UPDATE 1-Paulson says he, Geithner acted properly on AIG

*Financial system would have "buckled" under AIG collapse

*Collapse would have "wrought economic havoc"

(adds quotes, details, background)

WASHINGTON, Jan 26 (Reuters) - Former U.S. Treasury Secretary Henry Paulson staunchly defended the decision to rescue troubled insurer American International Group Inc (AIG.N) in 2008 and said he and others involved acted properly.

In testimony prepared for a hearing on Wednesday of the U.S. House of Representatives Oversight and Government Reform Committee, Paulson said he, Timothy Geithner who then was president of the New York Federal Reserve bank, and Fed Chairman Ben Bernanke acted properly because the situation was dire.

"If AIG collapsed, it would have buckled our financial system and wrought economic havoc on the lives of millions of our citizens," said Paulson, who headed Treasury from 2006-2009 in the former Bush administration.

The hearing is to examine how AIG handled payments to banks that were counterparties for credit default swaps that AIG had issued and to examine why it paid 100 cents on the dollar to settle them rather than getting a discount.

Questions also have been raised by Republican committee members whether Geithner had any role in advising AIG on the payments and on whether or not to fully divulge the amounts it was paying to banks like Paulson's old firm, Goldman Sachs (GS.N).

"I was not involved in any of the decisions made with respect to those payments, nor was I involved in any of the decisions about AIG's public disclosure of those payments," Paulson said. He is set to release his book, "On the Brink," which is about the financial crisis on Feb 1.

He repeated that there was no effective way to wind down AIG because there wasn't -- and still is not -- a resolution authority that can deal with a failing far-flung financial enterprise of AIG's scope.

"We had to intervene, and I am thankful that we did," Paulson said.

More than $180 billion of taxpayers' funds eventually were invested in bailing out AIG, which Paulson said was both "a mismanaged and misguided enterprise."

He urged Congress to work on modernizing the regulatory structure by creating a systemic risk regulator and a resolution authority that could, if necessary, handle the liquidation of a failing company like AIG and do so without destabilizing the whole financial system. (Reporting by Glenn Somerville; editing by Leslie Gevirtz)