_war.html (21) Vidal, Gore, ‘Dreaming War: Blood for Oil & the Cheney-Bush Junta,’ Nation Books, 2002. His essay, ‘The Enemy Within’ was first printed in the UK’s Observer (Oct 27, 2002) http://www.ratical.org/ratville/CAH/EnemyWithin.html (22) Ahmed, Nafeez, ‘The War on Freedom: How and Why America was Attacked, September 11, 2001’, Tree of Life Publications, 2002.

Flying the unfriendly skies Mar 22nd 2003 From The Economist Global Agenda

America’s big airlines say the war in Iraq could make their current dire predicament turn catastrophic. But this may not be enough to win them further state aid

COULD President George Bush be forced to order the nationalisation of America’s airline network to save it from total collapse? A report on the dire state of the airlines’ finances, published last week by the Air Transport Association (ATA), which represents them, insists that such a dramatic scenario is “not unrealistic”. Since the terrorist attacks in America on September 11th 2001, its airlines have lost a combined $18 billion, in spite of the big aid package that Mr Bush granted the industry shortly afterwards. Now, with a war being waged in Iraq, passenger bookings falling sharply and airlines making heavy cuts in their schedules, America’s main carriers predict that their losses this year, given a fairly short war, will be almost $11 billion. If the war drags on or there are more terrorist attacks in America, the losses could reach $13 billion.

United Airlines, the world’s second-largest carrier, which is already in bankruptcy proceedings (as is US Airways, another big carrier), added to the gloom on March 18th by saying that it was a “distinct possibility” that it may soon close altogether unless it achieves further cuts in wage costs. Though its staff unions have agreed to temporary pay cuts worth $840m annually, the airline is seeking long-term savings on labour costs of around $2.6 billion a year. New forecasts from the Federal Aviation Administration (FAA) on the same day were rather less doom-laden than the industry’s own predictions. Even so, they suggest that passenger traffic will not return to 2001’s levels until perhaps 2006 (see chart).

The FAA admits that its forecast of a gradual recovery in air traffic is at risk from the war and from any further terrorist attacks. A reminder that such risks are real came on March 19th, when home-made bombs were found, and three men arrested under Britain’s Terrorism Act, at an apartment near London’s Gatwick Airport. This follows an incident last month in which a grenade was found in the luggage of a passenger arriving from Venezuela.

America’s transport secretary, Norman Mineta, said the government would be “ready to move very quickly” to provide further aid on top of the $15 billion package announced after the September 11th attacks; and a bill to be introduced in the House of Representatives on March 19th by James Oberstar, a Minnesota Democrat, proposes that the government compensate the airlines for any losses due to the Iraq war and reimburse some of the extra security costs they have suffered since the 2001 terrorist attacks. However, there does not seem much prospect of getting extra subsidies past sceptical White House officials, who are more preoccupied with the likely heavy costs of pursuing the war.

The ATA’s report argues that America’s airlines have already taken significant “self-help” measures to cut their costs and rationalise their schedules. Around 100,000 airline jobs have been cut since September 2001. A further 70,000-100,000 are forecast to go. On March 21st, Northwest Airlines, the world’s fourth-largest carrier, added 4,900 to the redundancy count and said it was cutting 12% of its flights.

This is partly due to the downturn in bookings caused by the expectations of a war in Iraq, and the rise in the cost of fuel, which has doubled in the past six months. But the airlines have also been suffering from a fall in business travel due to the collapse of the dotcom boom. In all, the crisis in the industry goes beyond what might be expected from “normal” market forces, they argue, so there is a strong case for the government to come to the rescue. What the airlines want especially is reimbursement for the $4 billion of extra costs they claim to have suffered due to the extra security measures imposed on them by the government after the September 11th attacks. They also want cuts in taxes on air travel, which they reckon have risen by 180% since 1991, about six times the rate of inflation.

The 1991 Gulf war, triggered by Iraq’s invasion of Kuwait, caused years of losses for America’s airlines. After operating profits of $1.8 billion in 1989, they suffered more than $6 billion of losses in the following three years. Four firms (Pan Am, Eastern, Midway and Markair) went into liquidation. Despite enjoying a period of prosperity in 1995-2000, the industry enters the second Gulf war in an even worse state: the combined debt of America’s big “network” airlines is $100 billion, compared with their combined stockmarket valuation of just $3.2 billion in February.

Latin American airlines are also struggling. On March 21st, Colombia’s Avianca filed for bankruptcy protection in the American courts, as it sought to renegotiate debts of $130m. And Brazil’s heavily indebted flag-carrier, Varig, is seeking an operational merger with its local arch-rival, TAM.

Also on March 21st, KLM of the Netherlands became the latest European carrier to announce big cuts in continental and transatlantic flights. But in general Europe’s and Asia’s airlines are in a better position than America’s to withstand the slump in bookings caused by the war. Formerly troubled carriers like Lufthansa of Germany and Iberia of Spain are in better shape than they were, after making big cost cuts. Europe’s airlines are expected to share profits of $2.6 billion this year, reckons UBS, a bank, while Asia’s will make $3.2 billion.

Back in America, the FAA forecasts that, while the big network carriers will have a slow recovery, short-haul flights (dominated by leaner cut-price airlines) and air cargo will enjoy strong growth. United’s problems are partly the fault of its own staff, who got a stake in the airline in lieu of pay as part of a restructuring in 1994, and have used it to block painful but necessary cost cuts. The management’s threat to close the airline permanently is as much aimed at twisting its unions’ arms to make concessions as at pleading with the government for handouts.

The big airlines that are in bankruptcy proceedings are able to hold off their creditors and can thus try to grab market share by undercutting their rivals, forcing the whole industry to continue offering uneconomically low fares. Unless the government and the airline unions give in to the carriers’ demands, the industry’s crisis could well drag on until one or more of America’s main carriers is forced to close for good. In the meantime, hardy passengers who are prepared to brave the risks of air travel can enjoy fantastically cheap fares. The ATA reckons that tickets, before taxes, are cheaper in nominal terms than in the late 1980s, and therefore much cheaper in real terms. Enjoy it while it lasts.

As you’ll recall from Monday, I bought my Nortel for about $0.72 and I just sold at today’s close for about $1.07 (US Priced). Not a bad return for a four day investment. I suspect tomorrow Nortel will trend downward, given that it’s a Friday and there will be some profit takers. If that happens, I will buy in again tomorrow afternoon or Monday AM. I still believe in my original investment strategy, however, and Nortel is not a long term hold for me. Next big announcement and I’m out for sure, possibly for good.

Maybe I can rebuild my RRSP just trading this one stock. I just inflated it by 45%. 🙂

-Ian.

—— http://biz.yahoo.com/rc/021024/tech_nortel_stock_3.html Reuters Nortel shares race higher as cash concerns ease Thursday October 24, 3:05 pm ET By Franco Pingue

(Adds analyst comment, updates share price. Figures in U.S. dollars unless noted)

TORONTO, Oct 24 (Reuters) – Shares of Nortel Networks Corp. (Toronto:NT.TO – News; NYSE:NT – News) charged higher on Thursday as fears that the company’s cash reserves were drying up began to ease, while some investors rushed to cover short positions.

ADVERTISEMENT Nortel shares, which have soared 149 percent since touching a low of 65 Canadian cents on Oct. 10, were up 26 Canadian cents, or 18 percent, at C$1.67 on the Toronto Stock Exchange.

In New York, the shares were ahead 17 cents, or 19 percent, at $1.07.

Short selling occurs when investors borrow shares and sell them, hoping to buy them back at a lower price. When markets rise, short sellers must quickly buy back the shares before the price runs too high.

“Things can only keep going down forever if you think they are going bankrupt,” said John Wilson, an analyst with RBC Capital Markets.

“Now that people are realizing that Nortel is not going to go bankrupt, or that there is a very low risk of that happening, then they are willing to pay a much higher price for the stock.”

Last week Nortel, one of the world’s largest telecom equipment makers, posted a narrower third-quarter loss, in line with expectations, and said it was on track to return to profit.

Wilson, who has an “outperform” rating on Nortel shares with a $2 target price, also said that he does not expect spending in the tech industry to rebound next year.

“Next year we fully believe (capital expenditures) will be down again, spending will be down and Nortel’s revenues will be down, but as long as you don’t think they’re going bankrupt there is a price for everything.”

Benoit Chotard, an analyst with National Bank Financial, who feels Nortel’s stock was oversold recently, also does not see a spending recovery in the battered technology industry until 2004.

“The perception was too negative on Nortel,” said Benoit Chotard, an analyst with National Bank Financial. “Things are much better than what was anticipated in the context of a very tough environment.”

Chotard has a “market perform” rating on Nortel shares with a target price of C$1.50.

($1=$1.56 Canadian)

On Monday, October 21, 2002, at 07:52 AM, Ian Andrew Bell wrote:

> Nortel is probably going to experience a rally today based on news of
> a Wireless deal in China worth $280M. But they could experience a
> more sustained rally over the next two weeks as rumours fly around
> about their intended reaction to their plight.
>
> Now, I have virtually nothing to substantiate these predictions, so
> please take them with a grain of salt:
>
> 1) I think that Nortel has put their Enterprise products & services
> group, which is profitable, in play. I suspect their goal is to sell
> it for some quick cash. I would expect this to get between $5Bn and
> $7Bn and would stem the tide of impending doom for several years.
> 2) I think that they’ll use part of that money to write down and
> shutter the Optical business. Beneficiaries of this will include
> Juniper and to a lesser extent Cisco.
>
> I think that this puts the entire company very much in play for an
> acquisition by Cisco or Alcatel, except for one thing: cash in the
> bank.
>
> So, this morning I bought Juniper and Nortel, and we’ll see what
> happens.
>
> -Ian.
>
> ———–
> FoIB mailing list — Bits, Analysis, Digital Group Therapy
> https://ianbell.com:8888/foib.html

———–

Now, I have virtually nothing to substantiate these predictions, so please take them with a grain of salt:

1) I think that Nortel has put their Enterprise products & services group, which is profitable, in play. I suspect their goal is to sell it for some quick cash. I would expect this to get between $5Bn and $7Bn and would stem the tide of impending doom for several years. 2) I think that they’ll use part of that money to write down and shutter the Optical business. Beneficiaries of this will include Juniper and to a lesser extent Cisco.

