Charlie Rose:  
And so when you look at where we are going, there seems to be two issues that are apparent to me at least, risk and leverage.  We just lost sight of risk and leverage of what was appropriate?

Warren Buffett:  
Yeah.  Again, because it pays off for a while.  You know, you can lose leverage, and it's the only way a smart guy can go broke.  If you owe money, you can't pay them out.  You just pay for everything, you do smart things, you eventually get very rich.  If you do smart things and use leverage and do one wrong thing along the way, it could wipe you out, because anything times zero is zero.  But it's reinforcing when the people around you are doing it successfully, you're doing it successfully, and it's a lot like Cinderella at the ball.  I mean you know at midnight everything is going to turn to pumpkins and mice; right?  But if the evening goes along, I mean, you know, the guys look better all the time, the music sounds better, it's more and more fun, you think why the hell should I leave at quarter of 12.  I'll leave at two minutes to 12.  But the trouble is, there are no clocks on the wall.  And everybody thinks they're going to leave at two minutes to 12.

Charlie Rose:  
And should wise people have known better?

Warren Buffett:  
People should always know better.

Charlie Rose:  
Yeah.

Warren Buffett:  
I mean people -- people don't get -- they don't get smarter about things that get as basic as greed and you can't stand to see your neighbor getting rich.  You know you're smarter than he is, and he's doing these things, you know, and he's getting rich, and your spouse is getting unhappy with you because you aren't doing -- pretty soon you start doing it.  And so you get what I call the natural progression, the three Is.  The innovators, the imitators, and the idiots.  And that's what happens.  Everybody just kind of goes along.  And you look kind of silly if you disagree.  I mean, you know, you could have these crazy Internet valuations in the late 1990s, but they prove themselves out in the market.  The next day they were selling for more than they were the day before, and people said, you know, you're crazy if you don't get in on this.  So it's very human.  Now, with housing it's something even more dramatic than that, because most people aspire to own their own home.  And if you really think that houses prices are going to go up next year and the year after, you feel if I don't buy it this year, I'm going to have to buy it next year.  That's not true of an Internet stock.  But it's true of a home.  And when somebody makes it very easy for you to do it by saying you don't really have to put up my money, you can lie about your income a little, or we'll give you 100 percent mortgage, you're going to do it, because everybody that's done it has been proven right.  You have what they call social tools, and, you know, you're going to feel like an idiot if you didn't do it, because the house cost more.

Warren Buffett:  
Oh, I think confidence will come back.  I will tell you this.  This country is going -- be living better ten years from now than it is now.  It will be living better in 20 years from now than ten years from now.  The ingredients that made this country, you know, the miracle of the world -- I mean we had a seven for one improvement in the average American standard of living in the 20th century.  Now, we had the great depression, we had two world wars, we had the flu epidemic.  You know, we had oil shock.  You know, we had all these terrible things happen.  But something about the American system unleashed more and of a potential to human beings over that hundred years so that we had a seven for one improvement in -- there's never been any -- I mean, you have centuries where if you've got a 1 percent improvement, then it's something.  So we've got a great system.  And we've got more productive capacity now than we ever have.  The American worker is more productive than he's ever been.  We've got more people to do it.  We've got all the ingredients for a sensational future.  It's just that right now the athlete's on the floor.  But we -- this is a super athlete.

The event runs during 14-16 October 2008. I’m delivering the same four presentations I gave at TechEd US (and have used at most other TechEds around the world, too):

• Do these ten things now or else get 0wn3d!
• Virtualization and security: what does it mean for me?
• Privacy: the why, the what, and the how
• 21st century networking: throw away your medieval gateways

That’s gonna be a crazy week, because I’ll have been in Hong Kong for TechEd there the week prior. I get home from Hong Kong on Saturday, spend the night in Seattle, then on Sunday fly down to Sao Paulo! Oh well, I still love my job :)

If you’re headed to TechEd Brazil, be sure to introduce yourself to me after one of my talks. See you soon!

