Child-safety activists charge that some of the age-verification firms want to help Internet companies tailor ads for children. They say these firms are substituting one exaggerated threat -- the menace of online sex predators -- with a far more pervasive danger from online marketers like junk food and toy companies that will rush to advertise to children if they are told revealing details about the users.

It's an old story: protecting against the rare and spectacular by making yourself more vulnerable to the common and pedestrian.

Corporate custodians of confidential medical data should be closely monitoring events connected to a nightmarish computer security breach in the St. Louis region.

Express Scripts is one of the nation’s largest pharmacy benefits managers. The company, with headquarters in St. Louis County, handles approximately 500 million prescriptions per year for 50 million workers at 1,600 American companies. Early in October, it received an extortion letter, the details of which it released on Nov. 6.

The letter included personal information on about 75 Express Scripts clients — Social Security numbers, dates of birth and, in some cases, information about prescription medications. Whoever sent the letter demanded money from the company — the amount has not been disclosed — and threatened to use the Internet to reveal personal and medical information about millions of people if the demands were not met.

...

Beyond the scale of the problem for Express Scripts — and the potential impact on the company is enormous — the issue extends well beyond the mounting concerns about identity theft, a phenomenon with which most people have become at least somewhat familiar.

The greater problem is the unique nature of personal medical records, the importance of moving to computerization of such records to improve health safety and reduce costs and the irreversibility of the damage people can suffer if confidential medical information becomes public. The stakes are so high that a federal law establishes strict standards for maintaining the privacy of medical information and stiff fines for failing to do so.

Medical records of all kinds — paper and, especially, electronic — must be protected with the most sophisticated kinds of security systems available, including backup protections and automatic alerts of security violations. Yet Express Scripts learned of this breach in the “worst way,” as InformationWeek.com security correspondent George Hulme put it in an online report: “via an extortion letter.”

The Express Scripts breach raises many questions for all elements of the health industry: hospitals, clinics and doctors’ practices, benefits management firms, insurance companies, pharmacies, employers and government agencies:
Are they using the most advanced information security technology possible? Do they minimize the amount of data they collect and keep it only as long as necessary? Do they have strict protocols governing access to personal and medical data — and systems to enforce those protocols? If criminals were to hack into their systems, how would the companies know? How soon? And are the systems capable of instantly cutting off illegal access as soon as a breach is discovered?

Confronted with a grave breach of electronic security, Express Scripts has responded by contacting law enforcement, establishing an informational website, offering a substantial reward and hiring a private consulting firm to help clients who have privacy concerns and investigate situations that “appear to be tied to identity theft” and provide “identity restoration services.” There is no question that the company is taking the situation extremely seriously.
Given the ongoing criminal situation, information about how Express Scripts’ data systems were compromised — and whether it could have been avoided — has yet to be disclosed. But the American people have the right to expect that their sensitive personal and medical information is zealously protected and kept secure — not only by Express Scripts but also by every person or company entrusted with it.

"Customers and customer relationships...have tangible measurable value to businesses, and their value is much easier to communicate to those who fund projects. So in an enterprise risk management scenartio, their vlaue informs the risk management process...[For example, consider] a farmer deciding which crop to grow. A farmer interested in short term profits may grow the same high yield crop every year, but over time this would burn the fields out. The long term focused farmer would rotate the crops and invest in things that build the value of the farm and soil over time. Investing in security on behalf of your customers is like this. The investment made in securing your customer's data build current and future value for them. Measuring the value of the customer and relationships helps to target where to allocate security resources."

Warnings About Financial Institutions and Derivatives

Risks of Financial Institutions
The nature of a financial institution is that there are a lot of ways to go to hell in a bucket. You can push credit too far, do a dumb acquisition, leverage yourself excessively---its not just derivatives [that can bring about your downfall].

Maybe it's unique to us, but we're quite sensitive to financial risks. Financial institutions make us nervous when they're trying to do well.

We're exceptionally goosey of leveraged financial institutions. If they start talking about how good their risk management is, it makes us nervous.

We fret way earlier than other people. We've left a lot of money on the table through early fretting. It's the way we are -- you'll just have to live with it.

Derivatives
The system is almost insanely irresponsible. and what people think are fixes aren't realy fixes. It's so complicated I can't do it justice here - but you can't believe the trillions of dollars involved. You can't believe the complexity. You can't believe how difficult it is to do the accounting. You can't believe how big the incentives are to have wishful thinking about values and wishful thinking about ability to clear.

People don't think about the consequences of the consequences. People start by trying to hedge against interest rate changes, which is very difficult and complicated. Then, the hedges make the [reported profits] lumpy. So they use the new derivatives to smooth this. Well, now you've morphed into lying. This turns into a Mad Hatter's Tea Party. This happens to vast, sophisticated corporations.

Somebody has to step in and say, "We're not going to do it - it's just too hard."

I think a good litmus test of the mental and moral quality at any large institutions [with significant derivative exposure] would be to ask them, "Do you really understand your derivatives book?" Anyone who says yes is either crazy or lying.

It's easy to see [the dangers] when you talk about [what happened with] the energy derivatives - they went kerflooey. When [the companies] reached for the assets that were on their books, the money wasn't there. When it comes to financial assets, we haven't had any such denouement and the accountings hasn't changed so the denouement is ahead of us.

Derivatives are full of clauses that say if one party's credit gets downgraded then it has to put up collateral. It's like margin - you can go broke [just putting up more margin]. In an attempt to protect themselves, they've introduced instability. Nobody seems to recognize what a disaster of a system they've created. It's a demented system. 

In engineering people have a big margin of safety. But in the financial world, people don't give a damn about safety. They let it balloon and balloon and balloon. It's aided by false accounting. I'm more pessimistic about this than Warren is.