I think that this puts the entire company very much in play for an acquisition by Cisco or Alcatel, except for one thing: cash in the bank.

So, this morning I bought Juniper and Nortel, and we’ll see what happens.

-Ian.

———–

On quarterly revenue of $2.36 billion, they lost $1.8 billion. To quote Lance, that’s like bending over to pick up a quarter and having 4 dimes fall out of your pocket.

For all you sports fans, that means that in order to break even Nortel needs to cut their costs by 40% and increase their revenues by 15%: a bitter pill to swallow. And as far as I know, very few companies are able to increase revenues while hacking off limbs in an effort to cut costs.

And now they want us to believe that this is plausible. If they pull it off, they oughtta win a Nobel Prize.

At the end of 2001 they had $3.5Bn in cash in the bank… and have been blowing through it with abandon. Nortel will likely need to be borrowing money soon. I don’t know, but if I’m them, I’m going to be thinking about calling Mike Volpi at Cisco…

-Ian.

RICHARDSON, Texas — Two years ago, J. Michael Dugan spread the word to his fellow optical engineers in North Texas that he was starting a company that could make them all rich. The telecommunications business was hot, and optical engineers were the hottest commodities of them all, commanding big signing bonuses and six-figure salaries.

Mr. Dugan, a burly Texan with more than 20 years under his belt at the giant French equipment maker Alcatel SA, was persuasive. So many flocked to his annual summer party in July 2000 to learn more about Latus Lightworks that he ran out of food. The start-up took off quickly, hiring 120 employees as the engineers raced to devise ways to squeeze more data and voice traffic through a hair-thin strand of fiber-optic glass.

Then the bubble burst.

A few weeks ago, when all those engineers gathered again in Mr. Dugan’s backyard, it was to commiserate and swap job leads. Ken Maxham, a cheery 59-year-old who comes from a long line of engineers, was worried about his unemployment benefits running out as his savings dwindle. He had cut back expenses as much as possible, but basic health insurance costs $750 a month and his wife was putting off going to the dentist for a toothache.

David Wolf, who at 37 is one of the youngest optical engineers around, was counting the days until his second start-up was due to run out of money. The fresh-faced father of three young children was pruning expenses such as his daughter’s gymnastics lessons and worrying about the future. Mr. Dugan, whose work as a temporary consultant was about to end, was contemplating returning to school at age 50.

And the party was buzzing about a cruel twist of fate: Two of the former colleagues had just gone head-to-head for one of the few remaining telecom jobs out there. The one in the more precarious financial position didn’t get it.

“When I see someone I haven’t seen in a while, my first question is, ‘Do you have a job?’ ” said Bruce Raeside, a 46-year-old Michigan native who also worked as a Latus engineer. “It’s almost like Detroit in the ’70s.”

In many ways, it’s worse. Like the massive declines in the nation’s steel, oil and automobile industries in decades past, the disintegration of the telecom business is leaving deep wounds in the U.S. work force. But labor historians say telecom stands out for the unprecedented speed of the boom-and-bust cycle. After telecom was deregulated in 1996, it quickly expanded by some 331,000 jobs before peaking in late 2000. Since the downturn started, though, companies have announced layoffs that have wiped out all those new jobs and more — a total of well over 500,000 workers, according to a tally by The Wall Street Journal. By contrast, it took two decades for the ranks of the United Auto Workers to fall to 732,000 from 1.5 million, as the auto industry was forced to become much more efficient in the face of foreign competition.

The number of telecom jobs grew faster and has fallen much harder than the overall job market, according to James Glen, an economist with Economy.com, a West Chester, Pa., research firm. He says the 12% drop in telecom jobs is still gaining steam, especially as the rout claims bigger and bigger companies such as Global Crossing Ltd. and WorldCom Inc. And the economic and human cost of the telecom bust far exceeds that of the highly publicized Internet crash, which by and large involved smaller companies.

Telecom has turned into one of history’s biggest bubbles because so much money poured into the industry during the stock-market boom, creating some $470 billion in debt and a vast glut of capacity. Once a sleepy industry known for its modest growth, telecom took off like a rocket in the late ’90s as companies rushed to lace the world with ultra-fast fiber-optic networks to carry an expected onslaught of Internet traffic. But after a frenzy of spending and hiring, it suddenly became clear in mid-2001 that the Internet wasn’t growing nearly as fast as the 1,000-fold annual increases originally predicted. The huge run-up has now been replaced by a merciless ride down. Rumors of foreclosures and marital problems have replaced word of the latest IPO. Some laid-off telecom workers are even turning up in local homeless shelters.

So much money was spent buying telecom gear during the frenzy that there is now seven years’ worth of excess inventory, says Lonnie Martin, chief executive of White Rock Networks, a Richardson start-up that is trying to hang on. He values the excess supply at some $160 billion. “That is an awful lot of exuberance to get rid of,” he says.

There are few places where the hangover is more severe than here in the sun-blasted plains north of Dallas. Back during the boom years, developers couldn’t throw up office buildings fast enough to keep pace with the demand. Telecom jobs doubled to 90,000 between 1995 and the peak of the bubble as big names such as Cisco Systems Inc. stormed into town and companies such as Nortel Networks Corp. quadrupled their work forces. Money was flowing so freely that countless start-ups emerged from nowhere. Now, vacancy rates in the area known as the Telecom Corridor have shot up to 34%. The vast expanses of empty parking lots make the area look like a corporate ghost town.

And the layoffs keep coming. While the Latus workers left stable jobs to join the start-up, they know plenty of colleagues who stayed behind and lost their jobs anyway. Big suppliers such as Nortel and Alcatel had already shed half their work forces before WorldCom’s collapse. Xalted Networks Inc. just laid off most of its Texas engineers and issued a press release saying it’s moving its software development to Bangalore, India, where it plans to hire 70 engineers in a bid to conserve cash.

Change of Fortune

The change of fortune is especially jarring to telecom’s engineers, many of whom chose their profession because it promised a stable paycheck and seemingly limitless growth. Mr. Dugan, who has degrees in physics and electrical engineering, shifted into telecom after down-sizings in NASA’s space program and the Texas oil industry, where he built support electronics for the oil diggers. Mr. Raeside came on after surviving layoffs at semiconductor companies through the 1980s.

During the boom, no one was more in demand than the eclectic band of optical engineers who had worked for years in relative obscurity transmitting millions of calls a second through tiny hairs of glass by using lasers of light invisible to the human eye. Their value soared in a climate where any innovation could quickly become the next hot IPO. Suddenly, companies were paying salaries well over $100,000 to lure top talent.

As some of the early start-ups were purchased by bigger companies in deals that made their founders rich, the walls of the big companies started to feel a bit confining. Mr. Dugan left Alcatel in January 2000, contemplating a few offers. He was hanging around his house one February morning when he was contacted out of the blue by Michael Zadikian, who had sold his company, Monterey Networks, to Cisco Systems Inc. for $500 million in 1999.

Mr. Zadikian had a new plan to launch four start-ups at once to develop a single system that phone companies could use for all of their needs. He wanted Mr. Dugan to focus on the so-called long haul, the cross-country and undersea networks that companies were racing to build. Mr. Dugan signed on.

Latus was following in a rich tradition. The former MCI Communications Inc. started here in the late ’70s, using the microwave technology deployed by Collins Radio to challenge AT&T Corp.’s monopoly. But microwave towers couldn’t be placed more than 35 miles apart because of the curvature of the earth, leading MCI to push for advances in fiber-optic technology. In the early ’80s, MCI embraced a new technology that used light waves to transmit calls on one strand of fiber, a signal that was so strong MCI only needed to install equipment to boost it every 1,000 miles or so. Companies rushed into Richardson to help give MCI a competitive edge, a customer and supplier relationship that has flourished for years, but which is now in jeopardy with the collapse of MCI’s parent, WorldCom.

The goal of Latus was ambitious: to develop a system that could send data and voice traffic at higher speeds and longer distances than ever before. Optical networking was all abuzz about a technology called dense wave division multiplexing that could divide a single strand of fiber into dozens of channels by beaming different colors of light through it. The Latus system had 256 different channels, and was designed to go more than 1,200 miles before the signal needed to be boosted again so it could continue on.

The company didn’t have a name until March, when Mr. Dugan, flying home from a convention, bought a Latin-English dictionary at an airport and found the word, “latus,” meaning wide, open and expansive. Latus got $28 million in its first round of funding in July of 2000 from a group of investors eager to follow Mr. Zadikian’s success.

David Wolf knew he was at a turning point as he decided whether to follow his former boss to Latus. A friend of his late father told him to do it because it was a once-in-a-lifetime opportunity. His wife, Susan, advised making the leap as well. The couple had just purchased some property north of their home in Allen, Texas, to build a bigger house to accommodate their expanding family.

“Do it, as long as you get paid the same,” Susan told her husband. Even if it didn’t work out, the couple reasoned that Mr. Wolf could take advantage of one of several other job offers. In a matter of days, Mr. Wolf found himself plunking down $5,000 on his credit card to buy a laptop so he could start work at Latus on Monday. He remembers thinking with amusement that there were no expense forms to fill out to get the money back, but he trusted Mr. Dugan.

They found some office space to rent and began hiring workers. “At every board meeting, they said, ‘Spend the money. Spend the money,’ ” recalls Mr. Wolf. “The engineers were the hardest to find.” Latus had to pay at least $100,000 and as much as $120,000, plus bonuses, for the very senior engineers, who often were playing more than three job offers off each other. The start-up handed out 20% of its total shares to employees, and those who joined first were given the largest number of options. Another start-up raffled off a new BMW to employees who referred their colleagues to the company.

Money seemed to be everywhere — and in many senses, it was. Capital spending by telecom companies at the height of the boom soared to 106% of revenue, according to Mr. Glen at Economy.com. Historically, that figure had been just 38%.

At Latus, Ken Maxham jumped in as employee No. 11, Bruce Raeside as employee No. 16 and Amy Dugan as employee No. 47. Mrs. Dugan joined despite some nervousness about perceptions of nepotism. A respected engineer herself, she reasoned that joining her husband’s company meant the two could work day and night on Latus.