Blogger: Dan Blum

With the crisis in financial markets still unfolding, it is important to draw what lessons we can from the experience. Since the roots of the crisis lie in a monumental failure of risk management, it’s important to understand more about what happened, and then draw some parallels to our business risk management and  IT risk management situations.

The risk management failure in the housing market and on Wall Street had multiple interdependent dimensions:

• Mortgage lenders abandoned long standing prudent loan practices. They made too many loans that buyers might not be able to repay. Exotic instruments like ARMs, option ARMs, and interest only loans proliferated. In many cases, all pretense of lending standards were abandoned, so-called “liar loans” approved.
• Capital was grossly over-leveraged. Mortgage lenders and other financial services packaged loans into securities, which they sold to raise capital to support more lending. Real capital reserve requirements to back loans were reduced. Of course, if borrowers could not repay loans, all or parts of the derivative securities would become worthless.
• Risk was aggregated at Fannie Mae, Freddie Mac, and mortgage loan insurance companies. These companies bought or insured some mortgage loans, providing something of a backstop should loans fail. Government sponsored enterprises (GSEs) Fannie and Freddie in turn became over-leveraged and securities that they sold were in turn repackaged in the murky brew of mortgage-backed securities called collateralized debt obligations (CDOs) and other exotic instruments returning generous yields.
• Non-Caveat Emptor. Institutional wealth funds and financial services firms who should have known better bought securities that had been deliberately structured to obfuscate risk. They bought securities they didn’t understand with buried tranches of toxic subprime loans..

It was a great Ponzi scheme – one that kept working as long as housing prices were going up; the recipients of subprime loans could always flip that house to the next buyer. Everyone made money. As Chuck Prince of Citigroup famously put it during a July, 2007 interview: “So long as the music is playing, you’ve got to keep dancing. We’re still dancing.” But one month later, the music stopped. Since then, Citigroup and other financial institutions have taken massive writeoffs with more to come. Wall Street titans like Bear Sterns, Lehman Brothers, Merrill Lynch, and AIG have fallen or been bought out.

What can we learn from this risk management debacle?

As business risk managers and investors, we should ask questions like these:

• Does the executive incentive structure of the company encourage managers to dance around risk? Many Wall Street firms paid senior managers 5 times their salary in bonuses tied to annual growth alone.
• Is the company over-leveraged? Is it borrowing too much money and betting it on ventures with uncertain outcomes?
• Are financial models used for risk management realistic? Earlier, I described the mortgage market of the past few years as a Ponzi scheme, where risk management models must have assumed prices would keep rising. Unlike the dotcom boom whose demise many predicted, very few in the industry foresaw the sharp declines to come in housing prices and sales volumes. Historically, the U.S. housing market has been a steadily rising one, but on the other hand the 2000s saw unprecedented rates of price increases. In reality, what goes up must come down.
• Has your company’s risk council ever performed worst case scenario analysis and built adequate reserves? In the days before economics emerged as a would-be “hard” deterministic science, business leaders may have been more cautious, more aware of and more accepting of uncertainty. Events like the Great Tulip Bubble came once in decades or centuries – not every few years. Note that legendary investor George Soros has proposed a Theory of Reflexivity that, if true, helps explain the recent extremes of boom and bust cycles. This theory holds that market participants model market behaviors based on self-interest, and for a time, their manipulations change the reality of the market – until gravitational forces bring it back to earth. Has the music of ephemeral success played to the backbeat of deterministic-sounding economic models gone to your heads and infected your risk management models?
• Are cost cutting efforts pursued blindly? Outsourcing and other forays into treacherous global waters may be giving away the crown jewels. Smart companies cut costs, but they do it in smart ways. Smart companies think like intelligence agencies as they parcel out work to different partners with varying levels of dependability, and they check on those partners.

