Among them:

Can the President bring himself to state in public the obvious: The extent of political influence in the hands of our financial system – large banks in particular, but small banks also in some instances – is out of control and dangerous?  Where is the administration’s reform agenda on this crucial point?  To those of us who frequent Capitol Hill, it looks very much like business as usual, albeit with higher political market share for the big banks that remain in business.

That’s an excellent point. As TWI noted, Congress has already stalled on overhauling mortgage lending, despite the predatory practices that led to the crisis. What assurances do we have that Obama’s agenda has a chance of passage, without being totally watered down?

Here’s more:

Does he state plainly and unequivocally that the way the financial system has been run – and continues to be run – has damaged the national interest of the United States and pushed millions of people, both here and around the world, closer to poverty?

That’s a point few in Congress or the administration have addressed — the global effect of the U.S. meltdown. I doubt they’ll pick up on it at this point, however. The global poverty argument often doesn’t play all that well at home. People are more wrapped up in their own financial crises. Still, it’s worth thinking about, if only to understand the reach of this crisis and the need for reform.

And finally, there’s this concern, which I just raised:

Most important, does the President stress the need to protect consumers from the financial industry going forward, specifically with a strong Financial Products Safety Commission.  Messrs. Geithner and Summers seem, at best, lukewarm to this idea – in fact, we have no clear indication that they buy into the idea of consumer protection at all.  The President’s position on this issue will be decisive.

It’s not just making the announcement of the overhaul that’s important — it’s how, exactly, the announcement is made. Look to see whether Obama addresses these kinds of concerns, to decide how serious the administration will be about regulatory reform.

The idea has picked up steam in recent months. But the Obama administration proposal offers new details of exactly how it might work, including tackling one of the most vexing consumer problems: figuring out exactly what’s in all that paperwork at real estate closings.

The agency would have broad authority to overhaul a tangled mess of federal regulations, such as the various laws that compel lenders to give mortgage borrowers a massive stack of paperwork at closing that includes several calculations of the true cost of the loan itself.

Another idea: Making it standard practice to offer consumers a 30-year, fixed rate loan — the normal, plain vanilla mortgage. If the borrower wanted a more exotic product, such as an adjustable rate loan, they would have to opt out, signing a waiver saying they were deliberately choosing a non-standard loan.

Based on the leaked draft of the administration’s proposal obtained by The Post, all this must sound great to consumer activists, who have been pushing for more consumer protections for years. But not so fast.

While the idea sounds great on paper, the agency’s effectiveness will be determined by how much power it truly gets. Lobbyists and special interest groups will likely work hard to limit the scope of its authority. And its structure will be crucial, as well — for example, will it have the ability to approve or prohibit products before they hit the market, or will the agency have more limited recall authority, once products are on the market and run into trouble?

How much funding will the agency get? How strong will its political support be? Who will be appointed to the agency — and what interests will they represent?

These are all legitimate questions. Yes, it’s encouraging to consumer advocates to finally see a proposal like this get administration backing. But it’s only beginning. There’s still a long and difficult road ahead before such an agency becomes a reality. And even then, whether such an agency makes a difference to consumers or not will depend in great measure on just how much power Congress and the administration grant it so that it can truly protect consumers.

The plan seeks to overhaul the nation’s outdated system of financial regulations. Senior officials debated using a bulldozer to clear the way for fundamental reforms but decided instead to build within the shell of the existing system, offering what amounts to an architect’s blueprint for modernizing a creaky old building.

The White House makes its case for this approach in an 85-page white paper [pdf] that describes the roots of the crisis. Gaps in regulation allowed companies to make loans many borrowers could not afford. Funding came from new kinds of investments that were poorly understood by regulators. Big firms paid employees massive bonuses, while setting aside little money to absorb potential losses.

“While this crisis had many causes, it is clear now that the government could have done more to prevent many of these problems from growing out of control and threatening the stability of our financial system,” the white paper says.

The plan is built around five key points, according to a briefing last night by senior administration officials and a copy of the white paper obtained by The Washington Post.

The proposals would greatly increase the power of the Federal Reserve, creating stronger and more consistent oversight of the largest financial firms.

It also asks Congress to authorize the government for the first time to dismantle large firms that fall into trouble, avoiding a chaotic collapse that could disrupt the economy.

