If ever an elected official has reason to ask, without irony, "What do we do now?" Barack Obama does.

But if the new president has posed that question to his closest advisers, it's more likely a demand for a memo rather than anything akin to the bewildered query of Robert Redford's much-quoted character in the 1972 Oscar winner "The Candidate."

Still, on the economy and other policy fronts, Obama has to be wondering what happens next.

Members of his economic team and Federal Reserve Chairman Ben Bernanke have signaled that ambitious intervention into the financial system will continue, this time accompanied by a trillion-dollar economic stimulus aimed at preserving and creating 4 million jobs by spring. "The state of the economy calls for action, bold and swift, and we will act -- not only to create new jobs, but to lay a new foundation for growth," Obama said in his Jan. 20 inaugural address. "We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together."

Obama's speech was also a call to renew America's promise to lift all its citizens with economic opportunity. "The success of our economy has always depended not just on the size of our gross domestic product, but on the reach of our prosperity; on our ability to extend opportunity to every willing heart -- not out of charity, but because it is the surest route to our common good."

Events have a way of interfering with such grand plans, however, and the troubles of the country's biggest financial institutions and the government's continuing commitment to prop them up threaten to keep Obama focused on rescuing Wall Street rather than vast numbers of everyday Americans. Newfound rot in Merrill Lynch's mortgage securities portfolio is only the latest in a string of nasty surprises that have plagued other beneficiaries of federal bailouts, including American International Group Inc. and Citigroup Inc. Paul Miller, an analyst at Friedman, Billings, Ramsey Group Inc., wrote in a report to clients last week that Charlotte, N.C.-based Bank of America Corp., Merrill's new owner, needs at least $80 billion to build capital to federally required minimums as a result of the acquisition.

On Sept. 15, Bank of America agreed to buy Merrill Lynch & Co. for $50 billion, but deepening problems moved BofA chief executive Kenneth Lewis to warn the government that mounting troubles threatened to undo the deal. To keep the deal intact, Treasury announced two weeks ago that it would inject $20 billion of federal money into Bank of America and backstop as much as $120 billion of the bank's assets.

As if Bank of America's problems weren't enough, Treasury Interim Assistant Secretary for Financial Stability Neel Kashkari said in a Jan. 13 speech that there are "several similarly situated institutions."

To stanch the continued deterioration, the government is desperate to attract more private capital to financial firms but has been at a loss over how to lure them in. The reluctance of private investors to leap into potential financial black holes has revived government efforts to design a way to get weak assets off financial institutions' books. The latest notion is the so-called bad bank. The entity would be funded at least partially with private investments, and would acquire questionable assets, particularly mortgage securities, from financial firms at a discount to booked value. Struggling financial companies could then lure investors of their own after shoving the unpredictable assets out the door. When the housing market stabilizes, the bad bank's investors theoretically would unload the acquired assets for a profit.

But Kashkari has not said exactly how a bad bank would operate, particularly how it would arrive at a purchase price for the assets it acquires. The difficulty of determining how to price these assets doomed the Treasury's initial plan to buy troubled assets itself, which was the reason Congress authorized the Troubled Asset Relief Program in the first place. TARP later morphed into direct capital injections for banks.

Banking policy analyst Bert Ely says a bad bank is plagued by "all the same problems that were there for TARP. How do you value these assets? If you overpay, it's bad for taxpayers. Underpay, and banks won't participate."

Ely says the government should stick with the kind of interventions provided to Citi and BofA, which call for the firms to absorb a set amount of losses in a defined portfolio of troubled assets, with the government taking the bulk of losses after that. In the case of BofA, government assistance announced Jan. 15 requires the institution to take the hit on the first $10 billion in potential losses from a $118 billion asset pool. The government would take the next $10 billion and 90% of all losses beyond that.

Ely is skeptical that the bad bank model of removing questionable assets from an institution's books makes for better management of the assets than the approach taken so far with Citi and BofA. After all, the $10 billion that Bank of America faces on the asset pool is a "damn big deductible" that provides management "powerful incentive to get it right."

The ad hoc approach taken so far also gives the government flexibility to design future interventions according to each institution's specific problems, which are likely to differ based on challenges facing their local economies and their specific business models.

Ely says all available numbers indicate that the four other major institutions -- J.P. Morgan Chase & Co., Wells Fargo & Co., Morgan Stanley, Goldman, Sachs & Co. -- as well as the financial industry generally have problems that are manageable. The one wild card, he acknowledges, is how deep and how long the recession is going to be.

But Gil Schwartz, partner at Washington law firm Schwartz & Ballen LLP, takes a grimmer view. He warns that even the government's backstops may not be large enough to cover likely losses. "Guarantees help, but they limit the amount of money the federal government will provide," he says.

The goal of the bad bank, stemming erosion in mortgage portfolios, is "the most important issue to address," he says. Schwartz concedes, however, that he's not quite sure how to get over the pricing hurdle.

"They're going to have to be extraordinarily creative," he says. "There's still tremendous uncertainty as to what the real value is. The extent to which TARP was to have plugged the gap until equilibrium in the housing market is reached has not been successful."

But Joshua Rosner, managing director in New York at investment research firm Graham Fisher & Co., says the bad bank concept can't be implemented until the government decides to let some of the biggest money center banks disappear. That's because the concept works if assets are purchased at no more than a slight premium to market value. The resulting markdowns "would result in some institutions not being viable," Rosner says.

Schwartz is more supportive of Obama's call for foreclosure mitigation and other mortgage support. "That's where the administration can take dramatic action," he says. Mitigation, if it leaves borrowers who pay the restructured loans, will more quickly stem the decline of loan portfolios than waiting for housing prices to bottom out. It will also prevent another round of defaults. "A whole new wave of resets on the subprime loans are coming due next year," Schwartz says.

What's more, he insists, banks will be able to refinance a large percentage of these loans. "Enormous flows of money are going into financial institutions because they have no place else to go," he says. Because of the down economy, competing demand for the money is nonexistent. "There's very little loan demand out there," he says.

"People are really concerned about losing their jobs, and they're not buying homes and automobiles. That's what really is holding things down."