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.

Ten days before VMworld and VMware still can’t get good press. First their CEO, Diane Greene, gets ousted, then a high-profile licensing bug is found and now the Director of R&D, Richard Sarwal, leaves his $1.25 million salary after just 7 months. (Note to self: get into R&D) It will be interesting to take the pulse of the VMware community at the show and in person. And in the meantime, Microsoft Hyper-V comes out of the gate with customers already touting its benefits.

The hypervisor is the “new” operating system. If you didn’t think that before, take a look at Red Hat’s purchase of Qumranet for $107 million. With Qumranet, Red Hat gets KVM, described by CTO Brian Stevens as an extension to the Linux kernel that allows it to be used as a bare-metal hypervisor, running directly on the underlying hardware and hosting guest operating systems. But according to Brian Madden, the “press” around the purchase is all focusing on the not-so-interesting part. Along with KVM, the SolidICE product includes Spice, a remote display protocol for VDI.

I wonder if this will be like Symantec buying Altiris or Microsoft buying Softricity, where the portion that we care about sort of loses focus as The Borg concentrates on the parts of the acquired technology that are more relevant to them?

(I’m a sucker for quotes that reference The Borg)

Network World publishes “10 open source companies to watch”. On the list, Qumranet!

Also on the list: Kickfire, Marketcetera, Vyatta, Sonatype, Untangle, XAware, SnapLogic, Acquia and Openmoko. What’s best about the list: Matt Asay gives it a thumbs up.

The first UEPS transaction was performed on Sunday, August 3, 2008, in Baghdad, Iraq, during the official launch of the UEPS smart card technology with the two state banks namely, Rafidain Bank and Rasheed Bank.

The official launch, attended by invitees from Rafidain Bank, Rasheed Bank, the Iraqi Government, War Victim Ministry and Martyrdom Ministry, demonstrated smart card registration, biometric enrolment and issuing of UEPS cards, offline loading of wage payments and government grants to the UEPS cards and dispensing of cash.

The pilot project involving 100,000 beneficiaries is now ready for implementation across selected bank branches and will enable the distribution and payment of government grants to war victims and martyrdom beneficiaries, as well as salary and wage distribution and payment to employees of the two state banks.

Brenda Stewart, Net1 Senior Vice President Sales and Marketing, said, "From the entire team at Net1, we congratulate the Iraqi consortium on this historic achievement and look forward to the successful implementation of the various projects already identified for implementation, as well as the projects currently in business development. Net1 is proud that the development of its core technology, from which it creates end-user products that satisfy the requirements of its customers, can change the way business is conducted leading to the improvement of people's lives. We share the belief of our Iraqi partners that our technology can play a fundamental role in the upliftment of the economy. The success of any technology should be measured, not only by the profits it generates for its inventors, suppliers and users, but also by the difference that it makes to the lives of people," Stewart concluded.

Depending on who you talk to, he is:

a) a hero

b) a disgruntled worker

c) in need of a serious work/life adjustment

d) in need of $5 million and/or a better lawyer

e) all of the above

Surprisingly strong opinions, regardless of what you choose.

We chose to lighten things up a bit and, as we always try to do, figure out how to help our customers be proactive. So here it is, the Top 10 Signs Your Network Admin has Gone Rogue:

10) David Letterman has a Top 10 list called “Top 10 Signs Your Network Admin Has Gone Rogue”

9) Your Admin is the only one with the network device log-ins and refuses to share them with anyone else.

‘8) His presentations about network configuration include the words “Magic” and “Burn after reading”.

7) Instead of email, he forces everyone to use the Suggestion box placed outside of his door…and then places a very obvious nanny-cam hidden in a teddy bear right next to it.

6) He begins to grow out his sideburns and every question directed to him in meetings results in the same response, “Do you feel lucky today, punk?”

5) He has the mayor on speed-dial.

4) He starts wearing very big shoes to the office and accosts random people in the hallways asking if they think they could fill them.

3) He refuses to write router and switch configs to flash citing network security concerns.

2) He calls you and asks for a $5 million salary advance; caller id flashes “Department of Corrections”.

And #1: You’re the City of San Francisco

Enjoy your lock-down free weekend!

ShareThis

From MSNBC:

One in three information technology professionals abuses administrative passwords to access confidential data such as colleagues’ salary details, personal e-mails or board-meeting minutes, according to a survey.

U.S. information security company Cyber-Ark surveyed 300 senior IT professionals, and found that one-third admitted to secretly snooping, while 47 percent said they had accessed information that was not relevant to their role.

Ah, there it is. One-third admitted to it. OK, that is more what I would expect. Now for the other two thirds get the electric cattle prod and some thumb screws and I’m sure they’ll start singing.

hyuk.

Article Link

Nearly 40% of U.S. information technology workers would accept a reduced salary to have the ability to telecommute, a Dice Holding survey revealed Tuesday.

In a poll of more than 1,500 IT workers, 37% of respondents said they would be willing to take “slightly less” pay to telecommute full time. The survey defined “slightly less” as up to a 10% reduction in salary.

The article does mention that workers can save some costs at the gas pump — but there are a lot more savings from telecommuting too. Workers who commute have to pay not just for gas or bus fees, but also for parking, the cost of lunch from eating out often, and the time they spend in the commute. In the end, the amount that workers might save by telecommuting might make up for the potential pay cut.

Of course, there are other costs to working remotely — getting a good business phone line and Internet connection, setting up a home office that you can stand to sit in all day and the costs of coffee for renting a table at your local coffee shop. But those are certainly worthwhile for the convenience and flexibility of working remotely.

From Consumer Affairs:

A laptop containing personal information on AT&T employees and management was stolen from an employee’s vehicle last month, the company said.

The laptop, which had no encryption or security protection beyond a password lock, contained names, Social Security numbers, and salary information for an undisclosed number of workers.

Employees were notified of the theft on May 22, seven days after the theft, according to privacy watchdog PogoWasRight.org, which first reported the story. In a letter to employees, AT&T said that, “The measures and precautions we put in place to protect the security of company-owned property and our employees’ personal information were not followed.”

AT&T said that the responsible employee “has been disciplined.”

Disciplined you say?

Muawhaha!

Article Link