UPDATE 1-Fed takes heat on AIG from both sides of Congress

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WASHINGTON, Sept 17 (Reuters) - The U.S. Federal Reserve took some bipartisan bashing on Wednesday from members of Congress who criticized the central bank's $85 billion loan to troubled insurer American International Group AIG.N.

In what may be a foreshadowing of the sort of questions Fed Chairman Ben Bernanke can expect when he testifies before congressional committees next week, Republicans and Democrats alike expressed concern over the size of the bailout and perceptions that it put Wall Street ahead of Main Street.

House Speaker Nancy Pelosi, a California Democrat, told reporters at a news conference that lawmakers had a number of questions, particularly after they were told by Fed officials that the AIG bailout was urgent in part because of foreign central banks’ worries about fallout to their own economies.

“It raises certain questions. Why aren’t these foreign institutions participating in this bailout? Where is this money coming from? What is its impact on our budget?” Pelosi said.

Leveling harsh criticism against the Bush administration’s oversight of the financial industry over the past eight years, Pelosi also said hearings will look at potential industry fraud and mismanagement.

House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, questioned whether Federal Reserve Chairman Ben Bernanke should have so much power to act unilaterally.

“No one in a democracy, unelected, should have $800 billion to dispense with as he sees fit,” Frank said, referring to a pool of money the Fed has had at its disposal to deal with financial crises.

Rep. Henry Waxman, the California Democrat who heads the House Oversight and Government Reform Committee that also will hold hearings, said any legislation will likely be left to the next president and next Congress to be seated in January.

“But this Congress still has to find out what happened, why it happened, who is responsible and how we ought to go forward in the future,” Waxman said.

Republicans in Congress also criticized the bailouts.

“Americans should be very concerned by the size and frequency of these government bailouts,” South Carolina Republican Sen. Jim DeMint said. “The easy money, cheap credit policy of the Fed and the guarantees provided by Congress for Fannie and Freddie created a bubble that is now bursting.”

Fed officials said they needed to step in to steady AIG late on Tuesday because a bankruptcy could have caused chaos in credit markets and dealt a serious blow to an already shaky global economy. It was the third time in six months that the government acted to prevent the collapse of a major financial firm.

Sen. Christopher Dodd, the Connecticut Democrat who chairs the Senate Banking Committee, said the Fed ought to be doing more to help people struggling to pay their mortgages. Bernanke is scheduled to testify before Dodd’s committee next Tuesday.

“If the Federal Reserve bank is going to be using bad debt to provide collateral to extend loans or resources to financial institutions, how about doing the same for homeowners?” Dodd told reporters at a briefing.

“Allow them to have new mortgages to stay in their homes ... If it’s good enough for Wall Street it ought to be good enough for people ... running the risk of losing their home.”

Republican Sen. Jim Bunning of Kentucky said he was introducing legislation to strip the Fed of the authority to use taxpayer dollars on bailouts.

“Once again the Fed has put the taxpayers on the hook for billions of dollars to bail out an institution that put greed ahead of responsibility and used their good name to take risky bets that did not pay off,” he said. “The only difference between what the Fed did and what Hugo Chavez is doing in Venezuela is Chavez doesn’t put taxpayer dollars at risk when he takes over companies - he just takes them.”

Senate Majority Leader Harry Reid said he was doing his best to be supportive of Bernanke and Treasury Secretary Henry Paulson, but no one seemed to have any answers to the credit crisis that has raged for more than a year.

“We are in new territory. We’re not out there playing soccer, basketball or football. It’s a whole new game,” the Nevada Democrat said. “You could ask Bernanke, you could ask Paulson, they don’t know what to do (on regulatory reform) but they are trying to come up with ideas.” (Additional reporting by Richard Cowan, Donna Smith and Kevin Drawbaugh; Editing by Diane Craft)