Accounting for Derivatives
I hate with a passion GAAP [Generally Accepted Accounting Principles] as applied to derivatives and swaps. JP Morgan sold out to this type of accounting to front-end revenues. I think it's a disgrace.

It's bonkers, and the accountants sold out. Everyone caved, adopted loose [accounting] standards, and created exotic derivatives linked to theoretical models. As a result, all kinds of earnings, blessed by accountants, are not really being earned. When you reach for the money, it melts away. It was never there.

It [accounting for derivatives] is just disgusting. It is a sewer, and if I'm right, there will be hell to pay in due course. All of you will have to prepare to deal with a blowup of derivative books.

Likelihood of a Derivatives Blowup
We tried to sell Gen Re's derivatives operations and couldn't, so we started liquidating it. We had to take big markdowns. I would confidently predict that most of the derivatives books of [this country's] major banks cannot be liquidated for anything like what they're carried on the books at. When the denouement will happen and how severe it will be, I don't know. But I fear the consequences could be fearsome. I think there are major problems, worse than in the energy field, and look at the destruction there.

I'll be amazed if we don't have some kind of significant [derivatives-related] blowup in the next five to ten years.

I think we're he only big corporation in America to be running off its derivative book.

It's a crazy idea for people who are already rich -  like Berkshire - to be in this business. It's a crazy business for big banks to be in.

Yo would be disgusted if you had a fair mind and spent a month really delving into a big derivative operation. You would think it was Lewis Carroll. You would think it was the Mad Hatter's Tea Party. And the false precision of these people is just unbelievable. They make the worst economics professors look like gods. Moreover, there is depravity augmenting the folly. Read the book F.I.A.S.C.O., by law professor and former derivative trader Frank Partnoy, an insider account of the depravity of derivative trading at one of the biggest and best-regarded Wall Street firms. This book will turn your stomach.

Skein is our submission (myself and seven others: Niels Ferguson, Stefan Lucks, Doug Whiting, Mihir Bellare, Tadayoshi Kohno, Jon Callas, and Jesse Walker). Here's the paper:

Executive Summary

Skein is a new family of cryptographic hash functions. Its design combines speed, security, simplicity, and a great deal of flexibility in a modular package that is easy to analyze.

Skein is fast. Skein-512 -- our primary proposal -- hashes data at 6.1 clock cycles per byte on a 64-bit CPU. This means that on a 3.1 GHz x64 Core 2 Duo CPU, Skein hashes data at 500 MBytes/second per core -- almost twice as fast as SHA-512 and three times faster than SHA-256. An optional hash-tree mode speeds up parallelizable implementations even more. Skein is fast for short messages, too; Skein-512 hashes short messages in about 1000 clock cycles.

Skein is secure. Its conservative design is based on the Threefish block cipher. Our current best attack on Threefish-512 is on 25 of 72 rounds, for a safety factor of 2.9. For comparison, at a similar stage in the standardization process, the AES encryption algorithm had an attack on 6 of 10 rounds, for a safety factor of only 1.7. Additionally, Skein has a number of provably secure properties, greatly increasing confidence in the algorithm.

Skein is simple. Using only three primitive operations, the Skein compression function can be easily understood and remembered. The rest of the algorithm is a straightforward iteration of this function.

Skein is flexible. Skein is defined for three different internal state sizes -- 256 bits, 512 bits, and 1024 bits -- and any output size. This allows Skein to be a drop-in replacement for the entire SHA family of hash functions. A completely optional and extendable argument system makes Skein an efficient tool to use for a very large number of functions: a PRNG, a stream cipher, a key derivation function, authentication without the overhead of HMAC, and a personalization capability. All these features can be implemented with very low overhead. Together with the Threefish large-block cipher at Skein core, this design provides a full set of symmetric cryptographic primitives suitable for most modern applications.

Skein is efficient on a variety of platforms, both hardware and software. Skein-512 can be implemented in about 200 bytes of state. Small devices, such as 8-bit smart cards, can implement Skein-256 using about 100 bytes of memory. Larger devices can implement the larger versions of Skein to achieve faster speeds.

Skein was designed by a team of highly experienced cryptographic experts from academia and industry, with expertise in cryptography, security analysis, software, chip design, and implementation of real-world cryptographic systems. This breadth of knowledge allowed them to create a balanced design that works well in all environments.

Here's source code, text vectors, and the like for Skein. Watch the Skein website for any updates -- new code, new results, new implementations, the proofs.

NIST's deadline is Friday. It seems as if everyone -- including many amateurs -- is working on a hash function, and I predict that NIST will receive at least 80 submissions. (Compare this to the 21 submissions NIST received -- five were rejected as not being complete -- for the AES competition in 1998.) I expect people to start posting their submissions over the weekend. (Ron Rivest already presented MD6 at Crypto in August.) Probably the best place to watch for new hash functions is here; I'll try to keep a listing of the submissions myself.

The selection process will take around four years. I've previously called this sort of thing a cryptographic demolition derby -- last one left standing wins -- but that's only half true. Certainly all the groups will spend the next couple of years trying to cryptanalyze each other, but in the end there will be a bunch of unbroken algorithms; NIST will select one based on performance and features.

NIST has stated that the goal of this process is not to choose the best standard but to choose a good standard. I think that's smart of them; in this process, "best" is the enemy of "good." My advice is this: immediately sort them based on performance and features. Ask the cryptographic community to focus its attention on the top dozen, rather than spread its attention across all 80 -- although I also expect that most of the amateur submissions will be rejected by NIST for not being "complete and proper." Otherwise, people will break the easy ones and the better ones will go unanalyzed.