WASHINGTON (Bloomberg) — Federal Reserve chairman Ben Bernanke said American International Group Inc. operated like a hedge fund and having to rescue the insurer made him "more angry" than any other episode during the financial crisis.

"If there is a single episode in this entire 18 months that has made me more angry, I can't think of one other than AIG," Bernanke told lawmakers yesterday. "AIG exploited a huge gap in the regulatory system, there was no oversight of the financial-products division, this was a hedge fund basically that was attached to a large and stable insurance company."

Bernanke's comments foreshadow tougher oversight of systemically important financial firms, and come as President Barack Obama seeks legislative proposals within weeks for a regulatory overhaul. The US government has had to deepen its commitment to prevent AIG's collapse three times since September as the company accumulated the worst losses of any US company.

AIG is getting as much as $30 billion in new government capital and relaxed terms on its bailout announced yesterday.

The company "made huge numbers of irresponsible bets, took huge losses, there was no regulatory oversight because there was a gap in the system", Bernanke said. At the same time, officials "had no choice but to try and stabilise the system" by aiding the firm.

In another sign of tighter regulation to come, Bernanke said supervisors should have authority to bar new financial products that may be destabilising to markets.

Bernanke made the AIG comments in response to a question from Senator Ron Wyden, an Oregon Democrat, at a Senate Budget Committee hearing yesterday in Washington.

In his testimony, the Fed chief said that policy makers may need to expand aid to the banking system beyond the $700 billion already approved, and take other aggressive measures even at the cost of soaring fiscal deficits.

"Without a reasonable degree of financial stability, a sustainable recovery will not occur," Bernanke said. "Although progress has been made on the financial front since last fall, more needs to be done."

The Obama administration last week unveiled a budget blueprint that included standby authority for as much as $750 billion in new aid to the financial industry.

Whether those funds will be needed "depends on the results of the current supervisory assessment of banks" and the evolution of the economy, Bernanke said yesterday.

He also said that while Obama's $787 billion fiscal stimulus should boost the economy over the next two years and alleviate the slide in payrolls, the size of the impact is "subject to considerable uncertainty". Consumers may decide to pay down debt or save their cash rather than spend it, he noted.

US policy makers face headwinds from equity markets, with the Standard and Poor's 500 Index falling this year by 22.5 percent and the S&P Financials Index tumbling 44.2 percent.

The government is still trying to stabilise large financial institutions such as Citigroup Inc. and AIG.

AIG's fourth-quarter loss widened to $61.7 billion, the New York-based insurer said on Monday. The results brought its annual loss to almost $100 billion, prompting the US to offer a package of equity, new credit and lower interest rates on existing loans designed to keep it in business and prevent a new shock to the world's financial system.