The Big Picture

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• Where Does Spam Come From ?
• America’s Hottest Economist
• Jon Stewart Goes Head-to-Head Bill O’Reilly
• On Investing: The many hats of great investors
• Most Complete Map of the Universe EVER
• We’ve Gone from a Nation of Laws to a Nation of Powerful Men Making Laws in Secret
• 3 Day Weekend Reading

Where Does Spam Come From ? Posted: 28 May 2011 02:30 PM PDT > Crazy giant study on spam where authors disable spam filters and bought everything offfered to them: Abstract—Spam-based advertising is a business. While it has engendered both widespread antipathy and a multi-billion dollar anti-spam industry, it continues to exist because it fuels a profitable enterprise. We lack, however, a solid understanding of this enterprise's full structure, and thus most anti-spam interventions focus on only one facet of the overall spam value chain (e.g., spam filtering, URL blacklisting, site takedown). In this paper we present a holistic analysis that quantifies the full set of resources employed to monetize spam email— including naming, hosting, payment and fulfillment—using extensive measurements of three months of diverse spam data, broad crawling of naming and hosting infrastructures, and over 100 purchases from spam-advertised sites. We relate these resources to the organizations who administer them and then use this data to characterize the relative prospects for defensive interventions at each link in the spam value chain. In particular, we provide the first strong evidence of payment bottlenecks in the spam value chain; 95% of spam-advertised pharmaceutical, replica and software products are monetized using merchant services from just a handful of banks. > Source: Click Trajectories: End-to-End Analysis of the Spam Value Chain Kirill Levchenko, Andreas Pitsillidis, Neha Chachra, Brandon Enright, Mark Felegyhazi, Chris Grier, Tristan Halvorson, Chris Kanich, Christian Kreibich, He Liu, Damon McCoy, Nicholas Weaver, Vern Paxson, Geoffrey M. Voelker, Stefan Savage UC San Diego, UC Berkeley, International Computer Science Institute, Laboratory of Cryptography and System Security (CrySyS), Berkeley, CA and Budapest University of Technology and Economics

America’s Hottest Economist Posted: 28 May 2011 10:00 AM PDT There is a gushing article in BusinessWeek on Tyler Cowen, America’s Hottest Economist. It is interesting in a wonky kinda way. Way back in 2008, I had a problem with one of Cowen’s NYT articles Tyler Cowen: "Predatory Borrowing The Bigger Problem". I thought that he was ignoring the role the Fed and lenders played in the crisis, and blaming ignorant borrowers who took on too much debt/leverage. As former Fed Governor Ed Gramlich showed, Predatory lending was the problem. As to “predatory borrowing,” it is now more accurately described as “bank origination fraud.” I have since warmed up to more of his writing, especially things like this 2009 piece: Why Creditors MUST Suffer Also. We share similar views on Moral Hazard, and why bad investments and lenders need to suffer the consequences of their actions. As to the Business Week piece, I have two wholly unrelated thoughts: 1) Cowen seems like a genuine, nice and smart guy. It is a bit of a shame that his world view has been blinkered with the standard economist’s myopia, being based in large part on fundamentally flawed assumptions about how human beings behave in the real world. 2) The second thought: The graphic that accompanied the article was really, really awesome (see if you can guess why): > > Previously: Tyler Cowen: "Predatory Borrowing The Bigger Problem" (January 13th, 2008) Bad Precedent: The Long-Term Capital Bailout (December 28th, 2008) Why Creditors MUST Suffer Also (April 5th, 2009) Missing Radical Deregulation As a Cause of Crisis (September 13th, 2009) Source: Tyler Cowen, America’s Hottest Economist Brendan Greeley Business Week, May 26, 2011 http://www.businessweek.com/magazine/content/11_23/b4231066695798.htm

Jon Stewart Goes Head-to-Head Bill O’Reilly Posted: 28 May 2011 08:00 AM PDT Part 1: Jon Stewart Goes Head-to-Head Bill O’Reilly ~~~ Part 2: Jon Stewart Goes Head-to-Head With Bill O’Reilly

On Investing: The many hats of great investors Posted: 28 May 2011 07:00 AM PDT This was originally published at The Washington Post, on May 21, 2011: ~~~ On Investing: The many hats of great investors By Barry Ritholtz Graduation season is upon us. From the next generation of Warren Buffett wannabes, I occasionally hear questions such as "What should I learn to become a great investor?" Contrary to popular belief, investing isn't a traditional academic discipline. Money management is hardly a typical major. There are, of course, plenty of "Business Administration" undergrads, but their focus tends to be on running companies, rather than investing in them. We churn out MBAs like made-in-China widgets, yet few ever become outstanding investors. And don't even ask about economists — the profession that missed the housing boom and bust, the Great Recession, the credit crisis and the market collapse. Great investors are savvy generalists. I