Financial Cryptography

SEC bans illegal activity then permits it...

Whoops:

SEC Spares Market Makers From `Naked-Short' Sales Ban

July 18 (Bloomberg) -- The U.S. Securities and Exchange Commission exempted market makers in stocks from the emergency rule aimed at preventing manipulation in shares of Fannie Mae, Freddie Mac and 17 Wall Street firms.

The SEC granted relief for equity and option traders responsible for pairing off orders from a rule that seeks to bar the use of abusive tactics when betting on a drop in share prices. Exchange officials said limits on ``naked-short'' sales would inhibit the flow of transactions and raise costs for investors.

``The purpose of this accommodation is to permit market makers to facilitate customer orders in a fast-moving market,'' the SEC said in the amendment.

A reader writes: "that lasted what, 12 hours ?" I don't know, but it certainly clashes with the dramatic news of earlier in the week from the SEC, as the Economist reports:

Desperate to prevent more collapses, the main stockmarket regulator has slapped a ban for up to one month on “naked shorting” of the shares of 17 investment banks, and of Fannie Mae and Freddie Mac, the two mortgage giants. Some argue that such trades, in which investors sell shares they do not yet possess, make it easier to manipulate prices. The SEC has also reportedly issued over 50 subpoenas to banks and hedge funds as part of its investigation into possibly abusive trading of shares of Bear Stearns and Lehman Brothers.

Naked selling is technically illegal but unenforceable. The fact that it is illegal is a natural extension of contract laws: you can't sell something you haven't got; the reason it is technically easy is that the markets work on delayed settlement. That is, all orders to sell are technically short sales, as all sales are agreed before you turn up with the shares,. Hence, all orders are based on trust, and if your broker trusts you then you can do it, and do it for as long as your broker trusts you.

"Short selling" as manipulation, as opposed to all selling, works like this: imagine I'm a trusted big player. I get together with a bunch of mates, and agree, next Wednesday, we'll drive the market in Microsoft down. We conspire to each put in a random order for selling large lumps of shares in the morning, followed by lots of buy orders in the afternoon. As long as we buy in the afternoon what we sold in the morning, we're fine.

On the morning of the nefarious deed, buyers at the top price are absorbed, then the next lower price, then the next ... and so the price trickles lower. Because we are big, our combined sell orders send signals through the market to say "sell, sell, sell" and others follow suit. Then, at the pre-arranged time, we start buying. By now however the price has moved down. So we sold at a high price and bought back at a lower price. We buy until we've collected the same number we sold in the morning, and hence our end-of-day settlement is zero. Profit is ours, crack open the gin!

This trick works because (a) we are big enough to buy/sell large lumps of shares, and (b) settlement is delayed as long as we can convince the brokers, so (c) we don't actually need the shares, just the broker's trust. Generally on a good day, no more than 1% of a company's shares move, so we need something of that size. I'd need to be very big to do that with the biggest fish, but obviously there are some sharks around:

The S&P500 companies with the biggest rises in short positions relative to their free floats in recent weeks include Sears, a retailer, and General Motors, a carmaker.

Those driven by morality and striven with angst will be quick to spot that (a) this is only available to *some* customers, (b) is therefore discriminatory, (c) that it is pure and simple manipulation, and (d) something must be done!

Noting that service of short-selling only works when the insiders let outsiders play that game, the simple-minded will propose that banning the insiders from letting it happen will do the trick nicely. But, this is easier said than done: selling without shares is how the system works, at its core, so letting the insiders do it is essential. From there, it is no distance at all to see that insiders providing short sales as a service to clients is ... not controllable, because fundamentally all activities are provided to a client some time, some way. Any rule will be bypassed *and* it will be bypassed for those clients who can pay more. In the end, any rule probably makes the situation worse than better, because it embeds the discrimination in favour of the big sharks, in contrast to ones regulatory aim of slapping them down.

