On Sun, 3 Dec 1995, Timothy C. May wrote:
Netscape, being the dominant browser company, and Microsoft, being the dominant OS company, are in special positions to "build in Big Brother." I'm not claiming they are, just that they are clearly in a position to make it technologically more feasible to make non-GAK illegal. They both need to carefully think about the role that's been "given" to them (whether by fortune, hard work, or being in the right place at the right time) and do what's right.
That's always a tough position to be in. If Netscape or Microsoft knew what was the "right" thing to do, I don't doubt that they'd be doing it. The problem is always that there is no crystal clear "right" answer on lots of these issues. Everything is always "fuzzy" because of the possible consequence that flows from action.
Strong words, perhaps, but the implications of mandatory key escrow are quite clear. We debated these points for a long time during the Clipper debate, and later when "Software Key Escrow" began to rear its head. I won't repeat these arguments against GAK here, but will take this opportunity to quote from a new book that actually quotes my words:
Good quote, Tim. I'll lift a glass of eggnog at the end of the "open door policy" as well. It really doesn't serve anyone's interests at all. My concern is the policy wind-down challenge. It can call for a real strong stomach sometimes, as Greenspan could probably attest. It probably shouldn't be embraced except by the most foolish of fools.
And time is of the essence. Things move very fast. It is no longer the case that a law is passed, then companies respond to the new legal regime with their own policies and products. Companies, especially in high tech, are "partners" from the start, as we saw with the Clipper development (where AT&T had known about Clipper for years prior to the first public announcement, and was cooperating in the development of it, not to mention the other companies such as Mykotronx, VLSI Technology, etc., which were involved in secret for years).
Sure, this isn't news to anyone. Time is now compressed. There usually has to be some lead time to these things. AT&T as an example has been well rewarded -- in fact, some circles might suggest that they were overly well-rewarded -- when they got a $1 Billion plus preferential contract in the Middle East (Bahrain, if memory serves ...) following Desert Storm. Does this then mean that anyone should be surprised with Thomson-CSF's alternate means against Raytheon? Not this cowboy. We're into a completely different altitude of engagement here. Completely different. And in this case, we not only face an enemy, but we're surrounded with civilians who can get caught in the cross-fire. No different than the orphans who were used as human shields in Bosnia. These companies generally need to be briefed early on what the action plan will be and on the possible range of consequences and the attendant probabilities so that proper contingencies can be drawn up. Unless of course, these companies are actually your adversary, while posing as your friend, in which case it's best to keep them out of the loop altogether. Probably best just to amuse them, as you do a child in a crib, while you go about your affairs.
It is only sheer speculation on our part (some of us, at least) that negotiations about GAK have been going on with the major software companies. Jim Clark, for example, learned what he knows about key escrow _someplace_, and it probably wasn't from our list or from articles he'd read. I'm betting, but could of course be wrong, that he and other folks at Netscape (and I mustn't leave out Microsoft, Sun, SGI, Apple, etc.) have been briefed on key escrow and that various negotiations are already underway. This would match how things were done with Clipper, and would explain Clark's voiced support for the need for GAK.
Clark's voiced support for GAK is one of the most insane ideas I have come across. Does he have any idea of what he is tinkering with? Does he know how to play his tune of Tommy the Tinkerer?? Somehow, I have doubts. Serious doubts. His GAK comments could trigger a very nice cascade throughout the entire high-tech sector which could spill over and out. "Friendly Fire" could be deadly to some American financial powerhouses. Not only could Jim throw a monkey-wrench into the exit-strategies of valley venture-capitalist's, but this whole scenario could well spill into other issuers if he's not careful. To understand, the market truly is not looking at Netscape as a "software" play. It is the quintessential Internet play -- a whole "new" economic sector. The sector which many Dow firms (IBM, AT&T, and Disney) hope to exploit as part of their mid to long-term business plans. Future earnings forecasts and indeed valuations up and down the street are based around the assumption of Internet success. Jim is playing with fire, if the audience he's _hoping_ to address isn't listening to him while _another_ audience in fact is. Anyone who doubts this, or thinks that the markets aren't particularly vulnerable and sensitive, shouldn't listen to me -- who am i -- they should listen instead to the true "professionals". Here's what Doug Casey, an investment adviser out of Baltimore is writing: "We're at the tail end of one of the great manias of history, where value is thrown totally to the wind and everybody with two nickels to rub together plans on making a million with mutual funds. I sincerely hope that all the best happens and the market goes to 10,000. But I'm not planning on joining the party. Since May, 1985, when the mutual fund assets market reached a $100 Billion (US), asset growth has gone hyperbolic. Half of all the money in