This week, Rep. Barney Frank (D-Mass.), the House Financial Services chairman whose systemic-risk legislation includes the after-the-fact fees urged by Geithner, says he’s now leaning toward the Bair plan. Indeed, The Wall Street Journal reports today that “a Frank aide on Friday said he now favors amending the measure to create a prepaid fund.”

There will be plenty of time to make the changes. Frank’s committee will meet tomorrow to begin marking up the bill, with debate on amendments not expected until Thursday, the Journal reports. No doubt some lawmakers are drooling at the chance to tweak the bill.

Cantwell ripped into the financial reforms put forth by Geithner and the Obama administration as “appalling” for including alleged loopholes and exemptions for large financial institutions in legislation overhauling the regulatory framework for the nation’s top firms.

“I’m not sure,” Cantwell said during an appearance on MSNBC this morning when asked by host Dylan Ratigan why Geithner still has a job.

And yesterday on NBC’s “Meet the Press:”

“What the Treasury secretary basically said was that, yes, banks should take more risks and we should continue the loopholes,” she said. “And that’s really appalling because right now, we know that lack of transparency has caused this problem with the U.S. economy, and Wall Street is continuing, one year later, with the same loopholes.”

It won’t be easy for the Obama administration to push through legislation if it can’t even convince its own party to support it.

The Treasury Secretary went on to say that the what’s being requested is merely “the authority to wind them [failed companies] down.”

What he didn’t mention is that the winding down will require taxpayer dollars, at least in the early phases of a takeover.Those losses are designed to be recovered within 60 months by tapping shareholders and creditors, and if necessary by imposing an after-the-fact tax on other large and solvent institutions. Yet the provision also allows the government to extend that 60-month recovery window indefinitely.

“It could be 60 years,” said Rep. Brad Sherman (D-Calif.), in response to Geithner.

“Further,” Sherman said in a statement yesterday, “it is difficult to see how any tax on financial institutions would provide hundreds of Billions of revenue, which might be needed to repay a large bailout.”

House Democrats introduced legislation Tuesday granting the White House broad new authority to bail out investment houses and other non-banks when their potential collapse is a threat to the larger financial system. But while the bill goes far beyond a similar White House proposal in terms of protecting taxpayers, Rep. Brad Sherman isn’t impressed. The California Democrat, who said the White House proposal represents “TARP on steroids,” issued a statement last night claiming that the House bill is little better.

“The new resolution authority,” Sherman said, “provides permanent, unlimited bailout authority” granting “unprecedented powers for the executive to decide spending and taxes, without congressional approval.”

Under the House bill, sponsored by Financial Services Committee Chairman Barney Frank (D-Mass.), the White House would have the power to swoop in and dismantle failing Wall Street institutions in order to mitigate the negative effects on the finance system as a whole — a model designed after the authority of the Federal Deposit Insurance Corporation to intervene when commercial banks are poised to topple. To protect taxpayers, Frank’s bill attempts to force the tab ultimately on failed-company shareholders, as well as on other large Wall Street institutions that would presumably benefit from the general stability created by the government intervention.

Frank said his proposal would “ensure that the industry and shareholders absorb the risk and cost of failure, not taxpayers.”

But Sherman doesn’t see it playing out that way.

The taxpayer losses are supposed to be recovered from a new tax imposed on large and medium-large financial institutions.  The statute requires the Executive Branch to recoup taxpayer funds within 60 months, but then, allows them to extend this period for as long as they want. (§1609(o)(1)).  Further, it is difficult to see how any tax on financial institutions would provide hundreds of Billions of revenue, which might be needed to repay a large bailout.

And it’s not only trouble companies that could receive help under the House bill. Indeed, it would allow the president to loan solvent institutions unlimited funds “if necessary to prevent financial instability.”

When bailout funds are lent to a solvent financial institution under §1109, the executives and shareholders lose nothing.  Executives keep their jobs and their compensation packages; shareholders retain all their rights.  In contrast, when a troubled institution receives a bailout under §1604, some executives lose their jobs, and shareholders have to stand behind taxpayers.

That creates a moral hazard problem, Sherman argues, “allow[ing] those institutions which are clearly systematically important (the top 10 to 25) to borrow at a lower cost. This will help the largest institutions get bigger, so they can pose a greater systemic risk.”

The Financial Services Committee is holding a hearing on the bill this morning, with Treasury Secretary Tim Geithner testifying. There’s been no love lost between Sherman and Geithner in the past. Should be a good show.

The hearing, initially to be held Thursday, has not been rescheduled.

Lewis and BoA have been in hot water over their government-backed deal to acquire the failing Merrill Lynch in December. At the time of the deal, Merrill was set to pay $5.8 billion in employee bonuses — bonuses that BoA executives didn’t reveal to their shareholders, who approved the buyout.

The saga didn’t escape Democratic leaders on the House Oversight and Government Reform Committee, whose ongoing investigation of the deal has gained public prominence with several Capitol Hill hearings. Rep. Edolphus Towns (D-N.Y.), who chairs the panel, issued a statement Wednesday warning Lewis’s that the probe will continue despite the changing of the guard.

Our investigation has uncovered troubling facts about Bank of America’s acquisition of Merrill Lynch, and Mr. Lewis was at the center of this controversy. We hope that Bank of America’s new leadership will quickly repay American taxpayers and help us finally resolve unanswered questioned about this merger.

In a letter today to Federal Reserve Chairman Ben Bernanke, 10 House lawmakers are asking why Goldman — which last year converted to a bank holding company in order to tap bailout funds — is still allowed to behave largely unregulated, like the investment bank it previously was. The resulting dynamic, the lawmakers conclude, is that Goldman has been granted the best of all worlds: It’s bank status made it eligible for taxpayer-funded gifts — which it’s repaid — while a February exemption from bank regulations allowed it to invest those funds without the risk-limiting oversight of the government.

