Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke on Tuesday defended their handling of the AIG bailout while calling for Congress to grant new powers to take over failing firms.Both men, speaking before the House Financial Services Committee, defended the infusion of $170 billion of taxpayer funds to American International Group, saying it staved off a potential catastrophic 1930s-style meltdown at the firm. AIG is under fire for using some of that federal funding to pay $165 million in executive retention bonuses.“We knew from the beginning we had a mess on our hands,— Geithner said. He said that lacking a clear legal framework for taking over the company and winding it down, the government was faced with “no good options.—Geithner and Bernanke both argued for the need for a new regulator for non-bank financial institutions like AIG. That regulator would have the power to take over such institutions and adjust contracts the way that the Federal Deposit Insurance Corp. can when it takes over a bank. If that authority had existed last year, the bonuses wouldn’t have been a problem and AIG’s counterparties could have been required to take a “haircut,— Bernanke said.Geithner said he should have known the full extent of of the payments to people at AIG’s financial unit before March 10, when he was briefed on them, but both Geithner and Bernanke said they were constrained by the lack of a legal framework for disallowing them.“We would have faced the same legal constraints we now face,— Bernanke said.Geithner also acknowledged that the public concern about the bailouts and the bonuses would make future requests for similar federal lifelines harder.“We recognize that it’s going to be extraordinarily difficult,— Geithner said. But he defended the bailouts as essential to getting the economy moving again.“There is no way we’re going to get out of this financial crisis without the government taking risk the markets can’t take,— Geithner said.Bernanke argued that taxpayers would have seen their retirement accounts diminish by 70 percent had AIG not been saved, rather than the 50 percent loss many accounts have experienced.Geithner and Bernanke said they were pursuing all possible legal avenues for recovering the AIG bonus money. Already about a third of the bonus payouts have been voluntarily returned.“Maybe we could use some mean lawyers,— Geithner joked, adding that the government would be looking to set new compensation guidelines for financial institutions.“We are doing all we can to claw them back,— Bernanke said of the bonuses.Financial Services Chairman Barney Frank (D-Mass.) said the committee would draft a financial regulatory overhaul in May.“We have as important a task as we have had in this area since the 1930s,— Frank said.