can think of five fields that are hugely helpful to asset management. If you were to study these disciplines, your understanding of how markets work would greatly improve. And you would be a better investor. How? You will generate better risk-adjusted returns; meaning, you will get the most bang for the bucks you are putting at risk. You will suffer less from volatility — the stomach-churning ups and downs in the markets that are one part risk, one part opportunity. And you will avoid the typical mistakes that most investors make. The five disciplines that can help: Historian: Knowing what has happened in the past (and how often) is an enormous advantage when it comes to investing. It informs you of the range of possibilities, allows you to conceptualize possible outcomes to various scenarios and provides a framework for thinking about market cycles. Heading into the market bottom in 2003, some market historians warned about a secular bear market. These are the decade-plus long periods of huge rallies and great collapses. Some warned that investors should not be surprised if after a decade, the markets were essentially unchanged, which is exactly what happened. Think back to the market lows in March 2009. After about a 20 percent bounce off the bottom, quite a few commentators expressed fears that the markets had gone "too far, too fast." Market historians knew that the median bounce after a drop of 50 percent or more was 75 percent. With that information, you might not have been scared away from equities just before they gained 80 percent in value over 18 months. Psychiatrist: Speaking of scared: Have you ever sold anything in a panic — then regretted it over the ensuing months? What about the opposite — greedily buying stocks that were screaming higher because everyone else was? Many investors fall prey to these errors. Fear and greed are the most enduring investor emotions. They lead to destructive behaviors. Carl Richards, a financial planner, sums it up thusly: "Buy greed at tops; Sell fear at bottoms; repeat until broke." Not understanding your own psychology is the downfall of many an investor. The best financial plan becomes worthless if you are unprepared for the emotional turmoil that accompanies the ups and downs of markets. The crowd becomes an unthinking mob at tops and bottoms. Being able to read the emotional state of the market, as well as keeping your own emotions in check, are hallmarks of great investors. Trial lawyer: Good litigators are always skeptical, but not negative. Is that witness telling the truth? What is motivating him? Is the opposing counsel's argument logical? Being able to answer these questions makes for a good lawyer – and a good investor. All CEOs want you to buy their company's stock; every analyst wants you to follow his equity calls; every fund manager wants to run your money. When it comes to investing, everyone is trying to separate you from your money. Good investing requires good judgment. Being able to recognize valuable intel versus the usual blather is a huge advantage. Like a good litigator, you must question data, consider alternative explanations, argue against the obvious. You cannot blindly accept everything you hear as truth, nor can you reject everything out of hand. Being able to discern between information that is valuable and that which is not, is crucial. Mathematician/statistician: Investing is filled with math: compound interest-rates, dividend yields, long-term gains, price-to-earnings ratio, risk-adjusted returns, percentage draw downs, annualized rate of returns. Don't worry if you suffer from math anxiety: If you can operate the simplest calculator — even the free one that came with your computer — you have the requisite math skills needed. If you follow the professional literature there is a plethora of advanced mathematical formulas of dubious utility. Value-at-risk is a complex mathematical formula that was supposed to tell Wall Street banks how much risk they could safely assume. It failed to prevent them from blowing themselves up during the credit crisis. The Sharpe ratio measures the excess return — the "risk premium" — an investment strategy has. Even William Sharpe, its creator, has said it's been misapplied by Wall Street's wizards. Investors can ignore these sorts of mathematical esoterics. But understanding basic math is key. Accountant: When you buy a stock, you are buying an interest in a company's future revenue and profit. How much you pay for that future cash flow determines whether you are over or under paying. That means understanding the basics of a company's books is a key to recognizing value. An understanding of basic accounting is essential to grasping the fundamental health of a company or business model. It is how you determine whether an existing company is profitable, or when a young firm might become profitable. But it also can help you determine when a formerly profitable company is heading down the wrong path. You don't have to be a forensic accountant. These are sleuths in green visors poring over pages and pages of quarterly filings and footnotes, looking for evidence of