Rules making things worse could well be the stable situation in the USA, and possibly other countries. The root of the problem with the USA is historical: Congress makes the laws, and made most of the foundational laws for stock trading in the aftermath of the crash of 1929. Then, during the Great Depression, Congress didn't have much of a clue as to why the panic happened, and indeed nobody else knew much of what was going on either, but they thought that the SEC should be created to make sure it didn't happen again.

Later on, many economists established their fame in studying the Great Depression (for example, Keynes and Friedman). However, whether any parliament in the world can absorb that wisdom remains questionable: Why should they? Lawmakers are generally lawyers,and are neither traders nor economists, so they rely on expert testimony. And, there is no shortage of experts to tell the select committees how to preserve the benefits of the markets for their people.

Which puts the lie to a claim I made repeatedly over the last week: haven't we figured out how to do safe and secure financial markets by now? Some of us have, but the problem with making laws relying on that wisdom is that the lawmakers have to sort out those who profit by it from those who know how to make it safe. That's practically impossible when the self-interested trader can outspend the economist or the financial cryptographer 1000 to 1.

And, exactly the same logic leads to the wide-spread observation that the regulators are eventually subverted to act on behalf of the largest and richest players:

The SEC’s moves deserve scrutiny. Investment banks must have a dizzying influence over the regulator to win special protection from short-selling, particularly as they act as prime brokers for almost all short-sellers...

The SEC’s initiatives are asymmetric. It has not investigated whether bullish investors and executives talked bank share prices up in the good times. Application is also inconsistent. ... Like the Treasury and the Federal Reserve, the SEC is improvising in order to try to protect banks. But when the dust settles, the incoherence of taking a wild swing may become clear for all to see.

When the sheepdog is owned by the wolves, the shepherd will soon be out of business. Unlike the market for sheep, the shareholder cannot pick up his trusty rifle to equalise the odds. Instead, he is offered a bewildering array of new sheepdogs, each of which appear to surprise the wolves for a day or so with new fashionable colours, sizes and gaits. As long as the shareholder does not seek a seat at the table, does not assert primacy over the canines, and does not defend property rights over the rustlers from the next valley, he is no more than tomorrow's mutton, reared today.

SEC starts to investigate Bear Stearns. Or does it?

If you read the last few days' posts on the crisis market sometimes but erroneously known as Banking (and you should check up on Lynn's comments on CDOs to see more detail) then you might be forgiven for thinking that the job of the regulators is to ride into town and clean up all the dirty games: subprime, CDOs and toxic mortgages. It could be that way, but the truth is more complicated.

The Bear Stearns affair is illustrative of the dilemmas. At one level, it's just another dirty chip in a card game where seedy reputations are being made, and dirty cards are being played, to mangle the metaphors. At another level, it is indicative that the problem is far more systemic than just another failed bank to be rescued.

In short, this story was about a major bank in the US that very nearly folded its cards. At the time, Bear Stearns went through its "Barings moment" when the bad news of its impending bankrupcy turned up late Friday. By next Monday, however, instead of collapsing, a white knight rescuer in the form of Goldman Sachs JP Morgan, a top-tier investment bank, turned up to offer a charitable price of $2 per share.

Bear-Stearns itself was major because it handled the biggest chunk of securities settlement. That is, the boring back-office task of swapping money for shares, or owners for owners, depending on how you look at it. Which brings to mind that if the major back-end settlement bank failed, this could clog the markets. Can you say systemic risk ?

Alan Greenspan can say that with authority, and this was what prompted his fabled rescue of another major player, LTCM (for Long Term Capital Management) back in the late 1990s. When LTCM was rescued from its too-big-to-comprehend positions, the financial world sucked much breath between collective teeth. Weren't we supposed to be passed the notion of rescuing failed financial players? Wasn't the Barings failure a wake-up call that we should take our risks and carry them too?

Was LTCM really that big?