equity funds has come in during the last TWO years. It's a mania of historic proportions. It's completely and totally insane." I might go one step further, and ask the thorny question of how much of that recent mutual fund investment -- the "hot money" that's come in over the last two years -- is actually "leveraged money". How much of it is borrowed funds? Probably a pretty fair chunk. Then I might ask how many of these casino bets, are with money that people truly can't afford to loose. How many IRA's or college funds are invested either directly or indirectly in Spyglass, or some other darling?? Instead of prudent "blue-chip" stuff, that couldn't *possibly* ever take a big hit -- parts of the Dow Industrials -- like AT&T or Disney?? Again, probably a fair chunk. Let's suppose that as a result of Jim's GAK comments, people loose faith and ask to redeem their mutuals. What's the cash-position of these funds? Do they have the liquidity to meet the redemptions or will they have to engage in selling wave after selling wave -- selling everything regardless of "fundamentals"? And then will the across the board selling cause ever more redemptions as hopes and dreams fade and as reality sets in? Maybe, I'll help answer that question, by quoting analyst, Leo Hood, from Gainesville Florida, who spoke of some of the risks and attempted to debunk the perceived "safeguards" when he wrote: "One by one, investors have moved their money out of conservative investments and into growth funds and high-tech stocks. Many feel this concentration of power in the hands of a few is a safeguard against a horde of small investors selling all at once. I think the opposite is true. With funds down to very low cash levels, a panic by individuals is likely to make matters worse." Hood is correct in this case, about the present state of mutual fund liquidity. It's next to non-existant. And Hood raises another market vector to contend with. The so-called "safeguard" no longer resides in broadly distributed wetware. Instead, everything is auto-pilot. The safeguard -- Mr. "Safeguard" Circuit-breaker investment fund manager -- can't default on a client redemption. If he doesn't have cash in the bank, he has no option but to raise cash by selling. In fact, he might not even have the authority or discretion to determine what he'll sell. He might be forced to follow the Investment Committee's guidelines and formulae. He might even try to play hero, and over-sell near the perceived market "top" to meet his anticipated future redemptions, and "beat the market", so that he and his fund have claim to future "bragging rights". Seeds for an anticipatory meltdown?? Possibly. In addition to the historic mania for mutual funds, Alan Newman from Great Neck, New York tries to help out and give us some historical perspective on where our market sits, historically. He looks back many years and writes: "The dollar value of all U.S. stocks now amounts to 85.9 per-cent of nominal GNP -- far and away the highest such reading of all time. Prior peaks in August 1929 at 77.4 per-cent, December 1968 at 79.3 per-cent and December 1972 at 80 per-cent were all followed by brutal bear markets that lopped off at least 21 percent in value over the next twelve months. Two of these times, 1929 and 1973-74 -- marked the start of the two worst bear markets of the century. To understand and give Alan's words some context, especially his observation that these nosebleed valuation levels were invariably followed by spectacular historic corrections, let's remember that his data reflected old fundamentals. The old-style market. This is not '29 nor '73-74. Back then, we didn't have the compressed ultra-sensitive global market we now face, where a sneeze turns into an earthquake. We also didn't use the complex financial instruments (many of which are off-balance sheet) like we now do. And we didn't have duelling neural nets in charge of trading. The seasoned professionals with the experience and human reason and judgment to manage these events are gone. The ones who had the authority in the past to exercise their "judgment" in managing new "unlearned" events have had all of their authority stripped from them. That authority now sits in other hands. In silicon. During '29 and 73-74, the markets certainly weren't facing the type of optimism that we're facing today ... (well maybe, in '29 they were.) An optimism which has been fuelled by the media. Including such memorables as the Rolling Stones "Start me up" which I've heard hummed in elevators. They weren't facing the "News" on the front page of every major periodical and the near constant bombardment on the "Internet". And no one need mention that nifty icon in the corner of every computer screen. The coverage has set individual expectations to unattainable levels. All of the above, might well come together to form a "series of factors" which act serially -- factors which will magnify market swings. If all of this hasn't helped convince Jim, perhaps Paul Franke from Kansas City might shed some additional illumination on the present situation. Some recent history. He tried to look at the current market within a narrower time frame than Alan Newman's long-term historical. He wanted to give some current (twelve-month) context for our consideration. He wrote: "In late 1994, skepticism and pessimism among investors were very high. Mutual funds had cash levels of close to 10 per-cent. Some 60 per-cent of investment advisers were staunchly bearish. Interest rates were high after rising all year. Inflation seemed to be picking up steam. Today, the stock market is in the opposite position it was a year ago. Futures traders are more bullish than they have been in several