fraud or accounting shenanigans. Forensic accountants are the guys who discovered the frauds at Enron and Worldcom, and they warned about AIG and Lehman Brothers. Amazingly, even after these frauds were revealed, many investors refused to believe them. Having a basic knowledge about accounting can help you understand and heed the work of forensic accountants. You don't need to have an MBA or doctorate in economics to be a good investor. Indeed, as the spectacular blow up at Long-Term Capital Management has taught us, these can be impediments to good investing. Instead, you need to develop more general skills. Learn market history, understand crowd psychology, how to think critically, be able to do simple math and understand basic accounting. Do this, and you are on the path to becoming a much better investor. ~~~ Ritholtz is chief executive of FusionIQ, a quantitative research firm. He runs a finance blog, The Big Picture. On Investing: The many hats of great investors

Most Complete Map of the Universe EVER Posted: 28 May 2011 06:00 AM PDT ~~~ Source: Scientists unveil most complete EVER map of the universe that extends to 380 million light years away DAILY MAIL 26th May 2011 http://www.dailymail.co.uk/sciencetech/article-1390908/Scientists-unveil-complete-EVER-map-universe-extends-380-million-lightyears-away.html?ITO=1490

We’ve Gone from a Nation of Laws to a Nation of Powerful Men Making Laws in Secret Posted: 28 May 2011 05:00 AM PDT Preface: Some defendants are no longer allowed to see the “secret evidence” which the government is using against them. See this and this. The U.S. Supreme Court has ruled that judges can throw out cases because they don’t like or believe the plaintiff … even before anyone has had the chance to conduct discovery to prove their case. In other words, judges’ secret biases can be the basis for denying people their day in court, without even having to examine the facts. Judges are also becoming directly involved in politics with the other branches of government. Claims of national security are being used to keep the shenanigans of the biggest banks and corporations secret, and to crush dissent. But this essay focuses on something else: the fact that the laws themselves are now being kept secret. America is supposed to be a nation of laws which apply to everyone equally, regardless of wealth or power. Founded on the Constitution and based upon the separation of powers, we escaped from the British monarchy – a “nation of men” where the law is whatever the king says it is. However, many laws are now “secret” – known only to a handful of people, and oftentimes hidden even from the part of our government which is supposed to make laws in the first place: Congress. The Patriot Act Congress just re-authorized the Patriot Act for another 4 years. However, Senator Wyden notes that the government is using a secret interpretation of the Patriot Act different from what Congress and the public believe. Senator Wyden’s press release yesterday states: Speaking on the floor of the U.S Senate during the truncated debate on the reauthorization of the PATRIOT ACT for another four years, U.S. Senator Ron Wyden (D-Ore.) – a member of the Senate Select Committee on Intelligence — warned his colleagues that a vote to extend the bill without amendments that would ban any Administration's ability to keep internal interpretations of the Patriot Act classified will eventually cause public outrage.Known as Secret Law, the official interpretation of the Patriot Act could dramatically differ from what the public believes the law allows. This could create severe violations of the Constitutional and Civil Rights of American Citizens. *** I have served on the Senate Intelligence Committee for ten years, and I don't take a backseat to anybody when it comes to the importance of protecting genuinely sensitive sources and collection methods. But the law itself should never be secret – voters have a need and a right to know what the law says, and what their government thinks the text of the law means, so that they can decide whether the law is appropriately written and ratify or reject decisions that their elected officials make on their behalf. As TechDirt points out: It’s not just the public that’s having the wool pulled over their eyes. Wyden and [Senator] Udall are pointing out that the very members of Congress, who are voting to extend these provisions, do not know how the feds are interpreting them: As members of the Senate Intelligence Committee we have been provided with the executive branch’s classified interpretation of those provisions and can tell you that we believe there is a significant discrepancy between what most people – including many Members of Congress – think the Patriot Act allows the government to do and what government officials secretly believe the Patriot Act allows them to do. *** By far the most important interpretation of what the law means is the official interpretation used by the U.S. government and this interpretation is – stunningly -classified. What does this mean? It means that Congress and the public are prevented from having an informed, open