R.C. Lim, Attorney and Counselor at Law

Public Key Encryption Hacked

This post is perhaps a bit off-topic. But given that it’s potential connection to the possibility that millions will have their credit destroyed perhaps not.

Background:

This may be a little bit mathy. If so, my advance apologies. Encryption has long been one of my interests.

Public-key encryption, the one most commonly used in commerce is called RSA encryption, works by having two keys — one to encode and one to decode. Essentially, you have part of the cipher — the public key that you give to the public at large.  Then anyone can encode a message and send it to you. The neat thing is that no one can take your public key and then decrypt any of your messages. For that, they would need the private key, which you keep to yourself.  This kind of encryption is at work any time you look at your browser and see that little lock in the bottom right corner. It is used in nearly all Internet transactions.

The big idea behind this kind of encryption is that factoring, or breaking a number down into its prime divisors is difficult and time-consuming. While there are a few shortcuts, mostly the method to determine prime divisors is simply to try them one by one. Because its so time-consuming, to crack the encryption on your web browser would take modern computers longer than the life of the universe and certainly longer than any human life.

There has always been two big potential monkey wrenches here. One is the possibility that some crazy mathematicians figures a way around the supposedly hard problem of prime factorization. (There is no theorem that it’s got to stay a hard problem.) Two is that the computer power surges past the computations that would be necessary to crunch the numbers in a reasonable amount of time. Something of a hybrid of the two seems to have gotten it done.

Why You Might Not Want To Send Private Information Online For The Next Year Or More:

A couple of electrical engineers working on an entirely other problem have figured out that if you vary the voltage on the machine sending or receiving the encrypted message there will be errors, then if you examine the kind of errors that has occurred, you can figure out the private key in far less time. In this case, they were able to crack the RSA cypher in 10 days.

This should be huge news! Personally, I’d advise that you be cautious until the remedies can be implemented. The proposed remedies — that errors be purposefully included in all encrypted messages might work. (It’s still unclear if that doesn’t simply create a new much easier problem than the problem of factoring.) Until then, every rogue hacker has a blueprint of how to get into your private information over the Internet. There are a lot of people who have the skills to capitalize on this development before an effective remedy can be developed.

Derivatives, Bankruptcy, and Wall Street

Reading this op-ed in the WSJ today left me scratching my head.

Evidently, prior administrations — Dem and GOP — took the position that derivative contracts needed a special set of rules and considerations in bankruptcy. Their chief fear seems to be that not doing treating them as having special considerations might rattle derivatives markets. Strange!

Now President Obama does not want to sign any new financial reform legislation that does not include some regulation of the derivatives market. This is evidently so important that he has threatened to veto any legislation that does not include provisions accomplishing as much.

President Obama forever the seeker of compromise has now evidently found a cause that he believes in. And this time, he’s flat wrong! Presumably prior administrations were eager to go along with bad policy because they were worried that the derivatives market was sufficiently complex that there was much that they did not understand. Most people’s eyes glaze over when the Black-Scholes equation and all of that icky math enters the picture. Finally, President Obama shows a spine, but it’s on an issue where he gets it exactly wrong!

The missing fact that President Obama is ignoring is that the majority of the derivatives market is compromised of individualized contracts between two parties that are peculiar to the situation and so cannot regulated as if they were traded on an exchange. Moreover, he fails to recognize that trading risk in this fashion accomplishes a good. Namely, risk is spread throughout the system. The dispersion of risk throughout the economy, when it is not in the exceptional circumstance of placing the entire economic order at risk of collapse, is a public good and needs to be encouraged by the government and not discouraged.

Elderly Gay Couple In Sonoma County Wrongfully Separated

For those gay couples looking for a cautionary tale of what can go wrong as you get older, the recent story of an elderly couple who were wrongfully separated and deprived of their assets is chilling. In brief, the fall of an eighty year old man led county employees to visit the home and admit the couple. The county employees admitted the couple to different nursing homes. In the case of the younger partner, it was entirely against his will. The older partner who had fallen spent the final two months of his life alone and away from his partner of twenty years. Despite the fact that documents had been prepared giving each other powers of attorney, healthcare directives, and wills, county officials went into court claiming that the two longtime partners were just roommates and asked for a court order to sell their stuff.

This couple evidently had already done the estate planning to prepare themselves for such an event. Worse still, these ugly acts were committed by county employees under the color of law. It shows in yet another glaring fashion why prohibiting gay marriage is wrong.

FreeCreditReport.Com Is Not FREE!

Don’t be duped. How do you think they pay for those awful commercials?

The actual free site that facilitates your requests from Equifax, Experian, and TransUnion. None will give you your FICO score, but you can gain access to each entry to review it for accuracy.