The scramble began to get the technology ready for viewing at Supercomm, a huge trade show in June of 2001. The engineers sometimes put in 20-hour days working out kinks in the product, which looked like a bunch of refrigerators full of wires. “Our entire existence was hinged on meeting our claims,” says Mr. Dugan. “I said there is no way we can go back and tell the board there appeared to be fundamental physics limitations.”

What they didn’t realize was that economic limitations would prove the bigger threat. Latus was launched precisely at the peak of the bubble, when money was flowing so freely in telecom that companies seemed willing to buy anything.

It was at Supercomm in Atlanta that the big buyers began showing signs of flagging demand. Mr. Dugan had to rush out to California in the middle of the show to give a funding pitch to one of the original investors. But the second round of financing for Latus became almost impossible as the spigot of capital shut off. An initial public offering became a distant dream.

Mr. Dugan was hoping the uncertainty was just a slight fluctuation in the market. That summer, the Dugans threw an even bigger party than before, and catered it for the first time, bringing in trays of Mexican food under a huge rented tent. Around that time, Susan Wolf started joking with Mr. Dugan about whether her husband would still be able to bring home a paycheck. An accountant, she works only during tax time to bring in a few thousand dollars. Mr. Dugan knew it was a joke, but he began feeling the responsibility on his shoulders.

The first layoffs hit the Richardson area in the middle of 2001. Susan Wolf began hearing stories in her neighborhood. “It is like the black plague. You hear it happening to someone your neighbor knows. Then her brother is laid off, and then it happens to you,” she told her husband over dinner recently with a guest. “It goes from the edges in — closer and closer — and finally gets here.”

The company was notified that it lost its funding the morning of Sept. 11. Mr. Dugan was waiting for a conference call among the Latus board when the second plane hit the World Trade Center, but the call went on as investors notified them that funding would be cut off. The founders were given only 10 days to find a new backer — an almost impossible feat because any potential bidders would have had to travel by bus to visit the company, since all flights were grounded for days by terrorism fears. “We got bombed twice,” says Mr. Dugan, who doesn’t blame the investors for their decision given the climate.

On Sept. 12, he called an all-hands meeting and told his fellow Latus employees to update their resumes and finish their projects. “It’s not over, but it doesn’t look good at all,” he told them.

On Sept. 23, Mr. Dugan invited them all to the local Omni Hotel, the place where all the deals were made during better times. He told them that Latus would be shut down, and its doors padlocked as the bank cleared out its equipment. Everyone would lose their jobs immediately. Mr. Dugan made arrangements to sign them up for unemployment benefits on the spot, and then the Dugans paid for drinks for all. “A lot of these people were my friends. They didn’t hold it against me,” says Mr. Dugan. “But I felt badly for them.”

When Latus shut down, the Wolf family cut down on spending as they could. They stopped hiring babysitters and going out to dinner, and cut back on groceries.

David Wolf stayed at home looking for a job, surprising his children the first time that he picked them up from school. To fill his time, to the slight irritation of his wife, he plunged into another start-up with Mr. Dugan and a few others to develop another optical product. They even paid out of their own pockets for Mr. Dugan to present the product at a show in California earlier this year. But with the downturn so pronounced, they received little interest. The fiber-optic amplifier is now sitting in a case in Mr. Dugan’s living room.

As he flung himself into a new start-up, Mr. Dugan and others held meetings at the local Starbucks, which had become the unofficial meeting place for the unemployed. He says it is a strange experience to run into people during the middle of the day. “It is like, ‘Oh, this happened to you, too,’ ” he says.

Mr. Maxham started looking for a job immediately. Even though he is 59, he was perhaps worst off financially because he had invested 30 years of retirement savings in tech stocks after leaving Alcatel. “I was a believer, but that was a bad decision,” says Mr. Maxham, who lost “hundreds of thousands” of dollars. Initially, he was mystified by the scarcity of jobs because he had turned down seven job offers before joining Latus. As he searched every day for jobs, unemployment benefits of about $300 a week kicked in.

To ease the tension, Mr. Maxham plays electric bass guitar in a band of engineers called Signal2Noise. But it wasn’t much of an escape: At one point, half of the band was out of work. He felt increasingly guilty about his precarious financial situation and apologized at one point to his wife, Penny. “I am not angry,” she told him. “I sort of know that we are going to be OK.” Still, it was rough recently when she had to accept money from her parents to travel back to Idaho to visit them.

For months now, the bottom has been getting deeper. Robert Shapiro, head of the local telecom branch of the national engineering association, thinks the cycle must be at the bottom. “How could it get any worse?” asks Mr. Shapiro, who is working a temporary job after months of unemployment. Attendance at the group’s monthly meetings at the local Holiday Inn has doubled since engineers now have extra time. Mr. Shapiro estimates that half of the association’s members have been laid off. Meetings now start with job-hunting tips.

Part of the problem is that there is no place for the highly specialized engineers to turn as the tech industry continues to slump. Krish Prabhu, the former chief operating officer of Alcatel who lives in the Dallas area, hears the desperation as companies ask for money and former colleagues call for job tips. A partner with Morgenthaler Ventures, a venture-capital firm, Mr. Prabhu says it will be tough for any start-up to survive. “There is a nervousness about whether this downturn is part of a cycle or a fundamental change that telecom has become a commodity like the computer industry,” says Mr. Prabhu.

The ripples are spreading. The city of Richardson is being hit by a drop of more than 20% of its sales tax and a coming hit to its property taxes from all the empty office buildings. Foreclosures in Collin County, where many telecom workers live, are up 79% over last year, especially for homes worth $250,000 or more. The process is brutally efficient in Texas: Once a house is posted for foreclosure, the owner has only 21 days to come up with the money before it is auctioned.

Howard Dahlka, executive director of the Samaritan Inn, a homeless shelter in nearby McKinney, is seeing the shell-shocked faces of telecom workers who have lost their homes. “It is a whole new breed, what we are seeing here,” he says.

People in Trouble

Just in the past week, Samaritan has received 15 calls from people who are expecting to lose their homes, and he worries whether his 58-bed shelter will have to turn people away. Bill Kewin, an engineer who was laid off from WorldCom six weeks ago, says many WorldCom workers are in very bad financial shape because their 401(k) plans are worth virtually nothing. Many have put their homes on the market and don’t know where they are going next. “There are a lot of people who are in trouble,” he says.

As November turned into December, Mr. Dugan had found no work. His wife, Amy, thankfully did land a job for $100,000 a year at a telecom manufacturer, giving them a degree of financial stability they are grateful for. But it isn’t easy for Mr. Dugan, who has 13 patents to his name. He eventually got a little work consulting for a start-up, but expects to lose that job in about a month. Something permanent feels pretty far off. He’s even thinking of going back to school to study medicine. “I don’t have a sense of accomplishment,” he says. “I still have more to do.”

Across town at the Wolf household, tension rose as Christmas approached and David still didn’t have a job. The couple fretted about Christmas, and how to contribute to the gift-giving rituals with their extended family. They didn’t want to ask for help but were happy to accept cash gifts to help ease the pinch. Susan Wolf was most worried about the $10,000 bill for private school for one of their children with some special needs. Her parents stepped in to help foot the bill late last year.

Finally, in January, David got a job at Yotta Networks, another local start-up that is focusing on long-haul networks. He makes about $100,000 a year, but Yotta has gone through two sets of layoffs and is set to run out of its funding in a matter of weeks. Company officials are negotiating with a promising new customer, but the start-up is burning through $1 million a month.

The Wolfs estimate they have only enough savings to last three months. “I’m getting nervous,” says Mr. Wolf. “I’ve got a lot of people who are telling me just to get out of telecom. I don’t want to end up on the street again.” Susan Wolf says that if she needs to, she will resort to anything to pay this year’s school tuition. “I’ll move into an apartment if I have to.”

In April, Mr. Maxham thought his prayers had been answered. A company called Celion Networks Inc. needed an engineer. He quickly called to arrange an interview. Then a friend tipped him off that Mr. Raeside, his old colleague from Latus, was also in the running for the job. After agonizing the day before the interview, he decided to deal with the competition head-on. “I put a good word in for him,” says Mr. Maxham.

He felt the interview went well. The job seemed like a perfect fit. They needed a systems engineer — a big-picture guy who supervises the hardware design of a new product. But while he was waiting to see if he’d get another interview, the phone rang with some disquieting news. It was Mr. Raeside, letting him know as a courtesy that he’d been asked back for a second interview. He called again when he got hired.

The two men remain friends, but Mr. Raeside seemed sheepish when he spotted him this year at Mr. Dugan’s party. “I was lucky,” he said softly. “I am really convinced that it came down to either one of us. We were both perfect for the job.”

The job only lasted four months. Mr. Raeside was laid off on Friday.

The party itself was much tamer this year. Guests were asked to bring potluck dishes, and the biggest attraction was a big tent Mr. Dugan designed himself to save money.

Mr. Maxham attends job workshops run by various churches in the area. As every week passes, he notices more and more of the unemployed coming. Lisa Miller, the executive director of Career/HiTech Connection, the biggest workshop in the area, makes it her mission to keep spirits high. “You will find a job,” Ms. Miller told the crowd packing the Preston Hollow Presbyterian Church one recent Tuesday night as she explained the importance of networking. But as the telecom crisis deepens, Mr. Maxham becomes less convinced there are even jobs to be had. He sat with a grim look one recent night as job openings were called off, none of them for engineers.

As Mr. Maxham’s savings account dwindles to under $10,000, things are getting very shaky. He now buys only food that is on sale, looks for the cheapest gas and has put off replacing his wife’s 10-year-old car. He won’t go to a food bank because he says they give away too much meat, which he doesn’t like. Repairs are going undone. Recently, Mr. Maxham set out with sealant to repair some leaks on his roof. If he doesn’t find any work by September, he says that money will “get very tight.”

It already has. Penny Maxham says that she is trying to ignore a toothache because the couple has no dental coverage. She quit her job a couple of years ago to fulfill a dream of getting a Ph.D. in neuroscience, but she is considering going back to work.

Once there was a time when Mr. Maxham vowed never to leave engineering. His father was an engineer, and his three grown children are engineers. But a month ago, Mr. Maxham’s unemployment benefits ran out, and he is reconsidering. He recently applied to teach physics at a community college. A friend recently asked him to help install some computers in cars. He is open to anything because he really needs the money.

