– Matthew Goldstein is a Reuters columnist. The views expressed are his own –

Even as Ponzi king Bernard Madoff goes away to prison for the rest of his life and then some, there are still so many unanswered questions — both big and fundamental.

Were Madoff’s sons involved? What did his wife Ruth know? Were the operators of the giant feeder funds that sucked in tens of billions of dollars in investor money in on the charade?

Those questions, though important, ultimately pale when compared with the bigger ones that remain about the root causes of the worst financial crisis since the Great Depression.

Indeed, for all the misery Madoff and his Ponzi brethren have caused, none of those scam artists were the cause of the crisis that brought the financial system to the brink. If anything, it was the financial crisis that helped flush out Madoff and his scurrilous ilk, as many investors rushed for the exits at the same time.

So that’s why Congress needs to act quickly to get up and running a bipartisan commission to study the underlying causes of the financial crisis. House Speaker Nancy Pelosi likens this new 10-member panel to the Pecora Commission, the famous Depression-era investigative committee that led to passage of Glass-Steagall — the 1933 law that drove a wall between commercial and investment banking.

The 1999 repeal of Glass-Steagall contributed mightily to the current crisis by opening the door to an anything-goes mentality on Wall Street and allowing far too many banks to become too big to fail.

This new commission, armed with the power to subpoena witnesses and documents, is meant to investigate all aspects of the crisis, including regulatory lapses, Wall Street excesses and deceptive behavior by lenders and securities traders.

A first order of business for the commission should be looking at the Federal Reserve’s dereliction of duty for missing the warning signs of trouble. Congress can’t consider acting on the Obama administration’s proposal to upgrade the Fed’s status to supreme financial regulator before there’s a full accounting of its missteps.

But there are already worrying signs that this commission will lack the political nerve to tackle the tough issues, let alone ask the right questions.

Reuters reported last week that some of the people being considered for the commission include many former Congressmen, governors and familiar talking heads from Washington think tanks. Let’s hope that will not be the case because the financial system can’t truly be fixed until there’s a candid assessment of who let things get so out of control.

Sure, put some wise political statesmen on the commission. But also allow room for some longtime Wall Street critics, derivatives traders and hedge fund managers — the kind of people who know the system from the inside out.

Maybe, even include one or two people who were sharp enough to stay away from Bernie Madoff.

Investing in Goldman Sachs still requires a leap of faith in the investment firm's ability to out-trade, out-wit and out-muscle everyone else on Wall Street.

Sure, the bulls will say that with fewer competitors and with the Federal Reserve keeping bank borrowing costs near zero, Goldman's traders should be able to print money. But here's the thing: The post-federal bailout version of Goldman is as much of an investing riddle as the pre-crisis Goldman that many critics called a giant hedge fund or an inscrutable black box.

Even after becoming a bank holding company last fall, Goldman still doesn't make it easy for investors to get their arms around all the firm's many moving pieces. Trying to get a clear picture of how Goldman makes all that money and where the risks to its profitability may be lurking is like embarking on a treasure hunt with a ripped map.

Here's an example. Go to the section of Goldman's most recent 10-K where there is a list of the firm's "significant subsidiaries." There you'll find the names of some 115 companies and where each was incorporated.

That may sound like a lot, but that figure just scratches the surface. In all, Goldman has more than 800 subsidiaries operating around the globe. But Goldman never discloses the identities of the vast majority of those subsidiaries anywhere in its annual report.

Now technically, Goldman, which declined to comment, doesn't have to disclose information about so-called insignificant subsidiaries. Securities and Exchange Commission regulations, relying on a complicated formula, only require companies to disclose the identities of subsidiaries that account for a "significant" percentage of a company's income. But not all financial firms play it so close to the vest. Morgan Stanley, for instance, lists the names of every single one of its 1,300 subsidiaries in its 10-K. The list is so long it takes up 26 pages.

Actually, there is a place to find a more detailed list of all of Goldman's subsidiaries and that's in the regulatory filings for its small insurance firm, Commonwealth Annuity and Life Insurance Company.

Here's a case where regulatory arbitrage actually works to the benefit of investors, since insurers are statutorily required to provide periodically a fuller accounting of a parent company's subsidiaries. It's in those SEC regulatory filings for Commonwealth, that Goldman also has to provide a brief description for everyone of its more insignificant subsidiaries. It's worth a look.