Federal oversight would be extended to dark corners of the financial markets, imposing new rules on trading in complex derivatives and securities built from mortgage loans.

The government would create a new agency to protect consumers of mortgages, credit cards and other financial products.

And the administration would increase its coordination with other nations to prevent businesses from migrating to less regulated venues.

According to The Post, the plan calls for the creation of a Consumer Financial Protection agency to oversee mortgage lenders and protect borrowers, greatly expanded powers for the Federal Reserve to regulate large institutions whose collapse could pose a systemic risk to financial markets, and the merging of the troubled Office of Thrift Supervision and the Comptroller of the Currency to “to create a single agency to oversee banks with national charters.”

President Obama is expected officially announce the proposal later today, and Treasury Secretary Timothy Geithner is set to discuss the plan before the banking committees in both the House and Senate tomorrow.

Of the opportunities for tomfoolery available, the one that generated the most hand-wringing was the prospect for self-dealing. It was felt that banks might submit a small portfolio of assets for auction, while also signing up to join a bidding partnership. A bank could then bid up the price of its own assets using the government subsidy as support. This would help the bank in two ways. The government subsidy would allow the bank to overpay for assets and still have the opportunity to enjoy a gain on the portfolio, and the high price established for the loans would extend to all similar assets on the bank’s balance sheet, making it look much stronger financially than it actually is.

Yesterday, The Wall Street Journal reported that banks were basically asking for the explicit ability to do this, as a condition for them to participate in the program at all. This led The New Republic’s Noam Scheiber to ask whether PPIP was actually necessary at all. According to a story in The Journal today, a growing number of people in Washington are concluding that no, it really isn’t.

I am very much inclined to agree. The world has changed quite a bit since the plan was introduced. Markets have risen, making it easier for banks to raise private capital, and the results of the stress test seem to have been broadly accepted. In this climate, many of the healthier banks seem to be able to recapitalize themselves privately. Devoting TARP resources to such banks would be a poor use of increasingly scarce funds — essentially, government handouts to firms that no longer need the help.

Instead, it seems like a better idea to hold those funds in reserve, to be used if the more troubled banks, like Bank of America or Citigroup, cannot find their way out of their messes without additional support. While $100 billion would not be sufficient to shore up the banking system as a whole without a lot of FDIC-facilitated leverage, $100 billion is enough to stabilize one or two large banks. Having come this far in improving faith in the banking system and bolstering confidence in the leadership at the Treasury department, it seems unnecessarily risky to try and move forward with the opaque and uncertain PPIP auctions. Time to consign that particular policy to the scrap heap.

That’s perhaps the boldest declaration in the joint statement from G-20 world leaders meeting today in London.

The communiqué, which pledges $1.1 trillion in global stimulus spending and tighter supervision and regulation of the global economy, did not commit the leaders to another round of stimulus spending as President Obama wanted, nor cross-border financial regulation as Germany and France hoped.

But it does announce a new tool of transparency: the formal blacklisting of tax haven countries that have not agreed to international information sharing agreements. Fast money operations like  AIG haved use these countries to claim they don’t have to pay  U.S. taxes. Estimates of lost tax revenue range from $40 billion to $123 billion annually, according to recent Treasury Department study cited by The Wall Street Journal. The communique strengthens Obama’s efforts get capture these revenues to pay for his ambitious domestic agenda.

U.S. Federal Reserve Headquarters (Flickr: NCinDC)

The complex structure of modern capital markets is increasingly the cause of financial crises. External shocks like a decline in housing prices are intensified as they move through the convoluted chains of dealings that link market participants. Concentration of trading among a small group of dealers only heightens the many risks.

In hindsight, the Federal Reserve’s decision not to bail out Lehman Bros. was a major miscalculation that helped generate the wave of financial anxiety, distrust and uncertainty that doomed American International Group and other institutions. It also helped freeze up credit markets that are only now beginning to thaw. If government overseers had shown greater appreciation and knowledge of the plumbing of the financial system they regulate, some form of Lehman might still be around.

Illustration by: Matt Mahurin

In any case, central bankers and finance ministers frequently act like Pritzker Prize-winning architects charged with trying to unstop clogged plumbing. As a result, they find, as Woody Allen described: “Not only is there no god, but try getting a plumber on weekends.”