Risk management failures can also occur at the more technical level of IT security. As IT risk managers, we might ask questions like these:

• Are the accounting and financial systems your IT department supports under adequate control? As Fred Cohen wrote in one of our documents: “Many companies use computers to manage financial systems, and despite the Sarbanes-Oxley Act (SOX) claims about accounts being properly kept, there are many attacks on financial systems that remain. For example, most of the largest financial systems in the world running on common financial databases do not use double-entry bookkeeping and are thus susceptible to all manner of frauds by insiders.” We find it troubling that a prudent control dating back to the 12th century is going out of style in the name of convenience and cost cutting. Kind of like credit checking became anachronistic during the housing bubble, eh?
• Is the “separation” in your “separation of duty” (SoD) for real? Sure the SOX auditors are looking for SoD, and maybe you have different administrators with different accounts maintaining different systems or functions. But when they say Western civilization may be but one weak password from collapse they’re not lying. Look what happened to Sarah Palin’s email account! Weak and straggly SoD is a problem across all critical IT systems where deperimiterization and server consolidation may be bringing down protective barriers, identity management is weak, and strong process controls (e.g., where two people must sign on, one perform a critical operation such as backbone router reconfiguration, and the second observe) abandoned in the name of expediency.
• Are risks being aggregated to unacceptable levels in centralized control systems? There are many ways that risks aggregate within enterprise IT infrastructures as we pursue automation and cost cutting. Network risks aggregate when centralized domain name system control is implemented. Application risks aggregate when common infrastructure is shared among applications. And enterprises aggregate platform risks when they use low-assurance endpoints, authentication, and directory systems with single sign-on to access large numbers of resources and don’t separate high consequence systems.
• Non-caveat emptor: Has IT security really done the worst case consequence analysis, attack graphs, and vulnerability analysis to know when putting more eggs in a supposedly stronger basket aggregates risks to an unacceptable level? Or are you depending only on vendor claims about some black box appliance equivalent of a risk-obfuscated CDO security? Caveat emptor (buyer beware) again! (The good news is we’ll keep talking about promoting vendor and product rating systems so you don’t have to do all the detailed product analysis yourself, but that’s another post.)

There are many parallels between the monumental risk management failure in the financial markets, and the probable weaknesses in our day to day business risk management and IT risk management. Abandonment of prudent practices for profit; excessive leverage and centralization; ill-constructed risk analysis models; risk obfuscation; and a failure of caveat emptor seem to be common problems. Please take this as a wakeup call to sharpen up the risk management thinking, process, and execution.

Exactly who was behind the cyberattack is not known. The Georgian government blamed Russia for the attacks, but the Russian government said it was not involved. In the end, Georgia, with a population of just 4.6 million and a relative latecomer to the Internet, saw little effect beyond inaccessibility to many of its government Web sites, which limited the government's ability to spread its message online and to connect with sympathizers around the world during the fighting with Russia.

[...]

In Georgia, media, communications and transportation companies were also attacked, according to security researchers. Shadowserver saw the attack against Georgia spread to computers throughout the government after Russian troops entered the Georgian province of South Ossetia. The National Bank of Georgia's Web site was defaced at one point. Images of 20th-century dictators as well as an image of Georgia's president, Mr. Saakashvili, were placed on the site. "Could this somehow be indirect Russian action? Yes, but considering Russia is past playing nice and uses real bombs, they could have attacked more strategic targets or eliminated the infrastructure kinetically," said Gadi Evron, an Israeli network security expert. "The nature of what's going on isn't clear," he said.

[...]

In addition to D.D.O.S. attacks that crippled Georgia's limited Internet infrastructure, researchers said there was evidence of redirection of Internet traffic through Russian telecommunications firms beginning last weekend. The attacks continued on Tuesday, controlled by software programs that were located in hosting centers controlled by a Russian telecommunications firms. A Russian-language Web site, stopgeorgia.ru, also continued to operate and offer software for download used for D.D.O.S. attacks.

Welcome to 21st century warfare.