“It’s frustrating,” says Mr. Maxham, who in his 30 years as an engineer earned seven patents. An eighth just arrived in the mail last week. “I just enjoyed being an engineer so much. I was born like that and I passed it along to my children. … But maybe I will become a teacher, just like my dad did in the Depression.”

Write to Rebecca Blumenstein at rebecca.blumenstein [at] wsj [dot] com1

Hyperlinks in this Article: (1) mailto:rebecca.blumenstein [at] wsj [dot] com (2) <http://online.”>http://online.wsj.com/article/0,,SB10281640071014240,00.html>http://online. wsj.com/article/0,,SB10281640071014240,00.html (4) <3887 https://ianbell.com/2002/08/19/softbank-vc-heidi-roizen-updates-her-resume/ Mon, 19 Aug 2002 18:31:32 +0000 https://ianbell.com/2002/08/19/softbank-vc-heidi-roizen-updates-her-resume/ ——— http://story.news.yahoo.com/news?tmpl=story&u=/nm/20020817/wr_nm/tech_japan_softbank_dc_1

Softbank May Have Trouble Leaving Net Bubble Behind Sat Aug 17, 3:50 PM ET

By Eriko Amaha

TOKYO (Reuters) – Japan’s Softbank Corp. ( news – web sites), an ambitious high-tech powerhouse that has reinvented itself more often than Madonna ( news – web sites), may find it hard to exit troubled stock market and banking ventures as it recasts its fortunes yet again.

Softbank has sold off many of its Internet venture holdings since the dot-com bubble burst, but it may not be so easy to pull out of its money-losing Nasdaq Japan venture, analysts said, despite an expected exit by the U.S. Nasdaq Stock Market.

Similarly, government officials appear to be pressuring Softbank not to sell its 49 percent stake in Aozora Bank, even though Softbank badly needs funds for its nascent business providing high-speed Internet access.

“The risk is that if the Japanese financial authorities say Softbank should not easily give up something like Nasdaq Japan which serves the public interest, Softbank has to keep the exchange running even if it loses money,” said Makoto Ueno, a senior analyst at Daiwa Institute of Research.

So far, Softbank is insisting it will stick with the Nasdaq Japan venture, set up with the U.S. Nasdaq and other brokerage firms at the peak of the Internet bubble in 1999.

Softbank’s stake in Nasdaq Japan was called into question when local media reported on Wednesday that the U.S. Nasdaq planned to withdraw from the venture. Steep operating costs had forced the U.S. entity to write down investments in Nasdaq Japan, snarling its plan to create a global 24-hour trading system.

Although some analysts said Softbank’s exposure to Nasdaq Japan could remain limited to its investments in capital, others voiced concerns that Softbank may have to shoulder possible future costs to keep the bourse going.

Nasdaq Japan said it had an accumulative loss of 5.2 billion yen ($44.37 million) at the end of last year. Capital for Nasdaq Japan has been boosted to 4.16 billion yen from an initial 600 million yen, and Softbank, which owns 43 percent of Nasdaq Japan, has pitched in its portion.

The U.S. Nasdaq Stock Market wrote down $20.1 million — $15.2 million for such items as outstanding and unfunded loans and foreign exchange losses, and $4.9 million for the costs of hatching a developmental trading platform.

A Softbank spokeswoman said the company has invested only capital and not extended any loans to Nasdaq Japan.

But given that the bourse is unlikely to become profitable any time soon amid a global downturn in equity markets, and with no potential buyers around, Softbank’s stake in Nasdaq Japan remains a concern for investors.

“Softbank is now in a phase where it needs money. They have been trying to liquidate any assets they can to get cash,” said Jiro Izumi, an analyst at Tokyo-Mitsubishi Securities.

DASHED HOPES

Softbank, which has gone from software distributor to computer systems integrator to Internet incubator in the two decades since its founding, is now trying to leave the dot-com bubble behind by shifting its focus to high-speed communications.

Softbank has said it is considering selling its 49 percent stake in Aozora, created from the ashes of failed Nippon Credit Bank to provide funding to small and mid-sized businesses. It bought the holding two years ago for about 100 billion yen.

Masayoshi Son, the founder and president of Softbank, said in June that his company was studying the possibility of a sale following a change in Japanese banking laws in April.

Softbank had agreed with other shareholders to hold the Aozora Bank stake for at least two years after its purchase in August 2000, he said.

But here again, Softbank’s sale of the Aozora stake may face hurdles.

Financial Services Minister Hakuo Yanagisawa said a sale would call into question Softbank’s sense of responsibility as an investor with long-term commitment.

Officials at the top banking regulator, the Financial Services Agency, have also expressed resistance toward letting a fund become a bank’s majority stakeholder for fear of destabilizing the bank’s management if too much emphasis is put on quick capital gains.

Aozora this month said it was on track to meet its half-year operating profit target of 15 billion yen, after posting 7.4 billion yen for the first quarter.

However, it said it still had 469.7 billion yen in bad debts at the end of June, compared with 489.6 billion yen at the end of March.

In the past year, Softbank has been divesting its holdings in several high-profile companies including U.S. Internet firm Yahoo Inc and E*Trade Group Inc to shed its outstanding debt.

But concerns about Softbank’s cash flow and uncertainty over its businesses have been weighing on the company’s shares.

The stock hit a lifetime low last week when the Nasdaq debacle burst onto the scene. On Thursday, Softbank shares closed up 5.96 percent at 1,245 yen, rebounding after a two-day fall, while the Nikkei 225-share average put on 1.63 percent.

($17.18 yen)

