Mr Market may also be spooked by Fed chief Ben Bernanke’s second day on Capitol Hill, where he is testifying about the Fed’s recent bailout of Bear Stearns.

The Dow Jones industrials fell 57.97 points to 12,547.86, with the broader S&P 500 declined 5.54 points to 1,361.99.

Read on at Dow Jones MarketWatch. 

The Wall Street Journal reports that the Fed has sent agents into major Wall Street investment banks to makes sure of the banks’ financial wellbeing.

“We want to be sure that any lending we do to the investment banks will be done on an appropriately sound basis,” said Fed chief Ben Bernanke.

The Fed has is lending money to investment banks, even though it currently has no statutory regulatory power over them. Under recent proposals by the Treasury Department to overhaul the system of financial regulation in the US, the Fed would have an expanded regulatory role.

“Cynics might be excused for thinking that the so-called ‘restructuring’ and massive increase in the powers of the Federal Reserve Board were like spackling, sanding, and repainting the stable doors after the horses had bolted and gotten run over on the highway,” says Joel Bowman in Today’s Financial News.

“The extension of the ‘supervisory’ powers of the Fed to non-bank (deposit) financial houses like stock brokers), derivative dealers, insurance companies, and even to the private, high-risk investment companies of the rich, like hedge funds, is dramatic to say the least. But when it is realized that, in return for supervision, the Fed will stand behind those industries as a lender of last resort, the true revolutionary magnitude of today’s proposal becomes manifest.”