debate on the Patriot Act because the official meaning of the law itself is secret. Most members of Congress have not even seen the secret legal interpretations that the executive branch is currently relying on and do not have any staff who are cleared to read them. Even if these members come down to the Intelligence Committee and read these interpretations themselves, they cannot openly debate them on the floor without violating classification rules. Here’s Wyden’s speech on the Senate floor. The Surveillance State and Unauthorized Wars Former constitutional lawyer Glenn Greenwald noted last week: The government’s increased ability to learn more and more about the private activities of its citizens is accompanied — as always — by an ever-increasing wall of secrecy it erects around its own actions. Thus, on the very same day that we have an extension of the Patriot Act and a proposal to increase the government’s Internet snooping powers, we have this: The Justice Department should publicly release its legal opinion that allows the FBI to obtain telephone records of international calls made from the U.S. without any formal legal process, a watchdog group asserts. ***The decision not to release the memo is noteworthy… By turning down the foundation’s request for a copy, the department is ensuring that its legal arguments in support of the FBI’s controversial and discredited efforts to obtain telephone records will be kept secret. What’s extraordinary about the Obama DOJ’s refusal to release this document is that it does not reveal the eavesdropping activities of the Government but only its legal rationale for why it is ostensibly permitted to engage in those activities. The Bush DOJ’s refusal to release its legal memos authorizing its surveillance and torture policies was unquestionably one of the acts that provoked the greatest outrage among Democratic lawyers and transparency advocates (see, for instance, Dawn Johnsen’s scathing condemnation of the Bush administration for its refusal to release OLC legal reasoning: “reliance on ‘secret law’ threatens the effective functioning of American democracy” and “the withholding from Congress and the public of legal interpretations by the Justice Department Office of Legal Counsel (OLC) upsets the system of checks and balances between the executive and legislative branches of government.” The way a republic is supposed to function is that there is transparency for those who wield public power and privacy for private citizens. The National Security State has reversed that dynamic completely, so that the Government (comprised of the consortium of public agencies and their private-sector “partners”) knows virtually everything about what citizens do, but citizens know virtually nothing about what they do (which is why WikiLeaks specifically and whistleblowers generally, as one of the very few remaining instruments for subverting that wall of secrecy, are so threatening to them). Fortified by always-growing secrecy weapons, everything they do is secret — including even the “laws” they secretly invent to authorize their actions — while everything you do is open to inspection, surveillance and monitoring. This dynamic threatens to entrench irreversible, absolute power for reasons that aren’t difficult to understand. Knowledge is power, as the cliché teaches. When powerful factions can gather unlimited information about citizens, they can threaten, punish, and ultimately deter any meaningful form of dissent … Conversely, allowing government officials to shield their own conduct from transparency and (with the radical Bush/Obama version of the “State Secrets privilege”) even judicial review ensures that National Security State officials (public and private) can do whatever they want without any detection and (therefore) without limit or accountability. That is what the Surveillance State, at its core, is designed to achieve: the destruction of privacy for individual citizens and an impenetrable wall of secrecy for those with unlimited surveillance power. And as these three events just from the last 24 hours demonstrate, this system — with fully bipartisan support — is expanding more rapidly than ever. *** So patently illegal is Obama’s war in Libya as of today that media reports are now coming quite close to saying so directly; see, for instance, this unusually clear CNN article today from Dana Bash. As a result, reporters today bombarded the White House with questions about the war’s legality, and here is what happened, as reported by ABC News‘ Jake Tapper: Talk about “secret law.” You’re not even allowed to know the White House’s rationale (if it exists) for why this war is legal. It simply decrees that it is, and you’ll have to comfort yourself with that. That’s how confident they are in their power to operate behind their wall of secrecy: they don’t even bother any longer with a pretense of the most minimal transparency. Secret Memos Secret laws are not a brand new problem. As I’ve previously noted: Scott Horton – a professor at Columbia Law School and writer for Harper’s – says of the Bush administration memos authorizing