In fairness, even experienced professionals struggle to understand the structure of modern markets. One is Jeremy Grantham, chairman of GMO. He recently rated his knowledge of the markets this way: “I want to emphasize how little I understand all of the intricate workings of the global financial system. I hope that someone else gets it, because I don’t. … It is just so intricate that all I can conclude, by instinct and by reading the history books, is that it will be longer, harder and more complicated than we expect [to solve the financial crisis].”

One consequence of the system’s complexity and interconnectedness is that it is difficult to analyze the solvency of financial institutions. The speed with which liquidity and access to funding can evaporate — as with the Dutch bank, Fortis — renders financial statements virtually meaningless.

Agreements governing a firm’s ties to other financial companies also increasingly affect perceptions of its solvency. For example, the downgrade of AIG to below an “AA” credit rating triggered margin calls in excess of $10 billion from the company’s lenders. It also gave AIG’s outside trading parties the right to terminate certain contracts, triggering losses of $4 billion to $5 billion. AIG did not have the resources to meet its obligations — and the government had to step in and bail out the world’s largest insurer.

How a company’s financial distress will affect the overall system can depend on how it is restructured. In the case of Lehman, it was the holding company that filed for bankruptcy protection. The investment bank’s other businesses continued to run. That means financial institutions doing business with Lehman were differently affected by its collapse.

The effects of the demise of Washington Mutual, the largest bank failure in U.S. history, were different. The Federal Deposit Insurance Corp. seized the Seattle thrift following a wave of deposit withdrawals. J.P. Morgan Chase subsequently agreed to acquire WaMu’s banking operations and assume its loan portfolio in a $1.9 billion deal engineered by the government regulator. WaMu’s customers were largely unaffected.

Lehman Bros., New York (Flickr: James Chen)

What’s predictable when financial institutions fail is that investors lose money. With Lehman, unlucky creditors included banks on every continent that had bought Lehman securities and bonds. Because J.P. Morgan did not assume WaMu’s senior unsecured debt, subordinated debt and preferred stock, investors in those financial instruments lost out.

Those losses can be steep. Market estimates of how much Lehman’s debt is worth range from 10 cents to 15 cents on the dollar — a potential loss to investors of 85 percent to 90 percent. In general, recovery rates will be determined by the nature of the assets that Lehman’s counterparties hold — private equity stakes, principal investments, hedge-fund equity, complex slices of risk in structured financial instruments and derivatives. The difficulty in valuing these assets — and the illiquidity of others — may exacerbate investor losses.

One way to examine the complexity of today’s financial plumbing is to focus on a Chapter 11 bankruptcy filing. When a firm files for bankruptcy, all contracts that it has had with trading partners — and the number can be huge — would usually terminate. Lehman reportedly had about 2 million open contracts.

Add to the sheer number of contracts the possibility of incomplete documentation, or plain error. Then throw in operational risks and problems of logistics.

All this triggers a complex chain of events.

The net value of an individual financial contract between a counterparty and a distressed firm may be settled if the contract specifies the amount. If it is the counterparty that owes the amount, it must pay it to the bankruptcy trustee. This means an immediate — and possibly large — cash outlay for the non-defaulting party. If the distressed firm owes the amount, then the counterparty must supply documentary proof to the bankruptcy trustee and await payment.

If the counterparty holds collateral to secure its exposure, then the collateral must be sold to cover the amount due.

If the contract was used as a hedge, its termination exposes the counterparty to its underlying risk. The counterparty must then enter into new contracts to re-hedge itself to avoid additional risk. In general, hedging must be done on a contract-by-contract basis, with limited scope for retrieving net value.

Because this process is complex and time-consuming, the amount of losses sustained may not be certain for some time.

The Chapter 11 filing may also trigger contracts concerning the firm itself. For example, Lehman’s bankruptcy filing would have required settlement of credit default swap contracts that, in effect, insured some of the investment bank’s debt. If a Lehman counterparty held these contracts as hedges, they would ease its losses. In all cases, settlements would create potential losses and claims on available liquidity and funding. Settlement of credit default swaps on Lehman’s debt, for example, came to about $365 billion.

