Bernanke defends AIG rescue

By Mark Felsenthal

WASHINGTON (Reuters) - U.S. Federal Reserve Chairman Ben Bernanke on Tuesday defended the government's latest bailout of embattled insurer AIG, telling irate lawmakers that he was also angry, but that the failure to act could have triggered an economic disaster.

Bernanke, in testimony to the Senate Budget Committee, gave a grim view of U.S. economic prospects, saying labour market conditions may have worsened in recent weeks. His comments helped drive the stock market briefly lower.

Pressed by the Senate committee to justify the latest in an expanding series of bailouts for American International Group, Bernanke said there was no alternative, even though the company had been irresponsible.

"We know that failure of major financial firms in a financial crisis can be disastrous for the economy. We really had no choice," he told the panel.

The U.S. government threw a fresh $30 billion (21 billion pounds) lifeline to AIG on Monday, as part of a restructured bailout that had earlier swelled to about $150 billion.

AIG, which reported a record $61.7 billion quarterly loss on Monday, has been slammed by losses on its credit default swaps that guarantee mortgage-linked securities.

Lawmakers told the Fed chairman that public patience has worn thin over the generous support for the foundering insurer even as smaller firms and households are taking heavy hits from the slumping economy.

"Right now, small businesses across the country, who played by the rules, paid their bills on time, can't get a line of credit, while AIG seems to have an open spigot for taxpayer money," said Senator Ron Wyden, a Democrat.