If the Fed thought orchestrating the sale of Bear Stearns to JP Morgan for a bargain basement price would make the problem go away, it was dead wrong. The shockwaves from the US-government backed sale continue with the Senate launching a probe into how much risk it creates for the taxpayer, reports Bloomberg.

The Federal Reserve helped engineer the takeover two weeks ago after customer withdrawals crippled the New York-based firm. The central bank agreed at the time to provide $30 billion of "special financing'' to guarantee some of Bear Stearns's assets, and later adjusted its financial support with JPMorgan now responsible for the first $1 billion of potential losses from the sale of Bear Stearns assets, while the Fed will fund the remaining $29 billion.

The fact that the Fed has become a deal maker is troubling because of the obvious conflicts of interest. So this latest development is important because Congress is warning the Fed not to use taxpayer resources. More to the point, it could be an acknowledging that other banks might soon hit the wall and Congress is in effect telling the Fed not to do it again. Or to at least tread carefully.

This whole rescue plan looks dodgy and is just dishing out some favours. Chuck Saletta at Motley Fool notes that all the Fed is doing is providing prime brokers with access to cheap money, allowing them to clean up big time.

"The bailout signals that if, for some reason, the new leveraged investing schemes run into the same troubles that Bear Stearns' did, the Fed will be there to pick up the pieces," Saletta writes."In other words, just like with JPMorgan and Bear Stearns, you'll pay the bill if their plans fail, but they'll reap the rewards if they succeed. Enough is enough. Either drop the subsidy to scuttle the deal, or close the emergency window, or both. But for heaven's sake, stop destroying the entire financial system just to help a few billionaires get richer at taxpayer expense."

London-based investment consultancy Independent Strategy warns that the Fed is doing the same thing that Japanese regulators tried during the banking crisis in that country. The result: a decade of uncleansed balance sheets leading to poor growth and high fiscal deficits. In its paper, A modest proposal, it says a better alternative would be to tackle solvency and then market stability. If banks become insolvent, they are recapitalised either by issuing capital in the market, or if that's unfeasible, by the state. The recapitalised banks, where nationalised, are subsequently sold off.

This is driven by a mandatory audit procedure of all financial institutions that are critical to system stability, but deemed to be at risk. And it's about sticking to the rules where the banks keep to recapitalization requirements and there are no bailouts of creditors. This has been done in other places where there was a banking crisis, like Korea. When that was applied, the downturn there was short.

"The US never tired of recommending the same model to the Japanese authorities after the bubble economy collapsed," Independent Strategy says."Japan ignored them, took ten years to clean up its house, wasted huge fiscal resources in vain attempts to bolster demand and suffered a lost decade of growth as a result. Now the US risks the same fate by failing to apply its own medicine to itself."