———–

To stop the rampant theft of expensive cars, manufacturers in the 1990s began to make ignitions very difficult to hot-wire. This reduced the likelihood that cars would be stolen from parking lots— but apparently contributed to the sudden appearance of a new and more dangerous crime, carjacking. After a vote against management Vivendi Universal announced earlier this year that its electronic shareholder-voting system, which it had adopted to tabulate votes efficiently and securely, had been broken into by hackers. Because the new system eliminated the old paper ballots, recounting the votes—or even independently verifying that the attack had occurred—was impossible. To help merchants verify and protect the identity of their customers, marketing firms and financial institutions have created large computerized databases of personal information: Social Security numbers, credit-card numbers, telephone numbers, home addresses, and the like. With these databases being increasingly interconnected by means of the Internet, they have become irresistible targets for criminals. From 1995 to 2000 the incidence of identity theft tripled. s was often the case, Bruce Schneier was thinking about a really terrible idea. We were driving around the suburban-industrial wasteland south of San Francisco, on our way to a corporate presentation, while Schneier looked for something to eat not purveyed by a chain restaurant. This was important to Schneier, who in addition to being America’s best-known ex-cryptographer is a food writer for an alternative newspaper in Minneapolis, where he lives. Initially he had been sure that in the crazy ethnic salad of Silicon Valley it would be impossible not to find someplace of culinary interest—a Libyan burger stop, a Hmong bagelry, a Szechuan taco stand. But as the rented car swept toward the vast, amoeboid office complex that was our destination, his faith slowly crumbled. Bowing to reality, he parked in front of a nondescript sandwich shop, disappointment evident on his face. Schneier is a slight, busy man with a dark, full, closely cropped beard. Until a few years ago he was best known as a prominent creator of codes and ciphers; his book Applied Cryptography (1993) is a classic in the field. But despite his success he virtually abandoned cryptography in 1999 and co-founded a company named Counterpane Internet Security. Counterpane has spent considerable sums on advanced engineering, but at heart the company is dedicated to bringing one of the oldest forms of policing—the cop on the beat— to the digital realm. Aided by high-tech sensors, human guards at Counterpane patrol computer networks, helping corporations and governments to keep their secrets secret. In a world that is both ever more interconnected and full of malice, this is a task of considerable difficulty and great importance. It is also what Schneier long believed cryptography would do—which brings us back to his terrible idea. “Pornography!” he exclaimed. If the rise of the Internet has shown anything, it is that huge numbers of middle-class, middle-management types like to look at dirty pictures on computer screens. A good way to steal the corporate or government secrets these middle managers are privy to, Schneier said, would be to set up a pornographic Web site. The Web site would be free, but visitors would have to register to download the naughty bits. Registration would involve creating a password—and here Schneier’s deep-set blue eyes widened mischievously. People have trouble with passwords. The idea is to have a random string of letters, numbers, and symbols that is easy to remember. Alas, random strings are by their nature hard to remember, so people use bad but easy-to-remember passwords, such as “hello” and “password.” (A survey last year of 1,200 British office workers found that almost half chose their own name, the name of a pet, or that of a family member as a password; others based their passwords on the names Darth Vader and Homer Simpson.) Moreover, computer users can’t keep different passwords straight, so they use the same bad passwords for all their accounts. Many of his corporate porn surfers, Schneier predicted, would use for the dirty Web site the same password they used at work. Not only that, many users would surf to the porn site on the fast Internet connection at the office. The operators of Schneier’s nefarious site would thus learn that, say, “Joesmith,” who accessed the Web site from Anybusiness.com, used the password “JoeS.” By trying to log on at Anybusiness.com as “Joesmith,” they could learn whether “JoeS” was also the password into Joesmith’s corporate account. Often it would be. “In six months you’d be able to break into Fortune 500 companies and government agencies all over the world,” Schneier said, chewing his nondescript meal. “It would work! It would work—that’s the awful thing.” uring the 1990s Schneier was a field marshal in the disheveled army of computer geeks, mathematicians, civil-liberties activists, and libertarian wackos that—in a series of bitter lawsuits that came to be known as the Crypto Wars—asserted the right of the U.S. citizenry to use the cryptographic equivalent of kryptonite: ciphers so powerful they cannot be broken by any government, no matter how long and hard it tries. Like his fellows, he believed that “strong crypto,” as these ciphers are known, would forever guarantee the privacy and security of information—something that in the Information Age would be vital to people’s lives. “It is insufficient to protect ourselves with laws,” he wrote in Applied Cryptography. “We need to protect ourselves with mathematics.” Schneier’s side won the battle as the nineties came to a close. But by that time he had realized that he was fighting the wrong war. Crypto was not enough to guarantee privacy and security. Failures occurred all the time—which was what Schneier’s terrible idea demonstrated. No matter what kind of technological safeguards an organization uses, its secrets will never be safe while its employees are sending their passwords, however unwittingly, to pornographers—or to anyone else outside the organization. The Parable of the Dirty Web Site illustrates part of what became the thesis of Schneier’s most recent book, Secrets and Lies (2000): The way people think about security, especially security on computer networks, is almost always wrong. All too often planners seek technological cure-alls, when such security measures at best limit risks to acceptable levels. In particular, the consequences of going wrong—and all these systems go wrong sometimes—are rarely considered. For these reasons Schneier believes that most of the security measures envisioned after September 11 will be ineffective, and that some will make Americans less safe. It is now a year since the World Trade Center was destroyed. Legislators, the law-enforcement community, and the Bush Administration are embroiled in an essential debate over the measures necessary to prevent future attacks. To armor-plate the nation’s security they increasingly look to the most powerful technology available: retina, iris, and fingerprint scanners; “smart” driver’s licenses and visas that incorporate anti-counterfeiting chips; digital surveillance of public places with face-recognition software; huge centralized databases that use data-mining routines to sniff out hidden terrorists. Some of these measures have already been mandated by Congress, and others are in the pipeline. State and local agencies around the nation are adopting their own schemes. More mandates and more schemes will surely follow. Schneier is hardly against technology—he’s the sort of person who immediately cases public areas for outlets to recharge the batteries in his laptop, phone, and other electronic prostheses. “But if you think technology can solve your security problems,” he says, “then you don’t understand the problems and you don’t understand the technology.” Indeed, he regards the national push for a high-tech salve for security anxieties as a reprise of his own early and erroneous beliefs about the transforming power of strong crypto. The new technologies have enormous capacities, but their advocates have not realized that the most critical aspect of a security measure is not how well it works but how well it fails. The Crypto Wars f mathematicians from the 1970s were suddenly transported through time to the present, they would be happily surprised by developments such as the proofs to Kepler’s conjecture (proposed in 1611, confirmed in 1998) and to Fermat’s last theorem (1637, 1994). But they would be absolutely astonished by the RSA Conference, the world’s biggest trade show for cryptographers. Sponsored by the cryptography firm RSA Security, the conferences are attended by as many as 10,000 cryptographers, computer scientists, network managers, and digital-security professionals. What would amaze past mathematicians is not just the number of conferences but that they exist at all. Sidebar: Why the Maginot Line Failed “In fact, the Maginot Line, the chain of fortifications on France’s border with Germany, was indicative neither of despair about defeating Germany nor of thought mired in the past….” Cryptology is a specialized branch of mathematics with some computer science thrown in. As recently as the 1970s there were no cryptology courses in university mathematics or computer-science departments; nor were there crypto textbooks, crypto journals, or crypto software. There was no private crypto industry, let alone venture-capitalized crypto start-ups giving away key rings at trade shows (crypto key rings—techno-humor). Cryptography, the practice of cryptology, was the province of a tiny cadre of obsessed amateurs, the National Security Agency, and the NSA’s counterparts abroad. Now it is a multibillion-dollar field with applications in almost every commercial arena. As one of the people who helped to bring this change about, Schneier is always invited to speak at RSA conferences. Every time, the room is too small, and overflow crowds, eager to hear their favorite guru, force the session into a larger venue, which is what happened when I saw him speak at an RSA conference in San Francisco’s Moscone Center last year. There was applause from the hundreds of seated cryptophiles when Schneier mounted the stage, and more applause from the throng standing in the aisles and exits when he apologized for the lack of seating capacity. He was there to talk about the state of computer security, he said. It was as bad as ever, maybe getting worse. In the past security officers were usually terse ex-military types who wore holsters and brush cuts. But as computers have become both attackers’ chief targets and their chief weapons, a new generation of security professionals has emerged, drawn from the ranks of engineering and computer science. Many of the new guys look like people the old guard would have wanted to arrest, and Schneier is no exception. Although he is a co-founder of a successful company, he sometimes wears scuffed black shoes and pants with a wavering press line; he gathers his thinning hair into a straggly ponytail. Ties, for the most part, are not an issue. Schneier’s style marks him as a true nerd—someone who knows the potential, both good and bad, of technology, which in our technocentric era is an asset. Schneier was raised in Brooklyn. He got a B.S. in physics from the University of Rochester in 1985 and an M.S. in computer science from American University two years later. Until 1991 he worked for the Department of Defense, where he did things he won’t discuss. Lots of kids are intrigued by codes and ciphers, but Schneier was surely one of the few to ask his father, a lawyer and a judge, to write secret messages for him to analyze. On his first visit to a voting booth, with his mother, he tried to figure out how she could cheat and vote twice. He didn’t actually want her to vote twice—he just wanted, as he says, to “game the system.” Unsurprisingly, someone so interested in figuring out the secrets of manipulating the system fell in love with the systems for manipulating secrets. Schneier’s childhood years, as it happened, were a good time to become intrigued by cryptography—the best time in history, in fact. In 1976 two researchers at Stanford University invented an entirely new type of encryption, public-key encryption, which abruptly woke up the entire field. Public-key encryption is complicated in detail but simple in outline. All ciphers employ mathematical procedures called algorithms to transform messages from their original form into an unreadable jumble. (Cryptographers work with ciphers and not codes, which are spy-movie-style lists of prearranged substitutes for letters, words, or phrases—”meet at the theater” for “attack at nightfall.”) Most ciphers use secret keys: mathematical values that plug into the algorithm. Breaking a cipher means figuring out the key. In a kind of mathematical sleight of hand, public-key encryption encodes messages with keys that can be published openly and decodes them with different keys that stay secret and are effectively impossible to break using today’s technology. (A more complete explanation of public-key encryption will soon be available on The Atlantic’s Web site, www.theatlantic.com.) The best-known public-key algorithm is the RSA algorithm, whose name comes from the initials of the three mathematicians who invented it. RSA keys are created by manipulating big prime numbers. If the private decoding RSA key is properly chosen, guessing it necessarily involves factoring a very large number into its constituent primes, something for which no mathematician has ever devised an adequate shortcut. Even if demented government agents spent a trillion dollars on custom factoring computers, Schneier has estimated, the sun would likely go nova before they cracked a message enciphered with a public key of sufficient length. Schneier and other technophiles grasped early how important computer networks would become to daily life. They also understood that those networks were dreadfully insecure. Strong crypto, in their view, was an answer of almost magical efficacy. Even federal officials believed that strong crypto would Change Everything Forever—except they thought the change would be for the worse. Strong encryption “jeopardizes the public safety and national security of this country,” Louis Freeh, then the director of the (famously computer-challenged) Federal Bureau of Investigation, told Congress in 1995. “Drug cartels, terrorists, and kidnappers will use telephones and other communications media with impunity knowing that their conversations are immune” from wiretaps. The Crypto Wars erupted in 1991, when Washington attempted to limit the spread of