A rift is emerging between the White House and the US Federal Reserve over whether banks should be bailed out by taxpayers, The Times has learnt.

It is understood that President Bush and his advisers are concerned about the repercussions of protecting a financial institution from bankruptcy because of its own poor decisions.

The White House is anxious about the long-term implications of a bank bailout and of the extension of emergency cheap credit facilities to investment firms.

In what is an election year in the United States, the President is worried that Washington will be accused of using taxpayers’ money to protect executives, staff and shareholders from the consequences of poor risk management.

Fed reluctant to say how far it will go

Financial markets believed the Federal Reserve would signal an end to its campaign of rate cuts, but it may not

• Federal Reserve unveils quarter-point reduction in interest rates

Background

• Darling hit with £16bn tax hole

• King's City bonus comment attacked

• Bank predicts crisis will hit UK hard

• Consumer slowdown 'could last until 2010'

Multimedia

• Full credit crunch coverage

• Video briefing: global market instability

Background

• Goldman loses star sub-prime trader

• Hedge funds stars made $2bn from US sub-prime

• Who caused this nightmare? The blame spreads

• Sub-prime mortgages explained

Related Links

• The day Wall St pulled $10bn from Bear Stearns

• Economy replaces Iraq in US election fight

• Fears for future of bond insurers

He also fears that Wall Street will become mired in new, onerous regulation.

In an attempt to prevent a meltdown of the US financial system, the Fed has backed JPMorgan Chase’s takeover of Bear Stearns and agreed to provide a financial lifeline for the deal.

In addition, the Fed, in the broadest use of its lending authority since the 1930s, said that it would allow squeezed Wall Street investment houses to go directly to it for emergency loans. That has long been a privilege for commercial banks only.

There is little to suggest that the stress on the American banking system is easing. Yesterday it emerged that the banks that had agreed to finance the $19.5 billion (£9.7 billion) buyout of Clear Channel, led by Citigroup and Deutsche, stand to lose about $3 billion on the transaction because loan prices have tumbled since they promised to fund the deal.

The private equity firms Thomas H. Lee and Bain Capital Partners have filed lawsuits against the Wall Street banks to force them to fund the buyout.

The rift between the White House and the Fed emerged as Henry Paulson, the US Treasury Secretary, said yesterday that the collapse of Bear Stearns underscored the need for investment banks to be brought under the same federal supervision as commercial banks.

Mr Paulson said: “This latest episode has highlighted that the world has changed, as has the role of other nonbank financial institutions and the interconnectedness among all financial institutions.

“These changes require us all to think more broadly about the regulatory and supervisory framework that is consistent with the promotion and maintenance of financial stability.”

Kevin Logan, a senior economist at Dresdner Kleinwort in New York, said: “It is likely that there will be a move towards reforming the regulatory system. It’s a hotchpotch and reflects what used to be a fragmented financial system. It’s now much more integrated and reform would make sense.”

At present, commercial and investment banks must answer to the Office of Thrift Suspension, the Comptroller of Currency, the Federal Reserve, state federal banks, the US Treasury, the Office of Enterprise Oversight, the Securities and Exchange Commission and accounting regulators.

However, any reform of the regulatory system would now have to be spearheaded by an incoming government.

Mr Paulson is also suggesting that the Fed collect as much information as necessary on investment houses to “make informed lending decisions”.

Explore Industry Sectors

• Banking & Finance

• Construction & Property

• Consumer Goods

• Engineering

• Health

• Industrials

• Leisure

• Media

• Natural Resources

• Retailing

• Support Services

• Technology

• Telecoms

• Transport

• Utilities

Times Recommends

• Repossession orders at a record high
• Retailers police industry through database
• Royal Mail demands cash after £279m loss