Bernanke: AIG shows urgent need for new regulations

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke said on Tuesday the September rescue of American International Group was warranted to avoid a potential 1930s style meltdown, but showed new rules were essential.

"AIG highlights the urgent need for new resolution procedures for systemically important nonbank financial firms," Bernanke said in prepared testimony to the House of Representatives Committee on Financial Services.

"Second, the AIG situation highlights the need for strong, effective consolidated supervision of all systemically important financial firms," he said.

Bernanke stoutly defended the decision to prop up the firm, whose demise just a day after the bankruptcy filing of investment bank Lehman Brothers would have been a disaster.

"Conceivably, its failure could have resulted in a 1930's-style global financial and economic meltdown, with catastrophic implications for production, income and jobs," Bernanke said.

The United States government's Sept 16 rescue of the insurance and financial products giant has totaled around $180 billion, causing anger among ordinary Americans that exploded into rage over its payment on March 15 of $165 million in bonuses.

Bernanke said he tried to stop these payments but was warned that if the lawsuit failed, it could end up with the bonus recipients getting two or three times as much money.

"My reaction upon becoming aware of these specific payments was that, notwithstanding the business purposes that might be served by this action, it was highly inappropriate to pay substantial bonuses to employees of the division that had been the primary source of AIG's collapse," he said.

(Reporting by Alister Bull; Editing by Chizu Nomiyama)