In the event, Alan Greenspan proved to be the supreme player of poker: The Fed didn't spend any money on the deal, and instead fingered the banks who were to share the risk. A strong implication was that the big financial players (such as Morgan and Goldman) were in deep for the profits, and they should pay up for the losses. History suggests that he more or less got it right, or right enough, even to the extent of a few rebels who short-sold him and had to be punished later on.

For LTCM, the collective breath was slowly let out as the news and rumours trickled in as to how deep it was.

Because of its core role in settlements, Bear Stearns may have been the same, or maybe not. The financial brethren collectively drew breach in, but early fears of systemic risk were quickly replaced by cries of "rip-off!" Just exactly how did Goldman Sachs JPMorgan manage to engineer a bargain-basement price for a key player and competitor? After some huffing and puffing, the price went up to $10, which tells us something about the real value here.

Just maybe, the regulators have now moved to ask those questions:

BOSTON, July 16 (Reuters) - Dozens of hedge funds and broker dealers are scrambling to send reams of e-mails and trading records to U.S. regulators probing suspected stock price manipulation, several sources at hedge funds said.

The U.S. Securities and Exchange Commission recently sent subpoenas to more than 50 firms concerning trading in investment banks Bear Stearns, which was rescued in March, and Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research), whose shares have been hurt badly by rumors about its financial health, said four sources, who have seen the documents but were not authorized to speak about them publicly.

Among those receiving subpoenas was investment bank Goldman Sachs Group Inc (GS.N: Quote, Profile, Research) and prominent hedge fund firms SAC Capital Advisors LLC and Citadel Investment Group. All three were named in a recent article about the Bear collapse in Vanity Fair.

Is this good news? On the surface, it sounds like hard dealing. Finally, the regulators are riding into town. Hip hip hooray!

But a few things are disquieting, and cheers may be premature. Firstly, the regulators were already in on the deal, so they were already in-the-know. If they are now investigating a game they were in on, this looks no good: Either they were duped, or they were players.

Secondly, the SEC has no particularly good reputation for these sorts of investigations (remember Lazio, mutual funds, etc?). It is an agency that is thought to be understaffed, under-missioned, under-enforced and generally turns up to the party after the barn has burnt to the ground. Indeed, perhaps minded by the SEC's record as a political hired-gun, Congress is musing on the possibilities of a UK-style super-regulator, and/or handing that power to the Federal Reserve.

Thirdly, subpoenas are a two-edged sword. Although they might feed information to the issuer of the subpoena, they also shut down the information for anyone else. It's as simple as the players saying to everyone and anyone "we have no comment on running cases;" they've been handed a get-out-of-jail card at least as far as investigative reporting goes. Likewise, the subpoena is a club that can just as easily be wielded within an investment bank or hedge fund as against any outsider; it's a licence to martyr any whistleblower who might accidentally have a momentary attack of morals. Not only that, the information is now likely to be locked down within the SEC's investigation department, which would typically protect it fiercely for several years in a real investigation, and as long as it takes for the heat to die down in a political paid-favour.

Fourthly, of the investigations I have seen, the good ones are done quietly, with surgical strikes for information. A subpoena is sent only after other tools have been exhausted because it raises the stakes in the game so high. To send 50 out at once is about as surgical as carpet-bombing.

The overall sense then remains. The Bear Stearns affair smells, and rumour has it that the Brothers Lehman were seen washing at the same laundry. Who else? IndyMac? It might be a coincidence, but there is no end to the bad news for the USA Federal investigative and regulatory arms in recent years.

Which brings us to the point of the article, and the lesson as to why financial cryptographers read and understand the financial markets. The financial regulators promote a model of independent and fair regulation, but this is simply not the case. Briefly, sometimes, we experience periods in history where regulators do strive to stand apart and to regulate lightly and fairly. For the benefit of more than the incumbents. But more often than not, the regulators are the best heeled but least well-equipped players in a rigged game, always on the back foot, and operating to a steady series of political favours which will generally make matters worse.