Let's just focus on one subsidiary that Goldman deems insignificant -- Archon Group. This Dallas-based real estate investment and management firm employs some 2,000 people worldwide, or more than 4 percent of Goldman's entire workforce.

Archon almost never gets mentioned in any Goldman regulatory filings, but it's a critical actor in the investment firm's many real estate ventures. Archon manages and helps buy and sell commercial and residential properties for Goldman's Whitehall Street Real Estate funds, a series of well-known investment funds for which Goldman has raised some $31 billion since 1991.

But there's much more that Archon does. The Dallas firm is the parent of Avelo Mortgage, a Goldman subsidiary that was a onetime originator and servicer of more than $10 billion in home loans -- many of them of the subprime variety. Archon, according to its website, manages "approximately 25,000 apartment units ... 1,500 hotel rooms and more than 1,200 acres of land."

Want an Archon/Goldman apartment in Oceanside, California? No problem. There are some three bedroom apartments currently available at the Missions at Rancho Del Oro luxury housing complex.

None of this is to say that Goldman is doing anything wrong by not including Archon on its list of "significant subsidiaries." The company apparently doesn't meet that legal description because it invests little of its own capital and makes most investment decisions under the direction of its Goldman masters. A top executive at Archon can make a good living. But it's not the path to becoming a managing director at Goldman.

Still, outside of the real estate world, few have ever heard of Archon. And that's a shame. Maybe if investors and financial analysts were more aware of Archon, there'd be a better understanding today of why Goldman still classifies some $59 billion in assets -- many of them real estate-related -- as untradeable and all but impossible to price Level 3 assets.

It's likely that some of the "real estate fund investments" and "less liquid mortgage whole loans and securities" that Goldman labels Level 3 were either acquired, managed or serviced by Archon.

And this is part of the broader problem with understanding complex financial companies like Goldman -- there's so much hidden from plain view that investors can never really know all the risks. Sometimes, it's the seemingly most insignificant things that can end up making all the difference.

The big winner in the Obama administration's financial regulatory reform package is the beaten-up hedge fund industry.

Hedge funds get a particularly "light touch'' when it comes to government oversight in the Obama plan. Essentially, the administration is calling for a reinstatment of a Securities and Exchange Commisison rules that requires managers to register with the agency as investment advisors.  The rule was overturned by the federal courts, but many large hedge funds remained registered with the SEC--even though they weren't required to do so.

The registration requirement would give the SEC the authority to conduct periodic inspections and require hedge funds to report information on trading positions. But the information reported by the hedge fund would remain confidential and not shared with the general public.

Some in the $1.1 trillion hedge fund industry feared managers might be required to publicly report "short'' positions on stocks. But there's nothing of the sort in the administration's proposal.

In short, the registration requirement is no big deal and don't expect much squawking from the hedge fund industry. Obama gave them a great a big kiss.

You have to marvel at the seemingly Midas touch of Larry Fink.

The BlackRock Inc. chief executive avoided taking over the helm of Merrill Lynch -- something John Thain probably wishes he had done. Fink's firm emerged from the financial crisis as the Federal Reserve's favorite private money manager, with BlackRock getting the lion's share of the government's work for managing troubled assets. And the $13 billion deal Fink just reached with Barclays Global Investors has turned BlackRock into the outright titan of the asset management world with $2.7 trillion in other peoples' money under management.

It's often been said Jamie Dimon is the new king of Wall Street. But one can argue that the 56-year-old Fink, who started BlackRock as a small bond investment shop two decades ago, can also rightfully lay claim to that honor. Even as the Obama administration is about to announce its plan for managing so-called "too big to fail" financial institutions, Fink's BlackRock is getting bigger and more consequential than ever.

The deal puts BlackRock's fingers firmly into every significant asset class-corporate bonds, mortgage-backed securities, mutual funds, stocks, cash, hedge funds and now the ever popular exchange traded funds -- a stock index-like security. Barclays now joins Bank of America and PNC Financial in having major equity stakes in BlackRock and a vested interest in the money manager's long-term health.

The danger, of course, in creating a money management firm the size of BlackRock is that it puts a lot of people's retirements at risk if the firm were to collapse, or its investment funds were to implode. To put BlackRock's size in perspective, it's now bigger than the combined assets managed by mutual fund giant Fidelity Investments and the entire hedge fund industry.