strong crypto. Schneier testified before Congress against restrictions on encryption, campaigned for crypto freedom on the Internet, co-wrote an influential report on the technical snarls awaiting federal plans to control cryptographic protocols, and rallied 75,000 crypto fans to the cause in his free monthly e-mail newsletter, Crypto-Gram. Most important, he wrote Applied Cryptography, the first-ever comprehensive guide to the practice of cryptology. Washington lost the wars in 1999, when an appellate court ruled that restrictions on cryptography were illegal, because crypto algorithms were a form of speech and thus covered by the First Amendment. After the ruling the FBI and the NSA more or less surrendered. In the sudden silence the dazed combatants surveyed the battleground. Crypto had become widely available, and it had indeed fallen into unsavory hands. But the results were different from what either side had expected. As the crypto aficionados had envisioned, software companies inserted crypto into their products. On the “Tools” menu in Microsoft Outlook, for example, “encrypt” is an option. And encryption became big business, as part of the infrastructure for e-commerce—it is the little padlock that appears in the corner of Net surfers’ browsers when they buy books at Amazon.com, signifying that credit-card numbers are being enciphered. But encryption is rarely used by the citizenry it was supposed to protect and empower. Cryptophiles, Schneier among them, had been so enraptured by the possibilities of uncrackable ciphers that they forgot they were living in a world in which people can’t program VCRs. Inescapably, an encrypted message is harder to send than an unencrypted one, if only because of the effort involved in using all the extra software. So few people use encryption software that most companies have stopped selling it to individuals. Sidebar: The Worm in the Machine “Buffer overflows (sometimes called stack smashing) are the most common form of security vulnerability in the last ten years….” Among the few who do use crypto are human-rights activists living under dictatorships. But, just as the FBI feared, terrorists, child pornographers, and the Mafia use it too. Yet crypto has not protected any of them. As an example, Schneier points to the case of Nicodemo Scarfo, who the FBI believed was being groomed to take over a gambling operation in New Jersey. Agents surreptitiously searched his office in 1999 and discovered that he was that rarity, a gangster nerd. On his computer was the long-awaited nightmare for law enforcement: a crucial document scrambled by strong encryption software. Rather than sit by, the FBI installed a “keystroke logger” on Scarfo’s machine. The logger recorded the decrypting key— or, more precisely, the passphrase Scarfo used to generate that key— as he typed it in, and gained access to his incriminating files. Scarfo pleaded guilty to charges of running an illegal gambling business on February 28 of this year. Schneier was not surprised by this demonstration of the impotence of cryptography. Just after the Crypto Wars ended, he had begun writing a follow-up to Applied Cryptography. But this time Schneier, a fluent writer, was blocked—he couldn’t make himself extol strong crypto as a security panacea. As Schneier put it in Secrets and Lies, the very different book he eventually did write, he had been portraying cryptography—in his speeches, in his congressional testimony, in Applied Cryptography—as “a kind of magic security dust that [people] could sprinkle over their software and make it secure.” It was not. Nothing could be. Humiliatingly, Schneier discovered that, as a friend wrote him, “the world was full of bad security systems designed by people who read Applied Cryptography.” In retrospect he says, “Crypto solved the wrong problem.” Ciphers scramble messages and documents, preventing them from being read while, say, they are transmitted on the Internet. But the strongest crypto is gossamer protection if malevolent people have access to the computers on the other end. Encrypting transactions on the Internet, the Purdue computer scientist Eugene Spafford has remarked, “is the equivalent of arranging an armored car to deliver credit-card information from someone living in a cardboard box to someone living on a park bench.” To effectively seize control of Scarfo’s computer, FBI agents had to break into his office and physically alter his machine. Such black-bag jobs are ever less necessary, because the rise of networks and the Internet means that computers can be controlled remotely, without their operators’ knowledge. Huge computer databases may be useful, but they also become tempting targets for criminals and terrorists. So do home computers, even if they are connected only intermittently to the Web. Hackers look for vulnerable machines, using software that scans thousands of Net connections at once. This vulnerability, Schneier came to think, is the real security issue. With this realization he closed Counterpane Systems, his five-person crypto-consulting company in Chicago, in 1999. He revamped it and reopened immediately in Silicon Valley with a new name, Counterpane Internet Security, and a new idea—one that relied on old-fashioned methods. Counterpane would still keep data secret. But the lessons of the Crypto Wars had given Schneier a different vision of how to do that—a vision that has considerable relevance for a nation attempting to prevent terrorist crimes. here Schneier had sought one overarching technical fix, hard experience had taught him the quest was illusory. Indeed, yielding to the American penchant for all-in-one high-tech solutions can make us less safe—especially when it leads to enormous databases full of confidential information. Secrecy is important, of course, but it is also a trap. The more secrets necessary to a security system, the more vulnerable it becomes. To forestall attacks, security systems need to be small-scale, redundant, and compartmentalized. Rather than large, sweeping programs, they should be carefully crafted mosaics, each piece aimed at a specific weakness. The federal government and the airlines are spending millions of dollars, Schneier points out, on systems that screen every passenger to keep knives and weapons out of planes. But what matters most is keeping dangerous passengers out of airline cockpits, which can be accomplished by reinforcing the door. Similarly, it is seldom necessary to gather large amounts of additional information, because in modern societies people leave wide audit trails. The problem is sifting through the already existing mountain of data. Calls for heavy monitoring and record-keeping are thus usually a mistake. (“Broad surveillance is a mark of bad security,” Schneier wrote in a recent Crypto-Gram.) To halt attacks once they start, security measures must avoid being subject to single points of failure. Computer networks are particularly vulnerable: once hackers bypass the firewall, the whole system is often open for exploitation. Because every security measure in every system can be broken or gotten around, failure must be incorporated into the design. No single failure should compromise the normal functioning of the entire system or, worse, add to the gravity of the initial breach. Finally, and most important, decisions need to be made by people at close range—and the responsibility needs to be given explicitly to people, not computers. Unfortunately, there is little evidence that these principles are playing any role in the debate in the Administration, Congress, and the media about how to protect the nation. Indeed, in the argument over policy and principle almost no one seems to be paying attention to the practicalities of security—a lapse that Schneier, like other security professionals, finds as incomprehensible as it is dangerous. Stealing Your Thumb couple of months after September 11, I flew from Seattle to Los Angeles to meet Schneier. As I was checking in at Sea-Tac Airport, someone ran through the metal detector and disappeared onto the little subway that runs among the terminals. Although the authorities quickly identified the miscreant, a concession stand worker, they still had to empty all the terminals and re-screen everyone in the airport, including passengers who had already boarded planes. Masses of unhappy passengers stretched back hundreds of feet from the checkpoints. Planes by the dozen sat waiting at the gates. I called Schneier on a cell phone to report my delay. I had to shout over the noise of all the other people on their cell phones making similar calls. “What a mess,” Schneier said. “The problem with airport security, you know, is that it fails badly.” For a moment I couldn’t make sense of this gnomic utterance. Then I realized he meant that when something goes wrong with security, the system should recover well. In Seattle a single slip-up shut down the entire airport, which delayed flights across the nation. Sea-Tac, Schneier told me on the phone, had no adequate way to contain the damage from a breakdown—such as a button installed near the x-ray machines to stop the subway, so that idiots who bolt from checkpoints cannot disappear into another terminal. The shutdown would inconvenience subway riders, but not as much as being forced to go through security again after a wait of several hours. An even better idea would be to place the x-ray machines at the departure gates, as some are in Europe, in order to scan each group of passengers closely and minimize inconvenience to the whole airport if a risk is detected—or if a machine or a guard fails. Schneier was in Los Angeles for two reasons. He was to speak to ICANN, the Internet Corporation for Assigned Names and Numbers, which controls the “domain name system” of Internet addresses. It is Schneier’s belief that attacks on the address database are the best means of taking down the Internet. He also wanted to review Ginza Sushi-Ko, perhaps the nation’s most exclusive restaurant, for the food column he writes with his wife, Karen Cooper. Minutes after my delayed arrival Schneier had with characteristic celerity packed himself and me into a taxi. The restaurant was in a shopping mall in Beverly Hills that was disguised to look like a collection of nineteenth-century Italian villas. By the time Schneier strode into the tiny lobby, he had picked up the thread of our airport discussion. Failing badly, he told me, was something he had been forced to spend time thinking about. In his technophilic exuberance he had been seduced by the promise of public-key encryption. But ultimately Schneier observed that even strong crypto fails badly. When something bypasses it, as the keystroke logger did with Nicodemo Scarfo’s encryption, it provides no protection at all. The moral, Schneier came to believe, is that security measures are characterized less by their manner of success than by their manner of failure. All security systems eventually miscarry. But when this happens to the good ones, they stretch and sag before breaking, each component failure leaving the whole as unaffected as possible. Engineers call such failure-tolerant systems “ductile.” One way to capture much of what Schneier told me is to say that he believes that when possible, security schemes should be designed to maximize ductility, whereas they often maximize strength. Since September 11 the government has been calling for a new security infrastructure—one that employs advanced technology to protect the citizenry and track down malefactors. Already the USA PATRIOT Act, which Congress passed in October, mandates the establishment of a “cross-agency, cross-platform electronic system … to confirm the identity” of visa applicants, along with a “highly secure network” for financial-crime data and “secure information sharing systems” to link other, previously separate databases. Pending legislation demands that the Attorney General employ “technology including, but not limited to, electronic fingerprinting, face recognition, and retinal scan technology.” The proposed Department of Homeland Security is intended to oversee a “national research and development enterprise for homeland security comparable in emphasis and scope to that which has supported the national security community for more than fifty years”—a domestic version of the high-tech R&D juggernaut that produced stealth bombers, smart weapons, and anti-missile defense. Iris, retina, and fingerprint scanners; hand-geometry assayers; remote video-network surveillance; face-recognition software; smart cards with custom identification chips; decompressive baggage checkers that vacuum-extract minute chemical samples from inside suitcases; tiny radio implants beneath the skin that continually broadcast people’s identification codes; pulsed fast-neutron analysis of shipping containers (“so precise,” according to one manufacturer, “it can determine within inches the location of the concealed target”); a vast national network of interconnected databases—the list goes on and on. In the first five months after the terrorist attacks the Pentagon liaison office that works with technology companies received more than 12,000 proposals for high-tech security measures. Credit-card companies expertly manage credit risks with advanced information-sorting algorithms, Larry Ellison, the head of Oracle, the world’s biggest database firm, told The New York Times in April; “We should be managing security risks in exactly the same way.” To “win the war on terrorism,” a former deputy undersecretary of commerce, David J. Rothkopf, explained in the May/June issue of Foreign Policy, the nation will need “regiments of geeks”—”pocket-protector brigades” who “will provide the software, systems, and analytical resources” to “close the gaps Mohammed Atta and his associates revealed.” Such ideas have provoked the ire of civil-liberties groups, which fear that governments, corporations, and the police will misuse the new technology. Schneier’s concerns are more basic. In his view, these measures can be useful, but their large-scale application will have little effect against terrorism. Worse, their use may make Americans less safe, because many of these tools fail badly— they’re “brittle,” in engineering jargon. Meanwhile, simple, effective, ductile measures are being overlooked or even rejected. he distinction between ductile and brittle security dates back, Schneier has argued, to the nineteenth-century linguist and cryptographer Auguste Kerckhoffs, who set down what is now known as Kerckhoffs’s principle. In good crypto systems, Kerckhoffs wrote, “the system should not depend on secrecy, and it should be able to fall into the enemy’s hands without disadvantage.” In other words, it should permit people to