A firm’s bankruptcy affects other parties through “contagion.” Counterparties that had dealings with the distressed firm either face losses or suffer cash outflows as they meet termination payments. They may face additional losses on sales of collateral or from re-hedging positions. These losses affect their credit quality, possibly leading to a fall in their share prices and increases in their borrowing costs. If credit ratings are affected, margin calls may be the result, further threatening solvency.

The overall market is also affected. Greater volatility in asset prices may reflect liquidation of positions, re-hedging activity and sales of collateral. Trading liquidity falls as the number of counterparties drops. Credit becomes scarce, limiting firms’ ability to deal with each other.

Uncertainty over the fallout of a company going under can cause trading in the inter-bank lending market to freeze up. That, in turn, further increases volatility and exposes weaker firms to failure.

Bankruptcy proceedings inevitably accelerate the need to deal with assets that are difficult to value or are illiquid. In resolving the matter, trustees and administrators, acting in the best interest of creditors, can adversely affect the overall market.

And because bankruptcy law is jurisdiction-specific, different sets of trustees and administrators have to grapple with how to best manage the assets of a firm to settle with its creditors. In the case of Lehman, there are already disputes about transfers, totalling $8 billion, made between the investment bank’s London office and those in the United States.

They may also differ in their approaches to dealing with assets. The U.S. trustee in the Lehman bankruptcy indicated that “time was of essence” in dealing with the bank’s assets. In contrast, the British administrator anticipated a long drawn-out affair. All this creates uncertainty about the effect of Lehman’s demise on its creditors and the overall market.

Assets held in a fiduciary capacity can become entangled in this mess. Where Lehman acted as their prime broker, hedge funds and other asset managers face potentially lengthy delays in recovering their investment. About $45 billion in assets, and $20 billion in short positions, are affected. Here’s another problem: Though unable to deal with their assets, legal owners may face margin calls if the value of their positions deteriorates.

A bankruptcy filing can thus reveal the complex networks that tie together all participants in modern financial markets. The chains of risk can spread problems from distressed financial institutions to weak ones, and can ultimately affect even strong firms seemingly remote from the problem.

Assume Bank A, a sound financial institution, has large hedges with Bank B, another sound institution. If a counterparty to Bank B has difficulties, its resulting losses may imperil Bank B, which, in turn, might affect Bank A.

The risk spreads through direct losses, liquidity calls, funding problems or uncertainty. Confidence in the financial system is undermined and financial transactions grind to a halt. It’s a contagion that resembles a hungry wolf pack systematically hunting down the weakest prey in a herd.

Understanding the financial system’s detailed connections, while unglamorous, is the key to anticipating the evolution of a crisis and preventing further exposure to events. It is also where long-term reform efforts should be directed.

John W. Gardner once observed: “The society which scorns excellence in plumbing as a humble activity and tolerates shoddiness in philosophy because it is an exalted activity will have neither good plumbing nor good philosophy: neither its pipes nor its theories will hold water.”

Shoddy monetary philosophies caused the financial crisis. Now inadequate plumbing of the global financial system is greatly increasing its risks.

Satyajit Das is a risk consultant and author of “Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives.”

At the time of publication the author or his firm did not own any direct investments in securities mentioned in this article although he may be an owner indirectly as an investor in a fund.

New money, as in, additional to the $700 billion already appropriated by Congress to bailout failing Wall Street firms.

From ABC:

Asked if his mortgage plan would be “new money or part of the $700 billion” already appropriated by Congress for the Wall Street bailout, McCain said, “part of the $700 billion, new money, if necessary.”

“Look,” he continued, “in one day they wiped out $1.2 trillion when it dropped 700 points. And I’m not throwing this money around lightly. But if the housing values continue to go down, there’s no floor. There’s no turnaround here. We all know what was the catalyst for this catastrophe. And that was Fannie and Freddie.”

McCain’s plan, announced Tuesday at the presidential debate in Nashville, has come under criticism for putting taxpayers on the hook for bad loans made by banks.

However, The Atlantic’s Marc Ambinder raises the possibility that the plan may already be illegal:

Folks who are much more savvy on the specifics of the Troubled Asset Relief Program (TARP) wonder whether the government’s $700 billion bailout/rescue program expressly prohibits what John McCain now says he wants to do — and that is to have the government buy distressed mortgages at face value from banks and renegotiate their terms with homeowners.