Wall Street historian Charles Geisst says money managers traditionally have not posed the same kind of risk to the financial system as a commercial bank or investment. But Geisst worries whether Wall Street is laying the groundwork for a new kind of systemic risk, if the BlackRock deal with Barclays encourages a consolidation of too much pension and retirement money into the hands of just a few players. "We could have big problems with these huge asset managers down the road," he says.

To be sure, BlackRock is not too big to fail in the way that phrase came to be used during the current crisis. The firm is not a primary lender to other institutions and BlackRock is not widely leveraging its own balance sheet to fund its operations. The firm has just $1 billion in debt on its balance sheet. More significant, the investments that BlackRock manages aren't insured by the federal government -- so a collapse of its many investment vehicles wouldn't require any direct payout by taxpayers. And it's hard to imagine all of BlackRock's many funds going south at the same time.

Still, it's worth remembering that no money manager always has the golden touch. Consider the case of Anthracite Capital, a commercial mortgage-focused real estate investment trust (REIT) that is teetering, and which long has been tied to both Fink and BlackRock.

Last year, Anthracite shelled-out about $24 million in management fees to BlackRock. In March, Anthracite's auditors officially voiced doubt about Anthracite's ability to survive as a "going concern", although it has since renegotiated some of its credit lines. The shares are trading around 80 cents -- down from $8 a year ago. Anthracite hasn't paid a dividend to most shareholders since the end of 2008.

Anthracite, meanwhile, owes its very existence to BlackRock. Back when BlackRock was still a subsidiary of PNC, it took Anthracite public in 1998 with Fink as the REIT's first chairman. Trying to decipher the many related party transactions between the two firms is enough to give you a headache. But suffice to say, the connections between the two financial firms are substantial.

Over the years, BlackRock has relied on Anthracite to provide $150 million in equity capital for two separate real estate funds Fink's firm manages, and BlackRock also is one of the REIT's main financiers.

Now if Anthracite were to go bust, the impact on BlackRock wouldn't be immense. (BlackRock declined to comment.) But the firm would be forced to take a write-down on the lost management fees, its remaining equity stake in Anthracite and the roughly $30 million in loans it has extended to Anthracite.

But the more significant impact might be to Fink's reputation. For Anthracite's collapse could come just as he is reaching for his share of the Wall Street crown.

– Matthew Goldstein is a Reuters columnist. The views expressed are his own –

Many critics of the Securities and Exchange Commission point to Christopher Cox’s appointment as chairman in August 2005 as the day the wheels came off Wall Street’s top cop.

But in some ways, the SEC began to veer off course a few months earlier, when the agency moved its Washington headquarters into a sparkling new office building that would make even a corporate law firm jealous.

The plush environs made it all too comfortable for lawyers and investigators and discouraged them from venturing out to discover what the Wall Street banks were doing with all that leverage or sniffing out what Bernie Madoff and R. Allen Stanford were really up to.

As she fights to keep Congress from diminishing her agency’s mandate, Mary Schapiro, the commission’s chairwoman, vows to put an end to the regulatory lethargy. Schapiro, according to The Wall Street Journal, recently told some of her senior lawyers, “We need to demonstrate that we’re going to make changes.”

That’s great news. Here are five things Schaprio can do right away to dust the cobwebs off and get the 75-year-old agency back into the business of protecting investors.

1) Transfer scores of lawyers and investigators from the Washington office to the agency’s 11 regional offices. Roughly 60 percent of some 3,500 employees work in the headquarters.

Now to be fair, only 500 of those 2,100 workers in Washington are directly involved in either enforcement work or regulatory oversight.

But that’s probably several hundred employees too many. The SEC would be better off with more eyes and ears on the ground in the regional offices-which would allow for more direct oversight of public companies and brokerage firms.

2) Open more regional offices. Moving lawyers and investigators out of the home office would make it easier for Schapiro to open more regional offices, enabling the agency to better protect the investing public.

It’s crazy that the SEC doesn’t have a regional office in Charlotte, N.C., which is home to Bank of America, the nation’s largest lender by assets. Even after Wells Fargo’s acquisition of Wachovia, Charlotte will remain a major banking hub.