keep messages secret even if outsiders find out exactly how the encryption algorithm works. At first blush this idea seems ludicrous. But contemporary cryptography follows Kerckhoffs’s principle closely. The algorithms— the scrambling methods—are openly revealed; the only secret is the key. Indeed, Schneier says, Kerckhoffs’s principle applies beyond codes and ciphers to security systems in general: every secret creates a potential failure point. Secrecy, in other words, is a prime cause of brittleness—and therefore something likely to make a system prone to catastrophic collapse. Conversely, openness provides ductility. From this can be drawn several corollaries. One is that plans to add new layers of secrecy to security systems should automatically be viewed with suspicion. Another is that security systems that utterly depend on keeping secrets tend not to work very well. Alas, airport security is among these. Procedures for screening passengers, for examining luggage, for allowing people on the tarmac, for entering the cockpit, for running the autopilot software—all must be concealed, and all seriously compromise the system if they become known. As a result, Schneier wrote in the May issue of Crypto-Gram, brittleness “is an inherent property of airline security.” Few of the new airport-security proposals address this problem. Instead, Schneier told me in Los Angeles, they address problems that don’t exist. “The idea that to stop bombings cars have to park three hundred feet away from the terminal, but meanwhile they can drop off passengers right up front like they always have …” He laughed. “The only ideas I’ve heard that make any sense are reinforcing the cockpit door and getting the passengers to fight back.” Both measures test well against Kerckhoffs’s principle: knowing ahead of time that law-abiding passengers may forcefully resist a hijacking en masse, for example, doesn’t help hijackers to fend off their assault. Both are small-scale, compartmentalized measures that make the system more ductile, because no matter how hijackers get aboard, beefed-up doors and resistant passengers will make it harder for them to fly into a nuclear plant. And neither measure has any adverse effect on civil liberties. valuations of a security proposal’s merits, in Schneier’s view, should not be much different from the ordinary cost-benefit calculations we make in daily life. The first question to ask of any new security proposal is, What problem does it solve? The second: What problems does it cause, especially when it fails? Sidebar: Gummi Fingers “Tsutomu Matsumoto, a Japanese cryptographer, recently decided to look at biometric fingerprint devices. These are security systems that attempt to identify people based on their fingerprint….” Failure comes in many kinds, but two of the more important are simple failure (the security measure is ineffective) and what might be called subtractive failure (the security measure makes people less secure than before). An example of simple failure is face-recognition technology. In basic terms, face-recognition devices photograph people; break down their features into “facial building elements”; convert these into numbers that, like fingerprints, uniquely identify individuals; and compare the results with those stored in a database. If someone’s facial score matches that of a criminal in the database, the person is detained. Since September 11 face-recognition technology has been placed in an increasing number of public spaces: airports, beaches, nightlife districts. Even visitors to the Statue of Liberty now have their faces scanned. Face-recognition software could be useful. If an airline employee has to type in an identifying number to enter a secure area, for example, it can help to confirm that someone claiming to be that specific employee is indeed that person. But it cannot pick random terrorists out of the mob in an airline terminal. That much-larger-scale task requires comparing many sets of features with the many other sets of features in a database of people on a “watch list.” Identix, of Minnesota, one of the largest face-recognition-technology companies, contends that in independent tests its FaceIt software has a success rate of 99.32 percent—that is, when the software matches a passenger’s face with a face on a list of terrorists, it is mistaken only 0.68 percent of the time. Assume for the moment that this claim is credible; assume, too, that good pictures of suspected terrorists are readily available. About 25 million passengers used Boston’s Logan Airport in 2001. Had face-recognition software been used on 25 million faces, it would have wrongly picked out just 0.68 percent of them—but that would have been enough, given the large number of passengers, to flag as many as 170,000 innocent people as terrorists. With almost 500 false alarms a day, the face-recognition system would quickly become something to ignore. The potential for subtractive failure, different and more troublesome, is raised by recent calls to deploy biometric identification tools across the nation. Biometrics—”the only way to prevent identity fraud,” according to the former senator Alan K. Simpson, of Wyoming—identifies people by precisely measuring their physical characteristics and matching them up against a database. The photographs on driver’s licenses are an early example, but engineers have developed many high-tech alternatives, some of them already mentioned: fingerprint readers, voiceprint recorders, retina or iris scanners, face-recognition devices, hand-geometry assayers, even signature-geometry analyzers, which register pen pressure and writing speed as well as the appearance of a signature. ppealingly, biometrics lets people be their own ID cards—no more pass words to forget! Unhappily, biometric measures are often implemented poorly. This past spring three reporters at c’t, a German digital-culture magazine, tested a face-recognition system, an iris scanner, and nine fingerprint readers. All proved easy to outsmart. Even at the highest security setting, Cognitec’s FaceVACS-Logon could be fooled by showing the sensor a short digital movie of someone known to the system—the president of a company, say—on a laptop screen. To beat Panasonic’s Authenticam iris scanner, the German journalists photographed an authorized user, took the photo and created a detailed, life-size image of his eyes, cut out the pupils, and held the image up before their faces like a mask. The scanner read the iris, detected the presence of a human pupil—and accepted the imposture. Many of the fingerprint readers could be tricked simply by breathing on them, reactivating the last user’s fingerprint. Beating the more sophisticated Identix Bio-Touch fingerprint reader required a trip to a hobby shop. The journalists used graphite powder to dust the latent fingerprint—the kind left on glass—of a previous, authorized user; picked up the image on adhesive tape; and pressed the tape on the reader. The Identix reader, too, was fooled. Not all biometric devices are so poorly put together, of course. But all of them fail badly. Consider the legislation introduced in May by Congressmen Jim Moran and Tom Davis, both of Virginia, that would mandate biometric data chips in driver’s licenses—a sweeping, nationwide data-collection program, in essence. (Senator Dick Durbin, of Illinois, is proposing measures to force states to use a “single identifying designation unique to the individual on all driver’s licenses”; President George W. Bush has already signed into law a requirement for biometric student visas.) Although Moran and Davis tied their proposal to the need for tighter security after last year’s attacks, they also contended that the nation could combat fraud by using smart licenses with bank, credit, and Social Security cards, and for voter registration and airport identification. Maybe so, Schneier says. “But think about screw-ups, because the system will screw up.” Smart cards that store non-biometric data have been routinely cracked in the past, often with inexpensive oscilloscope-like devices that detect and interpret the timing and power fluctuations as the chip operates. An even cheaper method, announced in May by two Cambridge security researchers, requires only a bright light, a standard microscope, and duct tape. Biometric ID cards are equally vulnerable. Indeed, as a recent National Research Council study points out, the extra security supposedly provided by biometric ID cards will raise the economic incentive to counterfeit or steal them, with potentially disastrous consequences to the victims. “Okay, somebody steals your thumbprint,” Schneier says. “Because we’ve centralized all the functions, the thief can tap your credit, open your medical records, start your car, any number of things. Now what do you do? With a credit card, the bank can issue you a new card with a new number. But this is your thumb—you can’t get a new one.” The consequences of identity fraud might be offset if biometric licenses and visas helped to prevent terrorism. Yet smart cards would not have stopped the terrorists who attacked the World Trade Center and the Pentagon. According to the FBI, all the hijackers seem to have been who they said they were; their intentions, not their identities, were the issue. Each entered the country with a valid visa, and each had a photo ID in his real name (some obtained their IDs fraudulently, but the fakes correctly identified them). “What problem is being solved here?” Schneier asks. Good security is built in overlapping, cross-checking layers, to slow down attacks; it reacts limberly to the unexpected. Its most important components are almost always human. “Governments have been relying on intelligent, trained guards for centuries,” Schneier says. “They spot people doing bad things and then use laws to arrest them. All in all, I have to say, it’s not a bad system.” The Human Touch ne of the first times I met with Schneier was at the Cato Institute, a libertarian think tank in Washington, D.C., that had asked him to speak about security. Afterward I wondered how the Cato people had reacted to the speech. Libertarians love cryptography, because they believe that it will let people keep their secrets forever, no matter what a government wants. To them, Schneier was a kind of hero, someone who fought the good fight. As a cryptographer, he had tremendous street cred: he had developed some of the world’s coolest ciphers, including the first rigorous encryption algorithm ever published in a best-selling novel (Cryptonomicon, by Neal Stephenson) and the encryption for the “virtual box tops” on Kellogg’s cereals (children type a code from the box top into a Web site to win prizes), and had been one of the finalists in the competition to write algorithms for the federal government’s new encryption standard, which it adopted last year. Now, in the nicest possible way, he had just told the libertarians the bad news: he still loved cryptography for the intellectual challenge, but it was not all that relevant to protecting the privacy and security of real people. In security terms, he explained, cryptography is classed as a protective counter-measure. No such measure can foil every attack, and all attacks must still be both detected and responded to. This is particularly true for digital security, and Schneier spent most of his speech evoking the staggering insecurity of networked computers. Countless numbers are broken into every year, including machines in people’s homes. Taking over computers is simple with the right tools, because software is so often misconfigured or flawed. In the first five months of this year, for example, Microsoft released five “critical” security patches for Internet Explorer, each intended to rectify lapses in the original code. Computer crime statistics are notoriously sketchy, but the best of a bad lot come from an annual survey of corporations and other institutions by the FBI and the Computer Security Institute, a research and training organization in San Francisco. In the most recent survey, released in April, 90 percent of the respondents had detected one or more computer-security breaches within the previous twelve months—a figure that Schneier calls “almost certainly an underestimate.” His own experience suggests that a typical corporate network suffers a serious security breach four to six times a year—more often if the network is especially large or its operator is politically controversial. Luckily for the victims, this digital mayhem is mostly wreaked not by the master hackers depicted in Hollywood techno-thrillers but by “script kiddies”—youths who know just enough about computers to download and run automated break-in programs. Twenty-four hours a day, seven days a week, script kiddies poke and prod at computer networks, searching for any of the thousands of known security vulnerabilities that administrators have not yet patched. A typical corporate network, Schneier says, is hit by such doorknob-rattling several times an hour. The great majority of these attacks achieve nothing, but eventually any existing security holes will be found and exploited. “It’s very hard to communicate how bad the situation is,” Schneier says, “because it doesn’t correspond to our normal intuition of the world. To a first approximation, bank vaults are secure. Most of them don’t get broken into, because it takes real skill. Computers are the opposite. Most of them get broken into all the time, and it takes practically no skill.” Indeed, as automated cracking software improves, it takes ever less knowledge to mount ever more sophisticated attacks. Given the pervasive insecurity of networked computers, it is striking that nearly every proposal for “homeland security” entails the creation of large national databases. The Moran-Davis proposal, like other biometric schemes, envisions storing smart-card information in one such database; the USA PATRIOT Act effectively creates another; the proposed Department of Homeland Security would “fuse and analyze” information from more than a hundred agencies, and would “merge under one roof” scores or hundreds of previously separate databases. (A representative of the new department told me no one had a real idea of the number. “It’s a lot,” he said.) Better coordination of data could have obvious utility, as was made clear by recent headlines about the failure of the FBI and the CIA to communicate. But carefully linking selected fields of data is different from creating huge national repositories of information about the citizenry, as is being proposed. Larry Ellison, the CEO of Oracle, has dismissed cautions about such databases as whiny cavils that don’t take into account the existence of murderous adversaries. But murderous