torture, spying, indefinite detention without charge, the use of the military within the U.S. and the suspension of free speech and press rights: We may not have realized it at the time, but in the period from late 2001-January 19, 2009, this country was a dictatorship. The constitutional rights we learned about in high school civics were suspended. That was thanks to secret memos crafted deep inside the Justice Department that effectively trashed the Constitution. What we know now is likely the least of it. Yale law professor Jack Balkin agrees, writing that the memos promoted “reasoning which sought, in secret, to justify a theory of Presidential dictatorship.” Constitutional law professor Jonathan Turley says that the memos are the “very definition of tyranny”. And former White House counsel John Dean says “Reading these memos, you’ve gotta almost conclude we had an unconstitutional dictator.” State of Emergency Cuts the Constitutional Government Out of the Picture As I wrote in February: The United States has been in a declared state of emergency from September 2001, to the present. Specifically, on September 11, 2001, the government declared a state of emergency. That declared state of emergency was formally put in writing on 9/14/2001: A national emergency exists by reason of the terrorist attacks at the World Trade Center, New York, New York, and the Pentagon, and the continuing and immediate threat of further attacks on the United States. NOW, THEREFORE, I, GEORGE W. BUSH, President of the United States of America, by virtue of the authority vested in me as President by the Constitution and the laws of the United States, I hereby declare that the national emergency has existed since September 11, 2001 . . . . That declared state of emergency has continued in full force and effect from 9/11 to the present. President Bush kept it in place, and President Obama has also. *** On September 10, 2010, President Obama declared: Section 202(d) of the National Emergencies Act, 50 U.S.C. 1622(d), provides for the automatic termination of a national emergency unless, prior to the anniversary date of its declaration, the President publishes in the Federal Register and transmits to the Congress a notice stating that the emergency is to continue in effect beyond the anniversary date. Consistent with this provision, I have sent to the Federal Register the enclosed notice, stating that the emergency declared with respect to the terrorist attacks on the United States of September 11, 2001, is to continue in effect for an additional year. The terrorist threat that led to the declaration on September 14, 2001, of a national emergency continues. For this reason, I have determined that it is necessary to continue in effect after September 14, 2010, the national emergency with respect to the terrorist threat. The Washington Times wrote on September 18, 2001: Simply by proclaiming a national emergency on Friday, President Bush activated some 500 dormant legal provisions, including those allowing him to impose censorship and martial law. *** Continuity of Government (“COG”) measures were implemented on 9/11. For example, according to the 9/11 Commission Report, at page 38: At 9:59, an Air Force lieutenant colonel working in the White House Military Office joined the conference and stated he had just talked to Deputy National Security Advisor Stephen Hadley. The White House requested (1) the implementation of continuity of government measures, (2) fighter escorts for Air Force One, and (3) a fighter combat air patrol over Washington, D.C. *** The Washington Post reported in March 2002 that “the shadow government has evolved into an indefinite precaution.” The same article goes on to state: Assessment of terrorist risks persuaded the White House to remake the program as a permanent feature of ‘the new reality, based on what the threat looks like,’ a senior decisionmaker said. As CBS pointed out, virtually none of the Congressional leadership knew that the COG had been implemented or was still in existence as of March 2002: Key congressional leaders say they didn't know President Bush had established a "shadow government," moving dozens of senior civilian managers to secret underground locations outside Washington to ensure that the federal government could survive a devastating terrorist attack on the nation’s capital, The Washington Post says in its Saturday editions. Senate Majority Leader Thomas A. Daschle (D-S.D.) told the Post he had not been informed by the White House about the role, location or even the existence of the shadow government that the administration began to deploy the morning of the Sept. 11 hijackings. An aide to House Minority Leader Richard A. Gephardt (D-Mo.) said he was also unaware of the administration’s move. Among Congress’s GOP leadership, aides to House Speaker J. Dennis Hastert (Ill.), second in line to succeed the president if he became incapacitated, and to Senate Minority Leader Trent Lott (Miss.) said they were not sure whether they knew. Aides to Sen. Robert C. Byrd (D-W. Va.) said he had not been told. As Senate president pro tempore, he is in line to become