Despite its exemption from bank holding company regulations, Goldman Sachs has access to taxpayer subsidies, including FDIC-backed bonds, TARP money (since repaid), counterparty payments funneled through AIG, and an implicit backstop from the taxpayer that allowed a public equity offering in a queasy market.  The only difference between Goldman Sachs today and Goldman Sachs last year is that today, the company is officially gambling with government money.  This is the very definition of “heads we win, tails the taxpayers lose.”

To its credit, Goldman at least is being honest about its unique position. The company’s Chief Financial Officer David Viniar told Bloomberg earlier this month that, “Our model really never changed.”

“We’ve said very consistently that our business model remained the same.”

Signing the letter were Reps. Alan Grayson (D-Fla.), Ron Paul (R-Texas), Walter Jones (R-N.C.), Brad Miller (D-N.C.), Dan Lipinski (D-Ill.), Elijah Cummings (D-Md.), Tom Perriello (D-Va.), Maxine Waters (D-Calif.), Jackie Speier (D-Cal.) and Maurice Hinchey (D-N.Y.).

The six questions from the lawmakers to Bernanke follow:

1) In the letter granting a regulatory exemption to Goldman Sachs, you stated that the SEC-approved VaR models it is now using are sufficiently conservative for the transition period to bank holding company.  Please justify this statement.

2) If Goldman Sachs were required to adhere to standard Market Risk Rules imposed by the Federal Reserve on ordinary bank holding companies, how would its capital requirements differ from the current regulatory regime?

3) What is the difference in exposure to the taxpayer between these two regulatory regimes?

4) What is the difference in total risk to the portfolio between these two regulatory regimes?

5) Goldman Sachs stated that “As of June 26, 2009, total capital was $254.05 billion, consisting of $62.81 billion in total shareholders’ equity (common shareholders’ equity of $55.86 billion and preferred stock of $6.96 billion) and $191.24 billion in unsecured long-term borrowings.”  As a percentage of capital, that’s a lot of long-term unsecured debt.  Is any of this coming from the Government?  In this last quarter, how much capital has Goldman Sachs received from the Federal Reserve and other government facilities such as FDIC-guaranteed debt, either directly or indirectly?

6) Many risk-management experts, most notably best-selling author Nassim Taleb, note that VaR models can dramatically understate risk.  What is your overall view of Taleb’s argument, and of the utility of Value-at-Risk models as regulatory tools?

Yet a recent report from the congressional panel charged with overseeing the bailout program reveals that, at least in the program’s initial stages, the returns are nothing to write home about. Indeed, the July 10 assessment found that the 11 small banks that have thus far repurchased their warrants from the Treasury paid just 66 percent of the warrants’ value. (Treasury received the warrants from bailout recipients as collateral to protect taxpayers.)

If similar underpayments were made for all outstanding warrants, the oversight panel warned, taxpayers could lose out on $2.7 billion.

Those figures weren’t lost on some congressional lawmakers, who introduced legislation last week designed to maximize taxpayer profits under the Troubled Asset Relief Program. Sponsored by Rep. Mary Jo Kilroy (D-Ohio), the bill would force the Treasury to sell back all of its warrants through a public auction, rather than through the secret negotiation process currently in place.

“The banks and Treasury are negotiating the repayment of this debt behind closed doors instead of allowing trading in the open market,” Kilroy said in a statement announcing her bill. “We do not know if the current process is producing the benefits we are owed and a market-based approach would remove the secrecy and special interests and maximize the return on the taxpayers’ investment.”

The question that remains, of course, is why isn’t Treasury already doing this?

Bank of America purchased Merrill Lynch in December, even after then-BoA CEO Ken Lewis voiced reservations that the buyout would be a bad move for BoA shareholders due to the bad financial shape of Merrill.

Lewis later told New York’s attorney general that federal officials, notably Bernanke and Paulson, had pressured him to go through with the sale. To sweeten the pot, the White House eventually put up $20 billion of Wall Street bailout dollars to catalyze the deal.

Appearing before Towns’ panel last week, Bernanke defended his role in the saga. Paulson will have his chance  July 16.

The saga made headlines this spring when former BoA CEO Ken Lewis told New York’s attorney general that he was reluctant to go through with the deal because Merrill was in such tough shape financially, but federal officials, including Bernanke, had pressured him to keep quiet about Merrill’s troubles so the deal could proceed.

Today Bernanke conceded that (1) Lewis had expressed interest in backing out of the acquisition, and (2) he urged Lewis to complete the contract, citing the fragility of the economy at the time. But in his strongest defense yet of the Fed’s handling of that deal, Bernanke also said the Fed put no inappropriate pressure on BoA to finalize the deal.

Here’s the money quote from his prepared testimony:

Importantly, the decision to go forward with the merger rightly remained in the hands of Bank of America’s board and management, and they were obligated to make the choice they believed was in the best interest of their shareholders and company. I did not tell Bank of America’s management that the Federal Reserve would take action against the board or management if they decided [not] to proceed with the [acquisition]. Moreover, I did not instruct anyone to indicate to Bank of America that the Federal Reserve would take any particular action under those circumstances.

Rep. Edolphus Towns (D-N.Y.), who chairs the oversight panel, had subpoened the Fed earlier in the month to obtain documents related to the BoA-Merrill deal. His opening statement at today’s hearing set the appropriate tone.

“This was,” Towns said, “a most unusual transaction.”