adversaries are exactly why we should ensure that new security measures actually make American life safer. ny new database must be protected, which automatically entails a new layer of secrecy. As Kerckhoffs’s principle suggests, the new secrecy introduces a new failure point. Government information is now scattered through scores of databases; however inadvertently, it has been compartmentalized—a basic security practice. (Following this practice, tourists divide their money between their wallets and hidden pouches; pickpockets are less likely to steal it all.) Many new proposals would change that. An example is Attorney General John Ashcroft’s plan, announced in June, to fingerprint and photograph foreign visitors “who fall into categories of elevated national security concern” when they enter the United States (“approximately 100,000” will be tracked this way in the first year). The fingerprints and photographs will be compared with those of “known or suspected terrorists” and “wanted criminals.” Alas, no such database of terrorist fingerprints and photographs exists. Most terrorists are outside the country, and thus hard to fingerprint, and latent fingerprints rarely survive bomb blasts. The databases of “wanted criminals” in Ashcroft’s plan seem to be those maintained by the FBI and the Immigration and Naturalization Service. But using them for this purpose would presumably involve merging computer networks in these two agencies with the visa procedure in the State Department—a security nightmare, because no one entity will fully control access to the system. Sidebar: How Insurance Improves Security “Eventually, the insurance industry will subsume the computer security industry….” Equivalents of the big, centralized databases under discussion already exist in the private sector: corporate warehouses of customer information, especially credit-card numbers. The record there is not reassuring. “Millions upon millions of credit-card numbers have been stolen from computer networks,” Schneier says. So many, in fact, that Schneier believes that everyone reading this article “has, in his or her wallet right now, a credit card with a number that has been stolen,” even if no criminal has yet used it. Number thieves, many of whom operate out of the former Soviet Union, sell them in bulk: $1,000 for 5,000 credit-card numbers, or twenty cents apiece. In a way, the sheer volume of theft is fortunate: so many numbers are floating around that the odds are small that any one will be heavily used by bad guys. Large-scale federal databases would undergo similar assaults. The prospect is worrying, given the government’s long-standing reputation for poor information security. Since September 11 at least forty government networks have been publicly cracked by typographically challenged vandals with names like “CriminalS,” “S4t4n1c S0uls,” “cr1m3 0rg4n1z4d0,” and “Discordian Dodgers.” Summing up the problem, a House subcommittee last November awarded federal agencies a collective computer-security grade of F. According to representatives of Oracle, the federal government has been talking with the company about employing its software for the new central databases. But judging from the past, involving the private sector will not greatly improve security. In March, CERT/CC, a computer-security watchdog based at Carnegie Mellon University, warned of thirty-eight vulnerabilities in Oracle’s database software. Meanwhile, a centerpiece of the company’s international advertising is the claim that its software is “unbreakable.” Other software vendors fare no better: CERT/CC issues a constant stream of vulnerability warnings about every major software firm. Schneier, like most security experts I spoke to, does not oppose consolidating and modernizing federal databases per se. To avoid creating vast new opportunities for adversaries, the overhaul should be incremental and small-scale. Even so, it would need to be planned with extreme care—something that shows little sign of happening. ne key to the success of digital revamping will be a little-mentioned, even prosaic feature: training the users not to circumvent secure systems. The federal government already has several computer networks—INTELINK, SIPRNET, and NIPRNET among them— that are fully encrypted, accessible only from secure rooms and buildings, and never connected to the Internet. Yet despite their lack of Net access the secure networks have been infected by e-mail perils such as the Melissa and I Love You viruses, probably because some official checked e-mail on a laptop, got infected, and then plugged the same laptop into the classified network. Because secure networks are unavoidably harder to work with, people are frequently tempted to bypass them—one reason that researchers at weapons labs sometimes transfer their files to insecure but more convenient machines. Sidebar: Remember Pearl Harbor “Surprise, when it happens to a government, is likely to be a complicated, diffuse, bureaucratic thing….” Schneier has long argued that the best way to improve the very bad situation in computer security is to change software licenses. If software is blatantly unsafe, owners have no such recourse, because it is licensed rather than bought, and the licenses forbid litigation. It is unclear whether the licenses can legally do this (courts currently disagree), but as a practical matter it is next to impossible to win a lawsuit against a software firm. If some big software companies lose product-liability suits, Schneier believes, their confreres will begin to take security seriously. Computer networks are difficult to keep secure in part because they have so many functions, each of which must be accounted for. For that reason Schneier and other experts tend to favor narrowly focused security measures—more of them physical than digital—that target a few precisely identified problems. For air travel, along with reinforcing cockpit doors and teaching passengers to fight back, examples include armed uniformed—not plainclothes—guards on select flights; “dead-man” switches that in the event of a pilot’s incapacitation force planes to land by autopilot at the nearest airport; positive bag matching (ensuring that luggage does not get on a plane unless its owner also boards); and separate decompression facilities that detonate any altitude bombs in cargo before takeoff. None of these is completely effective; bag matching, for instance, would not stop suicide bombers. But all are well tested, known to at least impede hijackers, not intrusive to passengers, and unlikely to make planes less secure if they fail. From Atlantic Unbound: Flashbacks: “Pearl Harbor in Retrospect” (May 25, 2001) Atlantic articles from 1948, 1999, and 1991 look back at Pearl Harbor from American and Japanese perspectives. It is impossible to guard all potential targets, because anything and everything can be subject to attack. Palestinian suicide bombers have shown this by murdering at random the occupants of pool halls and hotel meeting rooms. Horrible as these incidents are, they do not risk the lives of thousands of people, as would attacks on critical parts of the national infrastructure: nuclear-power plants, hydroelectric dams, reservoirs, gas and chemical facilities. Here a classic defense is available: tall fences and armed guards. Yet this past spring the Bush Administration cut by 93 percent the funds requested by the Energy Department to bolster security for nuclear weapons and waste; it denied completely the funds requested by the Army Corps of Engineers for guarding 200 reservoirs, dams, and canals, leaving fourteen large public-works projects with no budget for protection. A recommendation by the American Association of Port Authorities that the nation spend a total of $700 million to inspect and control ship cargo (today less than two percent of container traffic is inspected) has so far resulted in grants of just $92 million. In all three proposals most of the money would have been spent on guards and fences. The most important element of any security measure, Schneier argues, is people, not technology—and the people need to be at the scene. Recall the German journalists who fooled the fingerprint readers and iris scanners. None of their tricks would have worked if a reasonably attentive guard had been watching. Conversely, legitimate employees with bandaged fingers or scratched corneas will never make it through security unless a guard at the scene is authorized to overrule the machinery. Giving guards increased authority provides more opportunities for abuse, Schneier says, so the guards must be supervised carefully. But a system with more people who have more responsibility “is more robust,” he observed in the June Crypto-Gram, “and the best way to make things work. (The U.S. Marine Corps understands this principle; it’s the heart of their chain of command rules.)” “The trick is to remember that technology can’t save you,” Schneier says. “We know this in our own lives. We realize that there’s no magic anti-burglary dust we can sprinkle on our cars to prevent them from being stolen. We know that car alarms don’t offer much protection. The Club at best makes burglars steal the car next to you. For real safety we park on nice streets where people notice if somebody smashes the window. Or we park in garages, where somebody watches the car. In both cases people are the essential security element. You always build the system around people.” Looking for Trouble fter meeting Schneier at the Cato Institute, I drove with him to the Washington command post of Counterpane Internet Security. It was the first time in many months that he had visited either of his company’s two operating centers (the other is in Silicon Valley). His absence had been due not to inattentiveness but to his determination to avoid the classic high-tech mistake of involving the alpha geek in day-to-day management. Besides, he lives in Minneapolis, and the company headquarters are in Cupertino, California. (Why Minneapolis? I asked. “My wife lives there,” he said. “It seemed polite.”) With his partner, Tom Rowley, supervising day-to-day operations, Schneier constantly travels in Counterpane’s behalf, explaining how the company manages computer security for hundreds of large and medium-sized companies. It does this mainly by installing human beings. The command post was nondescript even by the bland architectural standards of exurban office complexes. Gaining access was like a pop quiz in security: How would the operations center recognize and admit its boss, who was there only once or twice a year? In this country requests for identification are commonly answered with a driver’s license. A few years ago Schneier devoted considerable effort to persuading the State of Illinois to issue him a driver’s license that showed no picture, signature, or Social Security number. But Schneier’s license serves as identification just as well as a license showing a picture and a signature—which is to say, not all that well. With or without a picture, with or without a biometric chip, licenses cannot be more than state-issued cards with people’s names on them: good enough for social purposes, but never enough to assure identification when it is important. Authentication, Schneier says, involves something a person knows (a password or a PIN, say), has (a physical token, such as a driver’s license or an ID bracelet), or is (biometric data). Security systems should use at least two of these; the Counterpane center employs all three. At the front door Schneier typed in a PIN and waved an iButton on his key chain at a sensor (iButtons, made by Dallas Semiconductor, are programmable chips embedded in stainless-steel discs about the size and shape of a camera battery). We entered a waiting room, where Schneier completed the identification trinity by placing his palm on a hand-geometry reader. Sidebar: Further Reading Brief descriptions of recommended books. Beyond the waiting room, after a purposely long corridor studded with cameras, was a conference room with many electrical outlets, some of which Schneier commandeered for his cell phone, laptop, BlackBerry, and battery packs. One side of the room was a dark glass wall. Schneier flicked a switch, shifting the light and theatrically revealing the scene behind the glass. It was a Luddite nightmare: an auditorium-like space full of desks, each with two computer monitors; all the desks faced a wall of high-resolution screens. One displayed streams of data from the “sentry” machines that Counterpane installs in its clients’ networks. Another displayed images from the video cameras scattered around both this command post and the one in Silicon Valley. On a visual level the gadgetry overwhelmed the people sitting at the desks and watching over the data. Nonetheless, the people were the most important part of the operation. Networks record so much data about their usage that overwhelmed managers frequently turn off most of the logging programs and ignore the others. Among Counterpane’s primary functions is to help companies make sense of the data they already have. “We turn the logs back on and monitor them,” Schneier says. Counterpane researchers developed software to measure activity on client networks, but no software by itself can determine whether an unusual signal is a meaningless blip or an indication of trouble. That was the job of the people at the desks. Highly trained and well paid, these people brought to the task a quality not yet found in any technology: human judgment, which is at the heart of most good security. Human beings do make mistakes, of course. But they can recover from failure in ways that machines and software cannot. The well-trained mind is ductile. It can understand surprises and overcome them. It fails well. When I asked Schneier why Counterpane had such Darth Vaderish command centers, he laughed and said it helped to reassure potential clients that the company had mastered the technology. I asked if clients ever inquired how Counterpane trains the guards and analysts in the command centers. “Not often,” he said, although that training is in fact the center of the whole system. Mixing long stretches of inactivity with short bursts of frenzy, the work rhythm of the Counterpane guards would have been familiar to police officers and firefighters everywhere. As I watched the guards, they were slurping soft drinks, listening to techno-death metal, and waiting for something to go wrong. They were in a protected space, looking out at a dangerous world. Sentries around Neolithic campfires did the same thing. Nothing better has been discovered since. Thinking otherwise, in Schneier’s view, is a really terrible idea.

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