president after the House speaker. Similarly, the above-cited CNN article states: Senate Majority Leader Tom Daschle, D-South Dakota, said Friday he can’t say much about the plan. “We have not been informed at all about the role of the shadow government or its whereabouts or what particular responsibilities they have and when they would kick in, but we look forward to work with the administration to get additional information on that.” Indeed, the White House has specifically refused to share information about Continuity of Government plans with the Homeland Security Committee of the U.S. Congress, even though that Committee has proper security clearance to hear the full details of all COG plans. Specifically, in the summer 2007, Congressman Peter DeFazio, on the Homeland Security Committee (and so with proper security access to be briefed on COG issues), inquired about continuity of government plans, and was refused access. Indeed, DeFazio told Congress that the entire Homeland Security Committee of the U.S. Congress has been denied access to the plans by the White House (video; or here is the transcript). The Homeland Security Committee has full clearance to view all information about COG plans. DeFazio concluded: “Maybe the people who think there's a conspiracy out there are right". As University of California Berkeley Professor Emeritus Peter Dale Scott warned: If members of the Homeland Security Committee cannot enforce their right to read secret plans of the Executive Branch, then the systems of checks and balances established by the U.S. Constitution would seem to be failing. To put it another way, if the White House is successful in frustrating DeFazio, then Continuity of Government planning has arguably already superseded the Constitution as a higher authority. Indeed, continuity of government plans are specifically defined to do the following: *** Those within the new government would know what was going on. But those in the "old government" – that is, the one created by the framers of the Constitution – would not necessarily know the details of what was happening Normal laws and legal processes might largely be suspended, or superseded by secretive judicial forums The media might be ordered by strict laws – punishable by treason – to only promote stories authorized by the new government See this, this and this. *** In 2007, President Bush issued Presidential Directive NSPD-51, which purported to change Continuity of Government plans. NSPD51 is odd because: NSPD51 was passed without Congressional input Even the New York Times wrote in an editorial: Beyond cases of actual insurrection, the President may now use military troops as a domestic police force in response to a natural disaster, a disease outbreak, terrorist attack, or to any 'other condition.' Changes of this magnitude should be made only after a thorough public airing. But these new Presidential powers were slipped into the law without hearings or public debate. So continuity of government laws were enacted without public or even Congressional knowledge, and neither the public or even Congress members on the Homeland Security Committee – let alone Congress as a whole – are being informed of whether they are still in effect and, if so, what laws govern. Postscript: As I’ve repeatedly noted, economics, politics and law are inseparable and intertwined. As Aristotle pointed out thousands of years ago, “The only stable state is the one in which all men are equal before the law.” Without the rule of law, the state crumbles, and the government bonds and other investments crumble with it. As I wrote last year: What’s the hole that is swallowing up the economy? The failure to follow the rule of law. The rule of law is what provides trust in our economy, which is essential for a stable economy. The rule of law is the basis for our social contract. Indeed, it is the basis for our submission to the power of the state. We are supposed to be a nation of laws, not of men. That’s what humanity has fought for ever since we forced the king to sign the Magna Carta. Indeed, lawlessness – the failure to enforce the rule of law – is dragging the world economy down into the abyss.

3 Day Weekend Reading Posted: 28 May 2011 03:08 AM PDT Start your holiday weekend with some eclectic links: • May's swoon disconcerts investors (FT.com) • How optimistic is the stock market really? (Market Watch) • Department of Duh: Study says top lobbying banks got biggest bailouts (Reuters) See also Financial Lobbying and the Housing Crisis (NYT) • Cleaning Up the Subprime Aftermath (Prospect) • Sharing Information Corrupts Wisdom of Crowds (Wired) • RSA SecureID breach linked to hacker attack on Lockheed Martin; other US military contractors may be affected  (various) • Politics 2-fer: . . . . -Democrats Put G.O.P. on Spot as Medicare Plan Fails (NYT) . . . . -Signs Grow That Palin May Run (NYT) • Are Our Lives Vanishing Into the Cloud? (The Atlantic) • Crazy cool: Tornadoes Suck Up Fire and Water (Washington’s Blog) • If I Take Down Fox, Is All Forgiven? (NY Mag) What are you reading?

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