The SEC needs to be there on the ground. Opening a regional office in Phoenix, one of the fastest-growing cities and home to many retirees, makes a lot of sense. For that matter, Las Vegas is a natural place too. After all, retirees are prime target for investment scams.

3) Require public companies and brokerages to report prominently on their websites if they are the subject of an active SEC investigation.

It’s long been up to the discretion of public companies and Wall Street firms to disclose whether the SEC has opened a formal investigation. And many companies and brokerages, on the advice of their lawyers, don’t disclose, arguing that many regulatory inquiries never result in an enforcement action.

But this does a disservice to the investing public, especially since SEC investigations can often take years to complete. Just imagine how many investors might have been protected, if Stanford Financial had been forced to put a red flag on its website, noting the SEC was investigating its certificates of deposit business since 2005.

4) Publish meaningful investor alerts. A year ago, the SEC initiated a good investor protection program called PAUSE-a website that lists unregistered investment firms operating in the U.S. that appear to be involved in fraudulent schemes.

Never heard of it? That’s not surprising because the SEC has done a poor job of publicizing its own initiative. In fact, since the PAUSE website began in April 2008, the number of potential bad actors identified by the SEC has nearly doubled to 112 unregistered investment firms.

But the SEC has not once issued a press release announcing the addition of new name to the PAUSE list. Publishing an investor alert about PAUSE firms would not only bring attention to the good work the SEC is doing, it also makes it easier for investors to do online due diligence.

5) Think like a cop on the beat. To catch bad guys, you sometimes have to think like them. For too long the history of the SEC is that it ends up fighting yesterday’s battle.

By the time it brings a regulatory action, the Wall Street scamsters are coming up with another way to defraud investors.

Or the big Wall Street firms have dreamed up another way of slipping through the regulatory cracks and coming up with an investment product that skirts SEC oversight-think credit default swaps.

Now it may be asking too much of the SEC to stay one-step ahead of the fraudsters, the investment bankers and derivatives traders. But there’s nothing preventing them from staying current by getting out more and talking to traders, investors, hedge fund managers and the mathematicians who develop trading algorithmic formulas.

For too long, critics have joked that the SEC brings its enforcement cases after reading about them in the business press. That’s not totally fair. But if the SEC got more of its people spread across the country and started talking to investors and traders like reporters do, it might actually stop looking like it is always late to the game.

So much for more transparency in the financial system.

It's hard for regulators to demand greater transparency from Wall Street banks when they can't even live up to their own standard of greater disclosure. A case in point is the Treasury Department's press release touting its decision to permit "10 of the largest U.S. financial institutions" to begin repaying $68 billion in federal bailout money. The only trouble is Treasury doesn't name any of the banks that can begin repaying money to the Troubled Asset Relief Program.

Treasury, it appears, has left it up to each of the "10 of the largest U.S. financial institutions" to make their own announcements about their intentions to repay the TARP. And some, like Morgan Stanley, didn't waste anytime putting out a PR trumpeting its plan to repay $10 billion in TARP money.

Now it's not like this list of banks is any big secret. For weeks now, it's been well-known that Goldman Sachs, JPMorgan Chase, American Express, Bank of New York Mellon--to name a few--were itching to repay the bailout money.

But this is a question of government accountability. If Treasury has made a decision to allow banks to repay TARP, it should tell us which banks it has given the all clear to. Why should it be left up to the banks to tell us? After all, isn't it the taxpayers' money that's being passed around here.

Nor should Treasury officials pass on the names of the banks in so-called "background'' sessions with favorite reporters. The best government is one that is run in the open--not in some closed-door Washington, D.C. conference room.

This refusal on Treasury to do something as simple as print the names of the "10 of the largest U.S. financial institutions" is similar to the same kind of arrogance the NY Fed displayed during the early days of the goverment's bailout of American International Group. The NY Fed, if you recall, refused to provide a list of the banks it was buying rotting CDOs from, in order to retire some $70 billion in credit default swaps that AIG had written on those securities backed by subprime mortgages.

At the time, the NY Fed claimed if it divulged the names of the banks selling CDOs to a Fed-sponsored entity called Maiden Lane III, the financial firms might be wary of doing business with the government. That argument sounded like a bunch of  rubbish back then because the arrangement was beneficial to both the banks and AIG.