years, and mutual fund cash levels have fallen to near a record low. Cautioning investors to watch their step may prove to be an understatement." Some very good advice there from Kansas City about watching your step. We have many other vectors to consider. One, is the manner in which mutual funds report unit-holder value. Mutual funds do not present and publish a "real-time" value. The reported NPV lags the calculation. The value most people see published and what they will react to, is not actualy where "it is" -- it's actually where "it was". This information "air-gap" will tend to make the unit-holder reaction time much longer and will tend to continue and give life to negative news, as well as presenting exploitation opportunities to market professionals who have an information advantage. Domestic and International Pros will use this "feature" to calculate and approximate the reported unit-holder value before the report hits the press. On the basis of educated "guesses", they will likely trade through overnight or international markets to pre-position themselves prior to the general release of mutual fund values to the American public, again magnifying the raid. This combined interplay -- between the public and the professional -- would respectively extend the reaction period and, magnify intra-day market movements. Or in plain English, it would last longer and be more volatile. Or much more succinctly, as Irwin Yamamoto said, "_Mutual Funds_ will be an obscene expression." The full impact would of course require a full analysis and model of another vector, that of the entire futures market and that of international arbitrageurs. When they smell blood, they tend to behave as piranha. Arbs and "vulture funds" have the resources -- personnel resources as well as procedural resources to preferentially position themselves such that they have an advantage of trading execution and a preferential view of how market buy/sell orders flow into the theatre of the exchange. Both professional types are prepared at a moment's notice to jump in or refrain. They can assess track record's, determine capitalization's, psychoanalyze the personalities of everyone involved and phone everyone in their Rolodex looking for some clue and subtlety to play. (Arbs not only have Breaking News Co-ordiantors but are also privy to particular intelligence. They recall how the market-makers took it on the chin in '87 and had to go to the window. Many market-makers made great sacrifices in attempts to maintain order during '87. A sacrifice they may not willingly make to ensure system-liquidity now.) All of these factors (and many more) will tend to interplay in one big international soup. Clearly, Jim is not only in position to influence the future of GAK, but he could cause a great deal of trouble throughout the chain of the US financial system. The market does not need a jittery Chairman, going on about GAK. No one is served by this type of play. I doubt the President wants a market meltdown as we start to move towards an election year. Body bags and a bad economic front are a bad mix and could swing the whole election with the dual near unsurmountable election obstacles. Then again, Bob Dole probably wouldn't want to take hold of the Presidential reins in that environment, either. As an endnote to something that really wasn't relevant to Jim's GAK comments, something which veered off and almost assumed a life of its own, I'd say that the probability of the foregoing is certainly in excess of one chance in ten.
I hope Jeff W. and Jim C. can have some _long_ chats. The stakes are too high for product decisions to be made without full awareness of the implications.
Yep, we're in "the shit" as they say.
The statements from Jim Clark do tend to imply a kind of defeatism, and even Jeff's comments seemed laden with qualifications about "only if the government requires us to." As Hal Finney noted in his post, it's as if the Netscape people are preparing for the inevitable. Maybe it's not an indication that GAK is being considered within Netscape, but maybe it is. After all, one rarely hears "only if we have to" qualifications on things that are truly from out in left field.
Preparation can be a good thing. I still think that coming out and saying what is being said, is risky business. It is a comment out of left field. But then I'm not privy to all the variables either, so take my comments with a grain of salt.
(A side point, somewhat abstract: The dominance of Netscape, rising from nowhere to becoming the major player in this debate, illustrates a point about "monocultures" and their ecological effects. If yellow corn is good, replace other strains of corn with yellow corn. Pretty soon, the world's corn output is 96% yellow corn. Some ecological downsides to this. In this case, Netscape is becoming the yellow corn of the Web, and an obvious "choke point" for the NSA and its sisters to mandate crypto policies. Hence, the role of non-yellow-corn alternatives...)
Yep Tim, I'll agree with you on this. I think Maurice Strong has also been saying something along these lines for some time. Warning about systems and monocultures. Sadly, monocultures can develop without our even seeing it. Or at least, I think Maurice has been saying something along those lines in his own fashion.
And what Netscape agrees to put in future releases of its browsers or its servers could have dramatic effects on the whole climate.
Sure. Just like Christmas in Bosnia will, undoubtedly. 'Tis the season ... Hopefully, god-willing, we won't face any tragedies. Alice de 'nonymous ... <an455120@anon.penet.fi> ...just another one of those... P.S. This post is in the public domain. C. S. U. M. O. C. L. U. N. E.