With the retirement of Greenspan, and the political assassination of Spitzer, the USA markets are now normalising towards a stability of chaos. For financial cryptographers, then, it is important to understand that the structure of the market is dominating, and the regulators are players in that structure, not fair policemen, or designers of that structure. Enter that game at your peril, and if you do, understand it better than they do.

Addendum: of course, not getting the names right doesn't help understanding at all... JP Morgan bought Bear Stearns, not Goldman Sachs.

wheretofore Vista? Microsoft moves to deal with the end of the Windows franchise

Since the famous Bill Gates Memo, around the same time as phishing and related frauds went institutional, Microsoft has switched around to deal with the devil within: security. In so doing, it has done what others should have done, and done it well. However, there was always going to be a problem with turning the super-tanker called Windows into a battleship.

I predicted a while back that (a) Vista would probably fail to make a difference, and (b) the next step was to start thinking of a new operating system. This wasn't the normal pique, but the cold-hearted analysis of the size of the task. If you work for 20 years making your OS easy but insecure, you don't have much chance of fixing that, even with the resources of Microsoft.

The Economist brings an update on both points. Firstly, on Vista's record after 18 months in the market:

To date, some 140m copies of Vista have been shipped compared with the 750m or more copies of XP in daily use. But the bulk of the Vista sales have been OEM copies that came pre-installed on computers when they were bought. Anyone wanting a PC without Vista had to order it specially.

Meanwhile, few corporate customers have bought upgrade licences they would need to convert their existing PCs to Vista. Overwhelmingly, Windows users have stuck with XP.

Even Microsoft now seems to accept that Vista is never going to be a blockbuster like XP, and is hurrying out a slimmed-down tweak of Vista known internally as Windows 7. This Vista lite is now expected late next year instead of 2010 or 2011.

It's not as though Vista is a dud. Compared with XP, its kernel—the core component that handles all the communication between the memory, processor and input and output devices—is far better protected from malware and misuse. And, in principle, Vista has better tools for networking. All told, its design is a definite improvement—albeit an incremental one—over XP.

Microsoft tried and failed to turn it around, security+market-wise. We might now be looking at the end of the franchise known as Windows. To be clear, while we are past the peak, any ending is a long way off in the distant future.

Classical strategy thinking says that there are two possible paths here: invest in a new franchise, or go "cash-cow". The latter means that you squeeze the revenues from the old franchise as long as possible, and delay the termination of the franchise as long as possible. The longer you delay the end, the more revenues you get. The reason for doing this is simple: there is no investment strategy that makes money, so you should return the money to the shareholders. There is a simple example here: the music majors are decidedly in cash-cow, today, because they have no better strategy than delaying their death by a thousand file-shares.

Certainly, with Bill Gates easing out, it would be possible to go cash-cow, but of course, we on the outside can only cast our augeries and wonder at the signs. The Economist suggests that they may have taken the investment route:

Judging from recent rumours, that's what it is preparing to do. Even though it won't be in Windows 7, Microsoft is happy to talk about “MinWin”—a slimmed down version of the Windows core. It’s even willing to discus its “Singularity” project—a microkernel-based operating system written strictly for research purposes. But ask about a project code-named “Midori” and everyone clams up.

By all accounts, Midori (Japanese for “green” and, by inference, “go”) capitalises on research done for Singularity. The interesting thing about this hush-hush operating system is that it’s not a research project in the normal sense. It's been moved out of the lab and into incubation, and is being managed by some of the most experienced software gurus in the company.

With only 18 months before Vista is to be replaced, there's no way Midori—which promises nothing less than a total rethink of the whole Windows metaphor—could be ready in time to take its place. But four or five years down the road, Microsoft might just confound its critics and pleasantly surprise the rest of us.