But wait a minute. Who was the president of the NY Fed when Maiden Lane III was put together. That's right Tim Geithner, the man who now runs Treasury.

It's hard to see how Geithner will have the courage to really reform the financial system when he still too willing to play footsie with Wall Street bankers and can't even do what he preaches on the need for transparency.

– Matthew Goldstein is a Reuters columnist. The views expressed are his own –

We’re not quite there yet, but hedge fund managers may soon need to start giving away toasters – or perhaps plasma TVs — to woo new investors. Forcing the funds to eat a little humble pie now would benefit hedge fund investors in the long run.

Most hedge funds are off to a decent start this year — the average return to date is 9.43 percent, says Hedge Fund Research. Yet it’s a particularly tough time for launching a new fund. In the first five months of 2009, just 40 new funds have begun reporting performance figures, BarclayHedge reports.

That’s a pittance compared with the same time last year, when 240 new funds started trading.

And investors, who were badly burned last year, seem more interested in pulling money out of hedge funds. This year the pace of redemptions is down only slightly from the fourth-quarter of 2008 — when investors pulled some $165 billion out of hedge funds.

Look for redemptions to continue well into the summer, as temporary “gates” that blocked investors from fleeing for the exits, start to get lifted at some big funds.

Sol Waksman, BarclayHedge’s president, says it will probably take “some period of sustained positive performance” before investors are willing to commit money to new funds.

But it may take more than a few “up” months for the hedge fund industry to get its mojo back.

So-called funds of hedge funds, big pools of investor capital which direct money to an array of funds, are fast disappearing.

The incredible shrinkage of funds of funds, which once accounted for 43 percent of all the money raised by hedge funds, means fewer places for managers to turn to for raising money.

Banks, meanwhile, continue to clamp down on financing for hedge funds.

After the easy credit of the last decade — when starting a hedge fund was nearly as easy as opening a lemonade stand — a period of anemic growth should be welcome.

As managers go begging for money, investors will get a lot more leverage in negotiating deals on the managers’ fees that had once been considered sacrosanct: the 2 percent asset management fee and the 20 percent cut of the profits.

Investors should also seek their freedom from capital lockup requirements. Forcing investors to lock up their money for anything longer than a quarter at a time only makes sense for strategies that take a while to generate results, such as a fund that invests in distressed assets or agitates for management shakeups.

Investors stand to gain if the great hedge fund debacle of 2008 leads to a lasting rollback in hedge fund fees and culture that has emboldened managers to do as they please.

The ouster of Bank of America's chief risk officer, Amy Woods Brinkley, should not cause anyone to shed any tears.

Even though Brinkley was one of the few top female executives working on Wall Street, her departure is well deserved and has nothing to with gender inequality in the world of finance as some might suggest.

It's all about failure, and there's been plenty of that at BofA, in light of the more than $150 billion in bailout money and loan guarantees U.S. taxpayers have had to float the nation's largest bank by assets.

Presumably, Brinkley signed off on BofA's disastrous move into collateralized debt obligation underwriting on the eve of the mortgage meltdown.

A case in point is the ill-fated $4 billion CDO that the bank packaged and sold for two Bear Stearns hedge funds a month before the funds' collapse in June 2007.

BofA lost at least $2 billion and possibly more in that transaction. Brinkley will not be missed.

But replacing Brinkley with Gregory Curl, the architect of the Merrill Lynch acquisition and a crony of CEO Kenneth Lewis, is inexplicable and gives more ammunition to bank shareholders who are agitating for the ouster of Lewis.

Robert Stickler, a bank spokesman, says people are more than free to question the promotion of Curl but to refer to him as a crony or confidant of Lewis is silly.

"This just shows how much you don't know. Greg has been Mr. Outsider at the bank for years," he said.

Curl's bona fides, if that's what you want to call them, are in deal making and commercial lending. There's not a lot of experience in risk management on his resume, even though Lewis says his man is more than up to the job because of his "natural ability to look at things, see both the upside and the potential pitfalls."

It'd be nice if Lewis told us what pitfalls Curl saw in the Merrill deal.

What BofA needs now is a seasoned, objective risk management professional. Shareholders would have been better served if Lewis went outside his banking colossus to find someone who would bring a fresh perspective on risk management to BofA.