The Basis Step-Up Conundrum

Check out BusinessWeek on the “Estate Tax Gap” or the problem that the basis step-up has gone away for the year. This can really, really hurt family businesses for which the basis is actually zero.

Next year, the estate tax will tax estates valued over $1 million at tax rates between 37% to 55%.

Increased Rates of Filing

Well, it looks like the vast majority of the increased rates in the Central District are occuring not in Riverside or Orange Counties as I would have guessed. Rather the big bump — 75% — happened right here in Los Angeles County!

Supreme Court Gossip: Elizabeth Warren To Replace Justice Stevens?

The latest gossip among the chattering lawyers is that Elizabeth Warren may be in line for the Supreme Court nomination to replace Justice Stevens. Professor Warren would likely be a more popular choice and face less Republic resistance than many potential nominees. Her nomination would also provide a strong example against the rule that law professors make lousy nominees because they have said and written too much.

In fact, Professor Warren’s populist message is exactly the sort that would give the Republican leadership pause because it’s so likely to be popular with their own constituents.  Given Professor Warren’s personal background as a consumer debtor attorney, it’s extremely likely also that during her term she would forever change the operation of finance in the United States.

The LA Times Picking Over Carrion: WaMu’s Role in the “Mortgage Time Bomb” Revealed!

Since the mortgage crisis has begun, I find that I often read newspapers and get the distinct impression that still no one gets what has happened here with our mortgage mess.

Today’s Los Angeles Times leads with a story uncovering Washington Mutual’s role in the housing crisis. Here the main piece of news is that the bank continued to accept loans in which it had uncovered fraudulent activity because the bank knew it would simply package the debt and sell it off to some other party.

The issue here is that this was commonplace among all of the banks in all of the various lending markets and had been so for years! Moreover, this is not a very well kept secret. Talk to any honest real estate appraiser, and he or she will tell you about the mountains of business that didn’t come his or her way because of scruples. Talk to anyone who packaged the debt, and he or she will tell you about the bag of tricks that were then used to gain higher ratings from the credit agencies.

Washington Mutual makes a convenient scapegoat because it no longer exists as an independent bank. Washington Mutual collapsed and was seized by regulators and then in turn sold to Chase. When the LA Times runs a story about how nearly all of the still existing banks were basically in the same line of work, that’ll be news! Basically, the inference that I draw from WaMu’s collapse is that the bank was less involved in the “mortgage time bomb” than the banks that are still around since it means that they did a worse job at getting the toxic stuff off of the books.

Derrick Coleman, NBA Star, Files Chapter 7

Derrick Coleman, the former number one pick in the NBA draft, recently filed for Chapter 7 protection under the bankruptcy code. His case will be one of the few Chapter 7 asset cases, and among his assets he lists many fancy cars and other tchotchkes one would expect an NBA great to have collected over a career as an NBA great.

Coleman owed more than $4 million than his assets were worth. As a high profile case, Coleman hopefully did a more thorough job filling out his schedules than the former auto dealer Danny Hecker I wrote about a few days ago did. Having made some $89 million over his career, Coleman’s monetary troubles seem to have come from investing money in his struggling hometown of Detroit.

I suspect that Coleman could have done a little better had he visited an asset protection planning attorney. One thing that such attorney can do is advise you on how to segregate your assets and risk so that when one business fails it does not spill over to the rest of your assets or businesses. This is what parent corporations do when they create subsidiaries. The subsidiary can then fail without harming the parent. In Coleman’s case, it might have allowed him to close a business without having his creditors reach his personal assets.  In the context of corporations owning corporations, this can be quite expensive — separate and then consolidated taxes and books for auditing. In the context of smaller businesses, the series LLC offered in several states makes this considerably easier and cheaper to accomplish.

The Future Direction of Housing Prices

When Robert Shiller speaks about market bubbles and prices, you’d be wise to listen.  Shiller is a Yale Econ professor who studies market bubbles. Shiller famously published the bestseller, Irrational Exhuberance, predicting the demise of the dot.com bubble months only a few months before it collapsed.

Mind you, Shiller is sharp. One distinction he draws is knowledge of the existence of a bubble from knowledge of when exactly that bubble is going to pop. As if calling and then watching the housing bubble in slow-motion, Shiller re-issued Irrational Exhuberance with a special new chapter on housing in 2005. There he pretty much laid out the narrative about housing and interest rates that it took most folks another four years to figure out. He also invented a brand-new index so as to make his point, the Case-Shiller Index, which measures the relative expensiveness of housing prices in a manner similar to the price-earnings ratio for a stock.

In today’s New York Times, Shiller penned an article, “Don’t Bet the Farm on Housing Recovery” where he sheepishly predicts that housing prices are set to move down again.  I personally am ready to listen to what he has to say.