U.S. Federal Reserve expands oversight

WASHINGTON, May 27 (UPI) -- The U.S. Federal Reserve's emergency bailout of investment bank Bear Stearns in March began an era of extended federal oversight, financiers said.

Using $29 billion in public funds to prop up the troubled bank before it was sold to J.P. Morgan and Chase -- and, subsequently, opening lending to other investment firms -- has forced the Fed to expand its risk-assessment operations, The Washington Post reported Tuesday.

Federal regulators are already working with Securities and Exchange Commission regulators to gather information at investment banks to see that public funds are not misused, the paper reported.

The New York Fed has created an investigation unit that reports directly to bank President Timothy Geithner and has kept its finding closely guarded to this point.

The investigations, however, could prompt complacency among bankers.

"Once the Fed starts … looking at the risks … the market could back off and say, 'Well, the Fed's in there, so there can't be much risk,'" economist Peter J. Wallison of the American Enterprise Institute told the Post.