Washington last night appointed a top level state prosecutor to scrutinise the US Treasury Department's handling of the $700 billion bank bailout fund.

The Senate announced yesterday that Neil Barofsky, a New York prosecutor, is to audit and investigate how the $700 billion worth of American taxpayer money is being spent in order to prop up Wall Street.

The appointment of Mr Barofsky, who will assume the title of Special Inspector General within the US Treasury Department, fulfils the final regulatory requirement demanded by Congress when it passed the bill to establish the Wall Street rescue fund in October.

Then, Congress insisted that three levels of oversight be set up to protect American taxpayer funds and ensure that the state had a reasonable chance of seeing the money repaid, with some form of interest. Washington is loath to use federal funds to prop up effectively bust companies and only wants to employ the capital to help otherwise robust firms trade their way out of the worst recession since the early 1980s.

In October, Congress demanded that the federal Government Accountability Office - effectively Washington's auditor, a special Congressional Panel, and also a new inspector general, all monitor the disbursement of the bail-out fund.

Since the fund was first established less than three months ago, Henry Paulson, the US Treasury Secretary, has come under growing criticism over the way he has altered the remit of the rescue scheme, and how the funds have been spent.

At first, Mr Paulson had wanted the fund to be used to acquire worthless mortgage-backed securities, helping banks to purge their balance sheets so that they might begin lending to one another again. Mr Paulson then changed his mind and said that the fund would then be used to take stakes in troubled banks, thereby providing much-needed capital injections. Almost half of the fund has already been spent.

But many in Washington have shown little appetite for spending the second $350 billion and have complained that Mr Paulson has shifted strategies and damaged the public and market confidence in the US Government. Many Democrats, led by Barack Obama, the US President-elect, have argued that more of the money should be devoted to reducing the number of mortgage foreclosures.

An audit by the Government Accountability Office found last week that the programme did not have measures in place to make sure financial institutions receiving taxpayer money were living up to their end of the bargain.

Mr Barofsky is now an assistant US attorney and heads up the mortgage fraud unit for the US attorney's office in Manhattan. As inspector general, he will have to file a report to Congress within 60 days detailing the purchases, obligations, expenditures and revenues associated with the bailout plan. Congress has allocated $50 million to run the office.

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