They point me to Section 101e of the law, which requires the Secretary of the Treasury to “take such steps as may be necessary to prevent unjust enrichment of financial institutions participating in a program established under this section”

Here’s the key part…

… “including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset.” Any loan that is not held by the originator, and the vast majority loans are not, would fall under this provision.”

So — if the bank gave you a 100 dollar loan…. and sold it for 80 bucks last year, and it’s trading at 50 dollars now, the law prohibits the government from buying it at $100 — face value — because that would “unjustly enrich” the entity which purchased the mortgage from the bank.

Under TARP, the government wouldn’t be able to buy it for more than $80… which isn’t face value.

So if they buy it at face value, wouldn’t they violate the law?

If this is the case, it could be back to the economic drawing board for McCain. It’s no secret the financial crisis is killing him in the polls.

If the “William Ayers”-strategy of diverting attention from the nation’s economic woes turns out to be the non-starter that it appears to be, McCain has 25 days and counting to start connecting with voters on the issues that really matter to them — like remaining their homes and being able to retire.

If he can’t do that, he can probably kiss the presidency good-bye.

Sec. Henry Paulson (WDCpix)

The ‘clean’ bailout bill that Treasury Secretary Henry Paulson Jr. sent to Congress over the weekend, is anything but ‘clean.’ It would allow the Treasury to pay up to $700 billion for whatever “troubled assets” — in the bill’s first draft “mortgage-related assets” — from whatever banks at whatever price it sees fit. And it has to be passed by Friday or the world will end. The truth is that it will make an unholy mess even worse.

In any case, the hopes for a ‘clean’ bill were gone by Monday morning, and it wasn’t because congressional Democrats were lining up to put in sweetheart provisions. Wall Street’s suits smell a goldmine and are clamoring for position to get the hundreds of millions in fees at stake. Even foreign banks – and foreign finance ministers – are lobbying hard to be part of the bailout. It could be another Marshall Plan

Illustration by: Matt Mahurin

Paulson, or course, will be out of office in a few months, and can walk away a hero to Wall Street. But the rest of us will have to clean up the mess.

Let’s take a deep breath. This $700 billion would cover at least three million homes, plus thousands of commercial developments. All of them, presumably, in various stages of delinquency or default.

Who sets the prices that the Treasury pays for this toxic brew?

Most banks are carrying their residential mortgage paper at something like 65 cents on the dollar. But when Merrill Lynch recently decided to sell off a big chunk of “super senior” triple-A rated mortgage-backed assets — like the ones the Treasury is planning to buy, it got 22 cents on the dollar. And Merrill had to provide 75 percent financing on a non-recourse basis. In other words, the real price was about a nickel on the dollar.

What army of collection and administrative agents will the Treasury hire? (Listen to the chorus of ‘Me!, Me! Me!’ coming from Wall Street.) Which mortgages will it forgive, which ones foreclose?

When the Resolution Trust Corp. took over the commercial mortgages inherited from the savings and loan crash of the 1980s, the administration was an utter horror. I once tried to work through the cost of the operation, but was told that the records were such a mess that it wasn’t possible.

The RTC decided – quite sensibly – just to dump everything, bundling it up into giant pools and selling it to vulture funds. The Bass Bros., KKR, Ronald Perelman, all jumped in, making profits of 100 percent or more a year.

If Paulson really wants a clean bill, the Treasury can just create a $700-billion, U.S. government-owned “sovereign wealth fund” to invest in troubled banks at market prices. A sophisticated board of ex-bankers and accountants could oversee the pricing of individual deals. The equity could even be contributed to the Social Security Trust Funds, under supervision of an investment panel, perhaps with reasonable rules regarding buy-backs or other dispositions.

That will re-liquefy the financial system, while leaving each bank to manage down its own bad assets as it sees fit. No huge transfer of assets, no windfall rake-offs for the bad guys, no administrative scandals. That is the definition of a “clean” bill.

Update: The original version of this story was updated to note a new draft of the bailout bill has circulated.

Charles R. Morris, a lawyer and former banker, is the author of “The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash.” His other books include “The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould and J.P. Morgan Invented the American Supereconomy” and “Money, Greed, and Risk: Why Financial Crises and Crashes Happen.”