Comment? Even though I predicted Microsoft would go for a new OS, I think this is a tall order. There are two installed bases in the world today, being Unix and Windows. It's been that way for a long time, and efforts to change those two bases have generally failed. Even Apple gave up and went Unix. (The same economics works against the repeated attempts to upgrade the CPU instruction set.)

The flip-side of this is that the two bases are incredibly old and out-of-date. Unix's security model is "ok" but decidedly pre-PC, much of what it does is simply irrelevant to the modern world. For example, all the user-to-user protection is pointless on a one-user-one-PC environment, and the major protection barrier has accidentally become a hack known as TCP/IP, legendary for its inelegant grafting onto Unix. Windows has its own issues.

So we know two things: a redesign is decades over-due. And it won't budge the incumbents; both are likely to live another decade without appreciable change to the markets. We would need a miracle, or better, a killer-app to budge the installed base.

Hence the cold-hearted analysis of cash-cow wins out.

But wait! The warm-blooded humanists won't let that happen for one and only one reason: it is simply too boring to contemplate. Microsoft has so many honest, caring, devoted techies within that if a decision were made to go cash-cow, there would be a mass-defection. So the question then arises, what sort of a hybrid will be acceptable to shareholders and workers? Taking a leaf from recent politics, which is going through a peak-energy-masquerade of its own these days, some form of "green platform" has appeal to both sides of the voting electorate.

DNS rebinding attack/patch: the germination of professional security cooperation?

Lots of chatter is seen in the security places about a patch to DNS coming out. It might be related to Dan's earlier talks, but he also makes a claim that there is something special in this fix. The basic idea is that DNS replies are now on randomised ports (or some such) and this will stop spoofing attempts of some form. You should patch your DNS.

Many are skeptical, and this gives us an exemplary case study of today's "security" industry:

Ptacek: If the fix is “randomize your source ports”, we already knew you were vulnerable. Look, DNS has a 16 bit session ID… how big is an ASPSESSIONID or JSESSIONID? When you get to this point you are way past deck chairs on the titanic, but, I mean, the web people already know this. This is why TLS/SSL totally doesn’t care about the DNS. It is secure regardless of the fact that the DNS is owned.

Paraphrased: "Oh, we knew about that, so what?" As above, much of the chatter in other groups is about how this apparently fixes something that is long known, therefore insert long list of excuses, hand-wringing, slap-downs, and is not important. However, some of the comments are starting to hint at professionalism. Nathan McFeters writes:

I asked Dan what he thought about Thomas Ptacek’s (Thomas Ptacek of Matasano) comments suggesting that the flaw was blown out of proportion and Dan said that the flaw is very real and very serious and that the details will be out at Black Hat. Dan mentioned to me that he was very pleased with how everything has worked with the multi-vendor disclosure process, as he said, “we got several vendors together and it actually worked”. To be honest, this type of collaboration is long overdue, and there’s a lot of folks in the industry asking for it, and I’m not just talking about the tech companies cooperating, several banking and financial companies have discussed forums for knowledge sharing, and of course eBay has tried to pioneer this with their “eBay Red Team” event. It’s refreshing to here a well respected researcher like Dan feeling very positive about an experience with multiple vendors working together (my own experience has been a lot of finger pointing and monkey business).

Getting vendors to work together is quite an achievement. Getting them to work on security at the same time, instead of selling another silver bullet, is extraordinary, and Dan should write a book on that little trick:

Toward addressing the flaw, Kaminsky said the researchers decided to conduct a synchronized, multivendor release and as part of that, Microsoft in its July Patch Tuesday released MS08-037. Cisco, Sun, and Bind are also expected to roll out patches later on Tuesday.

As part of the coordinated release, Art Manion of CERT said vendors with DNS servers have been contacted, and there’s a longer list of additional vendors that have DNS clients. That list includes AT&T, Akamai, Juniper Networks, Inc., Netgear, Nortel, and ZyXEL. Not all of the DNS client vendors have announced patches or updates. Manion also confirmed that other nations with CERTs have also been informed of this vulnerability.

