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.

Oil is the key to world recovery

The shock of $140 oil has created inflationary and deflationary pressures that threaten world economy and policy tools

• Former President Bush energy adviser says oil is running out

BACKGROUND

• Oil is the key to world recovery

• Banks may need to pump billions into scheme

• UK economic growth weakest for three years

Related Internet Links

• Full credit crunch coverage

BACKGROUND

• Happy days are over for UK households

• Banks restrict mortgages by brokers

• Credit crunch halves lending at Nationwide

• JPMorgan to cut Bear Stearns jobs

• George Soros: Crunch will bite deeper in UK

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”.

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts