So what's the next step? According to the Reuters story, "Rakoff directed the parties to prepare for a possible trial that would begin no later than February 1, 2010."

That doesn't mean there will be a trial. The parties could come back with a settlement more to Rakoff's liking.

But presumably that would have to involve naming names. Who were the executives responsible for misleading shareholders? B of A has refused to answer that question and the SEC seems to think it doesn't have the leverage to force it out of them.

I'm happy to see this development. I'm on-record saying the SEC should pick more fights. The truth of the matter is that we need more accountability at the top. The point behind Sarbanes-Oxley, for instance, was that executives would take more responsibility for their misdeeds, in this case Ken Lewis and John Thain.

Too often, "The Corporation" gets the blame and pays the fine. But that isn't justice, nor does it deter bad behavior.

(Here's the PDF of Rakoff's full order)

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.

The first 100 days demand that President Barack Obama sort out his priorities and choose the ones that will help solve many others. With many constituencies and direct reports clamoring for his time and attention, he cannot attend to them all.  He has to decide which of the many complex and urgent issues that have accumulated must be resolved first.

The new president will inevitably be pushed to spend a huge amount of time on foreign policy.  But I suggest that the president’s top priority should be to get the nation out of this economic and psychological funk.  He has selected some very capable people who will help sort out the economic mess. He made a brilliant move to have Paul Volcker in the White House.

But ensuring that various parts of the U.S. economy work together and with the rest of the global economy will take a significant amount of President Obama’s personal time and leadership. I have seen in my work with corporations that the best leaders are hands-on when it comes to making sure their top people coordinate their efforts.  The new president will have to do the same with the secretary of Treasury, Federal Reserve chair, SEC chair, and other relevant government leaders. Each of these experts sees the situation through the lens of his or her expertise.

The president must ensure that their perspectives are integrated.  He must provide the oversight to ensure that they communicate frequently and resolve any conflicts that arise to create cogent, urgent solutions to get the economy going.

The president also needs the common sense perspective of people who spend their lives dealing with the issues of falling demand, global trade, inflation, deflation, and layoffs.  He needs a way to gather “ground-level intelligence” from the business side. He should create a small group of perhaps ten active business leaders to periodically meet with him.

This country has many smart, thoughtful people doing their best to keep their companies going.  Communicating with them frequently will help the president grasp the depth and scope of the shifting economic problems better—and sooner—than hundred-page documents and statistical reports.

This group can help generate new solutions and provide insights into the practicality of solutions being proposed. They can help anticipate the second- and third-order consequences of proposed actions. The leaders must, of course, be carefully chosen so they don’t promote their self-interest; there is no room for PR grandstanding.  I have no doubt that there is an ample supply of business leaders who would donate their time to help get the nation back on track.

The aim should be to find a simple solution to the core problem rather than a comprehensive solution to all the problems created by the domino effect. Solving the problem of toxic assets that have gummed up the flow of money, for example, will have many positive ripple effects.

Here is one possible solution: Announce a program that converts all subprime nonperforming loans as of a particular date (say, February 1) to performing loans by having the Treasury make the mortgage payments for the next five years. As the banks become profitable, they will pay 25 percent of their profits to reimburse the Treasury. External audit firms can provide a check on which loans qualify.

Stemming the tide of foreclosures will turn the psychology of most Americans, who are anxious about their jobs and homes, and open the clogged transactions of CDOs and other derivatives that are based on the original mortgage loans.  Thus multiple problems are resolved by targeting the right one.  My discussions with bankers indicate that this solution is do-able.

Choosing the right priorities is essential.  Addressing them with realism, tempered with optimism, will enhance President Obama’s credibility, and, more importantly, build our future.

With Congress now probing the Bernard Madoff case, some claim the SEC missed the risk because of under staffing. Even if that’s an issue, one SEC enforcement officer using basic risk-management skills, asking probing questions, searching for clear answers, and exercising timely follow up could have helped in detecting this fraud before it grew to such a staggering size.

The central flaw at the SEC is that its current oversight approach is not sufficiently risk focused. Moreover, any changes in approach have tended to be in response to a specific event instead of incorporating an overall risk-based approach across all areas under their regulatory purview.

The SEC is responsible for overseeing registered broker-dealers, transfer agents, clearing agencies, investment companies and investment advisers, yet there is not a consistent risk approach used in all of these examinations. For example, in 2003, after widespread unlawful trading practices surfaced in the mutual fund industry, the SEC took steps to take a more risk-based approach.

Yet these higher examination standards were not viewed important enough to be applied to investment advisers such as Bernard Madoff. The weakness in the SEC’s existing examination approach can be best highlighted by the fact that, in the last 16 years, while Madoff’s firm was investigated 8 times, no fraudulent activities were ever uncovered.

As part of their broad regulatory mandate, the SEC is responsible for overseeing over 10,000 investment advisers. This agency needs to adopt a “where there is smoke there is fire” approach. The SEC must become risk focused in the scope and frequency of its monitoring and surveillance operations. Given the significant number of investment advisers, even if we assume that 99 percent are low risk, that still leaves 100 that need to be closely monitored and scrutinized.

The SEC should keep a detailed list of the top risky investment advisers and use it to prioritize and set review frequency. Currently, there is no clear indication that the SEC links review frequency or scope of exam with level of perceived riskiness. Former SEC Chairman Arthur Levitt recently indicated that only 10 percent of investment advisers are examined every three years. A wealth of new fraud can be dreamed up, hatched, and perpetrated at such firms in the interim.

Instead, the SEC must develop a stronger risk filter that will quickly flag investment advisers which exhibit higher risk characteristics. Such red flags should center on corporate governance issues such as level of independence and checks and balances. For example, does the investment adviser clear its own trades or do they use an independent third-party? Who is this third-party? Are they well known and do they have a good reputation? Who is the accountant for the investment adviser and what is their reputation and size?

Other warning indicators can come in the form of formal as well as informal complaints. What is the nature and frequency of such complaints and is a particular firm being consistently implicated?

Importantly, the SEC needs to develop a better “whistleblower” framework so it can quickly identify and respond to such complaints. If managed properly, the thousands of e-mails the SEC gets annually can be a powerful risk management tool to identify and respond to potential risk.

The SEC maintains a website to collect complaints and tips. However, the fact that whistleblower tips about Mr. Madoff’s firm were received as far back as 1999 and yet they were never fully vetted speaks to the weakness in the SEC’s risk filtering and response system. The SEC must be able to quickly sort through creditable allegations. Once such allegations have been identified, they must be prioritized, investigated and resolution reached in a timely manner.

Internally, the SEC should revise policy and include a clear action plan, process, and timeframe to address whistleblower complaints and tips. This would establish immediate accountability. To further encourage SEC investigators to comply with new response policy, standards must be directly linked to annual employee performance reviews.

In 1920, long before the SEC was established, Charles Ponzi was able to keep his scam running and undetected for only eight months. Fortunately, this fraud quickly unraveled when local media began to raise and followed up on some basic risk-related questions. The Madoff case and the failure of early detections is a further indication that the SEC should move to a more risk-focused approach.

Doing so, when coupled with timely follow up and consistent risk-based examination practices will help restore market confidence that the SEC can and will protect us against investment fraud.