Federal Reserve Board Chairman Ben Bernanke blasted AmericanInternational Group at a Senate hearing today, saying “nothing hasmade me more angry” than AIG's ability “to exploit a huge gap inthe regulatory system.”

Mr. Bernanke made his comments while testifying before theSenate Budget Committee hearing on President Barack Obama'sproposed budget for the remainder of fiscal-year 2009.

Mr. Bernanke used the occasion to suggest, as he did last week,that the Obama administration expand the authority of the FederalDeposit Insurance Corp. to deal with large, troubled financialinstitutions, such as insurance companies, securities firms, hedgefunds and mutual funds, that aren't banks.

“We have no structure–no legal and regulatory structure–thatallows us to resolve in a safe and sound way a large financialinternational conglomerate,” he said.

“We're much better off, frankly, trying to resolve it within thecontext of continued operation than to allow it to fail and allowall the chaos that would occur following a bankruptcy,” Mr.Bernanke said.

He justified the decision to provide more than $100 billion inaid to AIG by saying federal officials “really had no choice” butto provide aid to AIG in September.

The failure of a major financial firm in a crisis “can bedisastrous for the economy,” he said.

With millions of policyholders and thousands of derivates andcredit-insurance counterparties, Mr. Bernanke said AIG's downfallwould have been “devastating to the stability of the worldfinancial system.”

He added, “If there's been any doubt about the power offinancial stress to affect the real economy, I hope that it's beenremoved at this point.”

Responding to questions from a host of senators at the hearing,Mr. Bernanke said, “If there's a single episode in this entire 18months that has made me more angry [than AIG], I can't think ofone.”

He added, “AIG exploited a huge gap in the regulatory system.There was no oversight of the financial products division.”

Mr. Bernanke argued that AIG “was a hedge fund, basically, thatwas attached to a large and stable insurance company, made hugenumbers of irresponsible bets, took huge losses. There was noregulatory oversight because there was a gap in the system.”

And in answering a question from Sen. Patty Murray,D-Washington, Mr. Bernanke linked AIG's solvency to the welfare of“just average everyday families.”

Definitely, Mr. Bernanke said, talking about the “potential forcontagion.”

“In this case, we're dealing with the largest insurance companyin the world,” Mr. Bernanke said.

The failure of AIG “would have sent shockwaves through theentire insurance industry” and likely beyond, he said.