1) wipes clean; only get the credits; GPA starts over
2) I think it depends. If you're at a pretty good T2 in an area where you want to practice, and if your T2 has a pretty good career services, then I think you should consider staying. Of course, this depends very heavily on what you intend to do. Judicial Clerkship and other prestigious aspirations would almost require that you transfer up. However, if you want to work at a firm in your current city, then it may be better to stay with your huge GPA.
3)At my new school, firms treat transfers exactly the same. This is quite astounding and I wouldn't be suprised if this is different elsewhere. I was Top 18% at my T4 school and without my new school's ranking I am on EXACT equal footing as someone who achieved Top 18% here. But again, it seems like I'm just really fortunate.
As far as employers looking down on the transfer itself, I think that's nothing to worry about. I cannot percieve that a recruiter would care about that, after all recruiters are bigger prestige whores than posters on this board. They may question you as to why you did it, but I don't think that it would hurt you.