Still, for the most part, the industry remains fully focussed on the enemy within, as exemplified by Ptacek's comment above. I remain convinced that the average "expert" wouldn't recognise a security fix until he's been firmly wacked over the head by it. Perhaps that is what Ptacek was thinking when he allegedly said:

If the IETF would just find a way to embrace TLS/X509 instead griping about how Verisign is out to get us we wouldn’t have this problem. Instead, DNSSEC tried to reinvent TLS by committee… well, surprise surprise, in 2008, we still care about 16 bit session IDs! Go Internet!

Now, I admit to being a long-time supporter of TLS'ing everything (remember, there is only one mode, and it is secure!) but ... just ... Wow! I think this is what psychologists call the battered-wife syndrome; once we've been beaten black and blue with x.509 for long enough, maybe we start thinking that the way to quieten our oppressor down is to let him beat us some more. Yeah, honey, slap me with some more of that x.509 certificate love! Harder, honey, harder, you know I deserve it!

Back to reality, and to underscore that there is something non-obvious about this DNS attack that remains unspoken (have you patched yet?), the above-mentioned commentator switched around 540 degrees and said:

Patch Your (non-DJBDNS) Server Now. Dan Was Right. I Was Wrong.

Thanks to Rich Mogull, Dino and I just got off the phone with Dan Kaminsky. We know what he’s going to say at Black Hat.

What can we say right now?

1. Dan’s got the goods. ...

Redeemed! And, to be absolutely clear as to why this blog lays in with slap after slap, being able to admit a mistake should be the first criteria for any security guy. This puts Thomas way ahead of the rest of them.

Can't say it more clearly than that: have you patched your DNS server yet?

Digital Evidence: Musing on the rocky path to wisdom

I've notched up two events in London: the International Conference on Digital Evidence 10 days ago, and yesterday I attended BarCampBankLondon. I have to say, they were great events!

Another great conference in our space was the original FC in 1997 in Anguilla. This was a landmark in our field because it successfully brought together many disciplines who could each contribute their specialty. Law, software, cryptography, managerial, venture, economics, banking, etc. I had the distinct pleasure of a professor in law gently chiding me that I was unaware of an entire school of economics known as transaction economics that deeply affected my presentation. You just can't get that at the regular homogeneous conference, and while I notice that a couple of other conferences are laying claim to dual-discipline audiences, that's not the same thing as Caribbean polyglotism.

Digital Evidence was as excellent as that first FC97, and could defend a top rating in conferences in the financial cryptography space. It had some of interactivity, perhaps for two factors: it successfully escaped the trap or fixation on local jurisdiction, and it had a fair smattering of technical people who could bring the practical perspective to the table.

Although I'd like to blog more about the presentations, it is unlikely that I can travel that long journey; I've probably enough material for a month, and no month to do it in. Which highlights a continuing theme here at on this blog: there is clearly a hole in the knowledge-to-wisdom market. It is now even an archaic cliche that we have too much data, too much information to deal with, so how do we make the step up through knowledge and on to wisdom?

Conferences can help; but I feel it is far too easy to fall into the standard conference models. Top quality names aimed at top paying attendees, blindness by presumptions about audience and presenters (e.g., academic or corporate), these are always familiar complaints.

Another complaint is that so much of the value of conferences happens when the "present" button is set to "off". And that leads to a sort of obvious conclusion, in that the attendees don't so much want to hear about your discoveries, rather, what they really want is to develop solutions to their own problems. FC solved this in a novel way by having the conference in the Caribbean and other tourist/financial settings. This lucky choice of a pleasant holiday environment, and the custom of morning papers leaving afternoons freer made for a lot of lively discussion.

There are other models. I experimented at EFCE, which Rachel, Fearghas and I ran a few years back in Edinburgh. My call (and I had to defend my corner on this one) was that the real attendees were the presenters. If you could present to peers who would later on present to you, then we could also more easily turn off the button and start swapping notes. If we could make an entire workshop of peers, then structure would not be imposed, and relationships could potentially form naturally and evolve without so many prejudices.