"It costs about 4 cents per machine," Mr. Woodcock said. "You could fund an entire cyberwarfare campaign for the cost of replacing a tank tread, so you would be foolish not to."

Doesn’t this seem backwards to you? Shouldn’t the MBTA be suing the vendor who sold them the flawed system? Security problems go away by mandating independant security testing before a product is accepted, not by trying to get security researchers to be quiet. This is a good example of how the reactive approach doesn’t work. The flaws are still in the system and suing researchers has just shined a bright light on them.

Update 08/09/2008 6:00pm EST:

The EFF is appealing the injunction which is blocking the students from speaking about the results of their testing.

A telling quote from Kurt Opsahl, staff attorney at the EFF gets to the heart of the issue:

“Courts have found that the First Amendment covers these things. We believe that this is a protected speech activity. When you discuss security issues, if you are telling the truth, that is something that should be protected.”

Apparently the MBTA has known about this problem since at least March, 2008 when a graduate student from the University of Virginia announced he was able to break the encryption system.

The U of VA researcher gave an interview where he described why security by obscurity is not a valid security approach for a cryptosystem:

Q: What are your thoughts on security by obscurity? Is NXP using this method of protection?

A: Security-through-obscurity hardly ever works. The lack of proper peer-review often even hurts the security of the system. Our Mifare work discovered several vulnerabilities that could be fixed without increasing the cost of the cards. NXP did for a long time rely on obscurity for the security of some of their products, but now decided against this outdated design approach and instead bases the security of newer RFID cards on publicly scrutinized cryptography and independent evaluations.

Q: Can you explain “Kerckhoffs Principle” and why it applies to your work?

A: Kerchoff, who lived in the 19th century, observed that keeping anything secret is really hard. So instead of relying on the secrecy of your whole system, it would a lot easier to only rely on the secrecy of a small secret key. Security systems should hence be publicly known and analyzed, and only the key should be secret. When properly realised for RFID cards, Kerchoff’s principle means that by analyzing their own cards, thieves cannot compromise your cards. This is contrary to our Mifare work, where we only analyzed a few copies of the the secret algorithm that is found in all cards and were consequently able affect the security of all the other billion cards out there.

The MBTA not only accepted a security system which relied on security by obscurity but once accepting this flawed model must try to maintain this obscurity with the court system.

The documents detailing the presentation are here.

Had a great time Sunday with Rob Newby. We solved the world’s problems over deep fried whitefish and french fries (fish & chips to him).  It was a very good time, even if my driving did make him a bit uneasy.  If I may quote myself (said in an attempt to soothe Rob’s uneasyness about being lost in the car of a complete stranger in a strange country):

If your life doesn’t imitate the surreal aspects of a Douglas Adams book at least once a day, you’re just not living right.

Aside:  Bruce Scheier already has too many awards and too much recognition, so go vote for Rob instead :)   :  http://robnewby.blogspot.com/2008/07/award-up-for-grabs.html

SEPARATION OF CHURCH AND (CURRENT) STATE

Rob and I spent some time discussing risk and security,  and our conversation circled around the (now) recurring blogo-topic concerning the State of the Practice.  It’s a favorite topic of mine, so I’ve been delighted that it has reappeared in blogodom.

Rob writes about it some here in PCI the Priest.  LonerVamp’s and Richard Bejtlich’s blogs talk about Galileo, his confrontation with his church, and lessons we can learn from history (there’s nothing wrong with them recycling the meme, IMHO - because I, for one, never got closure the first time). Jon added a nice quote from Feynman today that’s also inline with the meme.

I’m not going to belabor the analogy, the “art vs. science” misnomer, nor discuss the problems with our various canon (PCI, ISO, CoBTI, COSO, blah, blah, blah).  Rather I’d like to talk about some essential things I think our industry needs to “sort out”  before it can move on towards a more scientific view of the world.  And by “sort out” of course, I mean agree with me on

CAN’T WE ALL JUST GET ALONG?

