This story is both scary and hilarious, depending on your viewpoint! A friend of mine was a nanny during undergraduate years--he is a fluent French speaker so he was paid a very good wage to look after 2 kids and speak to them only in French--the parents told their kids that he didn't speak any English, so they would have to speak to him in French. This situation worked out wonderfully as far as I could see for both parties for 2 years (but granted, he was only available in the afternoons since he was also a full-time student.) Also, I used to take care of a baby for about 8 hrs/week during undergrad years and loved it--I really enjoyed playing with a baby during breaks from lectures and studying. Not that I have ANY experience with hiring nannies, but I wonder if seeking out college students might be a good idea, even if you had to hire more than one to meet schedules. I think I would be inherently a little suspicious of anyone who wanted to be a "career nanny," but then again I'm sure there are some great ones out there (just not your former one, apparently!)
One quick note - if you did provide the letter about her employment make sure you've paid all the requisite taxes. I'm sure you have (if I remember correctly your husband is an attorney?). If you haven't paid the taxes and she decides to go after you you could have some trouble.
I was a live-in nanny (au pair) many years ago and I would never have dared to ask for my personal expenses (toiletries, snacks, phone bill) to be reimbursed, that is what my weekly stipend was for... especially since you are providing room & board already and paying her a very high salary.
As an au pair, I provided about 45 hours of childcare for 18-months-old triplets and a 5-year-old girl... the cost per hour is about $7.5 per hour for great quality childcare and a dedicated, motivated, energetic nanny and member of the family... and for exposure to a second language and culture, which was really neat especially for the 5-year-old.
Let me know if I can help you Tsunami and good luck!