Which brings us to yesterday's event: BarCampBankLondon. What makes this bash unusual is that it is a meeting of peers (like EFCE), there is a cross-discipline focus (finance and computing, balanced with some legal and consulting people) and there isn't much of an agenda or a selection process (unlike EFCE). Addendum: James Gardner suggests that other conferences are dead, in the face of BarCamp's model.

I'm all for experimentation, and BCBL seemed to manage the leading and focussing issue with only the lightest of touches. What is perhaps even more indicative of the (this?) process was that it was only 10 quid to get in, but you consume your Saturday on un-paid time. Which is a great discriminator: those who will sacrifice to work this issue turned up, and those looking for easy, paid way to skive off work did not.

So, perhaps an ideal format would be a BarCamp coupled with the routine presentations? Instead of a panel session (which I find a bit fruitless) replace one afternoon with a free-for-all? This is also quite similar to the "rump sessions" that are favoured in the cryptography world. Something to think about when you are running your next conference.

German court finds Bank responsible for malwared PC

Spiegel reports that a German lower court ("Amtsgerichts Wiesloch (Az4C57/08)") has found a bank responsible for malware-driven transactions on a user's PC. In this case, her PC was infected with some form of malware that grabbed the password and presumably a fresh TAN (German one-time number to authenticate a single transaction) and scarfed 4000 euros through an eBay wash.

Unfortunately only in German, and so analysis following is highly limited and unreliable. It appears that the court's logic was that as the transaction was not authenticated by the user, it is the bank's problem.

This seems fairly simple, except that Microsoft Windows-based PCs are difficult to keep clean of malware. In this case, the user had a basic anti-virus program, but that's not enough these days (see top tips on what helps).

We in the security field all knew that, and customers are also increasingly becoming aware of it, but the question the banking and security world is asking itself is whether, why and when the bank is responsible for the user's insecure PC? Shouldn't the user take some of the risk for using an insecure platform?

The answer is no. The risk belongs totally to the bank in this case, in the opinion of the Wiesloch court, and the court of financial cryptography agrees. Consider the old legal principle of putting the responsibility with the party best able to manage it. In this case, the user cannot manage it, manifestly. Further, the security industry knew that the Windows PC was not secure enough for risky transactions, and that Microsoft software was the dominant platform. The banking industry has had this advice in tanker-loads (c.f. EU "Finread"), and in many cases banks have even heeded the advice, only to discard it later. The banking industry decided to go ahead in the face of this advice and deploy online banking for support cost motives. The banks took on this risk, knowing the risk, and knowing that the customer could not manage this risk.

Therefore, the liability falls completely to the bank in the basic circumstances described. In this blog's opinion ! (It might have been different if the user had done something wrong such as participate in a mule wash or had carried on in the face of clear evidence of infection.)

There is some suggestion that the judgment might become a precedent, or not. We shall have to wait and see, but one thing is clear, online banking has a rocky road ahead of it, as the phishing rooster comes home to roost. For contrary example, another case in Cologne (Az: 9S195/07) mentioned in the article put the responsibility for EC-card abuse with the customer. As we know, smart cards can't speak to the user about what they are doing, so again we have to ask what the Windows PC was saying about the smart card's activities. If the courts hold the line that the user is responsible for her EC-card, then this can only cause the user to mistrust her EC-card, potentially leading to yet another failure of an expensive digital signing system.

The costs for online banking are going to rise. A part of any solution, as frequently described by security experts, is to not trust widely deployed Microsoft Windows PCs for online banking, which in effect means PCs in general. A form of protection is fielded in some banks whereby the user's mobile phone is used to authenticate the real transaction over another channel. This is mostly cheap and mostly effective, but it isn't a comprehensive or permanent solution.