1 - Can we agree that risk is a probability issue?
Now obviously, you can retreat in probability theory a century or so and claim that risk is a Knightian uncertainty and that we just can’t “know” it.  Have fun.  But you should know that there’s the catch - “security” is also a probability issue.  So I’m betting that you can’t know “secure” for much of the same reasons Frank Knight would argue we can’t know “risky”.

But if risk (and security) is a probability issue, however, then we’re going to have to do better than “A’s in three college courses in statistics” to address the problem.  We will have to do as Curphey (and others) suggest and bring elements of other disciplines to bear on our problem space.  Let me suggest probability theory and economics as fine, fine places to start.

2 - Can we agree to stop measuring stupidly?
We have to agree that Ordinal Scales are not measurements, and Interval Scales are not useful measurements?

I had a post titled “More Ways To Confuse Your Auditor/Assessor” but it turned out to be a pretty cruel discussion about how we tend to try to act like our calculations based on ordinal or interval scales are useful (hint:  insist that your auditor/assessor/consultant replace the label “one” with the label “zero”).

Note that if risk is a probability issue, then we’re going to have to throw out the concepts of measuring in any scale other than a ratio anyhow.

3 - Can we agree on a (good) taxonomy?
We’re going to have to do (much) better than ISO 27005 (nudge, nudge).

4 - Can we agree we need to do a better job with our data?
We’re going to have to do better with measurements, metrics, models and testing.

It’s a shame that honeypots tend to be under appreciated.

5 - Can we agree to test that data and share it with each other?
We may not need to share specific data, but we will need to share when a model falls down.

I’d like to be as idealistic as some of my fellow ‘New Schoolers’ and suggest we’ll someday all be sharing data together, but I’m skeptical.  But that doesn’t mean we can’t demonstrate where results from the models we use are not repeatable, consistent or logical.   One thing Rob and I talked about at length yesterday was the ability to disprove a model using realistic but “substitute” or sanitized data.  There’s gonna be a TON of work to be done here, and that work will take not years but careers.  Which begs a great question:

Is it the sharing of data that we need, or the sharing of models?

HELP ME OUT, HERE
That’s my list of 5 fundamental concepts I wish we could move past.  Let me ask you - what else am I missing?  What’s it going to take to get past our current malaise?  How does the New School reach critical mass?  Who is going to help us agree in a centralized manner?

Your comments or own blog posts are most welcome (please include a trackback or post here)

At TechEd this year, I gave a presentation called "21st century networking: time to throw away your medieval gateways." (Actually, I've given this same talk before, at events in Amsterdam, Brussels, Oslo, and numerous on-campus customer meetings. It's time to bring the knowledge to the masses.)

I described an idea of using IPv6, IPsec, NAP, and group policy to build a pretty slick replacement for clunky VPN gateways. Turns out we've been piloting this very idea on our internal corpnet. Like a good little bunny I got myself enrolled in the thing and -- pardon the unattractive gushing -- this thing rawks! Here's a brief rundown of the parts you'd configure on managed clients:

• Windows Vista Business (with Software Assurance), Enterprise, or Ultimate editions
• That are domain-joined
• Users run as non-admin
• Group policy applies numerous settings
• UAC is enabled
• BitLocker is configured to protect confidential information stored offline
• The Windows Firewall is enabled
• NAP is used for checking health
• Forefront Client Security for keeping malware off the box
• Smart cards for strong authentication of users
• IPsec is required for connection authentication and traffic encryption
• IPv6 is required for worldwide Internet connectivity
• A DNS suffix search list represents the data center name space
• Static IPv6 DNS servers provide name resolution for hosts in the data center

What does this give you? True anywhere access, anywhere in the world, directly to corpnet resources from managed and secure client PCs. The Internet has replaced private WAN links for good reason: enormous cost benefits. The only thing holding us back from fully utilizing this development has been a lack of way to enforce and monitor the security of clients not physically located within the corpnet. Well, those days are over. Now you can build PCs that are trusted just as if they were on the corpnet, without knowing or caring anything about the underlying network connections. And let me tell you, it's as addictive as a few other substances I could mention, but will refrain, since this is (I hope) a family blog :)