The Wall Street Journal is reporting that the Federal Deposit Insurance Corp. is pushing for a major management, a move that could put CEO Vikram Pandit's job in jeopardy. You can't quarrel with that.

But it's move like the elevation of Curl that should prompt the FDIC to do the same at BofA.

The problem with being a private equity investor is that you're subject to long lockups for withdrawing money--sometimes up to 5 years.

That wasn't much of an issue back in the halcyon days for PE firms--say three or four years ago--when investors could regularly look forward to high double-digit rates of returns. But today those long lockups are feeling like balls-and-chains, with PE firms having to take writedowns on their portfolio investments and investors seeing returns sag. 

Of course, one way an investor can try to get out a PE fund is by selling his or her limited partnership interest at a discount in the secondary market. But the trouble with the secondary market is that a PE firm's masters must sign-off on any transfer of an ownership interest. In good times, PE firms usually don't object much. But in hard times,  the PE overlords are reluctant to approvate partnership transfers--especially if they are sold at a considerable discount.

But some clever secondary market buyers have come up with an exit strategy that essentially keeps the PE firm in the dark about their investors' intentions. In essence, what these secondary buyers do is enter into a contractual swap agreement with a PE investor looking to get out a fund. The PE investor, in return for a cash payout, agrees to transfer any economic benefit he or she gets from the fund to the secondary market buyer. The PE investors legally remain a limited partner in the fund---but in name only.

Now for obvious reasons, secondary market buyers don't like to talk about these arrangements. But they are happening with greater frequency. I've gotta say there's some poetic justice in investors getting a chance to pull the wool over the eyes of these much hyped titans of finance.

The clock is still ticking on what would appear to be an inevitable indictment for disgraced Texas financier R. Allen Stanford, the man who allegedly ran an $8 billion Ponzi scheme out of his Antigua-based bank. It appears the federal prosecutors manning the investigation are trying to make sure they have an airtight case before filing criminal charges--something Stanford and his lawyer expect will happen any day.

At first blush, it's hard to fathom why it should take this long for prosecutors to file charges, given that Stanford and two of his top associates were the subject of a civil action by the Securities and Exchange Commission nearly three months ago. One of those associates, Laura Pendergest-Holt, has even been indicted on federal obstruction of justice charges. But still nothing on Stanford.

Bryan Burroughs, in the most recent issue of Vanity Fair, does a good job detailing how just about every US investigative agency was on Stanford's tail for more than 15 years. But whether it was allegations of money laundering, or fleecing investors with the sale of dubious CDs, no one was ever able to get the goods on Stanford.

In fact, I'm told Houston and New Orleans agents from DEA and IRS even considered running an ABSCAM-style sting on Stanford in 1998. The plan called for the agencies to work together and rent a yacht and throw a party with undercover agents posing as big-time drug dealers. The agencies planned to invite Stanford and some of his cronies to the party to see if he'd be willing to do business with the drug dealers. In other words, help them hide the proceeds from their illegal trade. The sting never happened.  It's not entirely clear why.

Ironically, a year later, DEA agents in Miami would praise Stanford as being one of the good guys in agreeing to turn over money that a group of alleged drug dealers had stashed away in an account at his Antigua-based bank. Again, it's not clear if the Miami agents knew about the aborted sting the Houston agents had discussed.

Sure, a lot of the difficulty in going after Stanford stemmed from the simple fact that he kept the core of his operation in a tiny country, whose political leaders were all too cozy with the native Texan and dependent on his largess to fuel the nation's economy. But there probably also was a simple lack of will on the part of the SEC, FBI, DEA and IRS to follow things through, in part because so many of Stanford's banking customers were Latin Americans.

Or, as Burroughs describes, may be it was the aggressive lobbying by the investigative firm Kroll that tamed the authorities looking into Stanford. And, of course, don't rule out the impact of inter-agency turf battles making it difficult for anyone investigative agency to take the lead and bring Stanford to justice.

In the end, the sad part of the Stanford story will be one of missed opportunities by investigators. All those years of failing to bring a case against Stanford simply allowed him to build his empire and sell more CDs to investors wanting to believe they'd found a can't lose proposition.

It would have been nice if one of those agencies had thrown up some red flag along the way to at least warn investors to stay away.