Maybe you've heard of the notion of "deperimeterization." Taken to its extreme, I think it's a bit silly. To put a SQL Server directly on the Internet is just plain stupid -- not because I don't think I could keep it protected, but simply because that's unnecessary risk. Only my web server -- and no one else -- should be talking to my SQL Server. But that web server will be in the same subnet as the SQL Server, and IPsec policies used also here will govern who can connect to the SQL Server. Warning to any and all network DMZs: your days are numbered!

Shrink your perimeter to that which really matters -- your data center. All your clients live (as we would say in the olden days) "on the outside of the firewall." Now then, there are two kinds of clients. Managed clients, as I described above, establish IPsec-authenticated/encrypted, group-policy-configured, NAP-enforced IPv6 connections directly to corpnet resources without going through any kind of access gateway. The router connecting you to your ISP is fully sufficient for blocking denial of service attempts. Be sure to follow my advice in "Configure your router to block DOS attempts," and then add two more rules to permit incoming port udp/500 and IP protocol 50 over IPv6. That's it. No NATing or other unnatural network acts are required (finally, you can stop lying to your significant other about why you squirrel yourself away in the computer room all those weekend nights).

Unmanaged clients will continue to use IPv4 to access published Web and Win32 applications through a gateway like IAG. Since you can't trust these clients nor can you trust the data they're throwing at you, you have to inspect and validate at the perimeter. You can take advantage of IAG's application-modifying capabilities to "wrap" security around poorly-written web apps; you can even download an ActiveX control to unmanaged clients to perform some basic health checking, policy enforcement, and cache clearing. None of these eliminates the final requirement to continue inspecting and removing malware from servers where users store data: Exchange, SharePoint, Office Communications Server, and file servers.

Machines are mobile, data is mobile. The mainframes and large desktop PCs of the past posses an effective security attribute: the heaviness of the machines. You couldn't easily saunter out the front door with a PC-AT in your pocket! These days, we all line our pockets with tiny little mobile phones stuffed with 16GB of storage. It's now a fact: data moves. And like water, data moves wherever it can, as rapidly as it can, often beyond your control if you don't prepare for that. With properly-configured and managed clients we can enjoy a single access and authentication experience no matter where the computer is physically located. For example: I can sit in my house and enter '"http://internal-web-site-name" in my browser. The DNS suffix search list adds the appropriate suffix, my browser's resolver performs an IPv6 name lookup, and my computer makes an authenticated and encrypted connection, after it meets the NAP policy, directly to that internal server. Very nice. As far as I'm concerned, there's no difference between the Internet and my corpnet. It's all just there.

For a while now many of you know I've been speaking and writing, mostly at the conceptual level, about the day when such a way of remote computing will arise. Well, my friends, that day is now. You can indeed build it now, with the products you have. I won't admit it's all peaches and cream: there's a fair number of moving parts here, it's true. But most of these moving parts are parts you're already familiar with: I'm simply encouraging you to move them in a specific way. You'll need to do some custom scripting for client-side connection diagnostics, but that's about it.

My next step is to create a more detailed guide, which I plan to publish through TechNet Magazine. I'm targeting (but not promising) the October issue. The article will include greater details about configuring your infrastructure to support the managed clients I describe.

I've lost track of the swelling number of individual conference attendees and the plethora of email writers who've expressed a desire to build this in their own environments. The one common thread from everyone is "I want to do it now!" Folks, it's really pretty exciting for me to see so many of you ready to cross the chasm from the perdition of paleo-networking (layer upon endless, complex layer of DMZs) into the paradise of flat, simple, cheap, and secure access to information. If you haven't yet, please take the time to read through some of our information (especially Scott Charney's paper) on end-to-end trust. Friends, the idea I describe above is the plumbing for realizing the end-to-end trust vision.