The Obama administration on Tuesday mounted a full-scale push for government authority to shut down troubled institutions like insurer AIG to avoid the need for future bailouts.

U.S. Treasury Secretary Timothy Geithner, testifying before lawmakers still fuming about big bonuses for executives at bailout recipient AIG, called on Congress for new powers to take over big non-bank financial firms that run amok.

Federal Reserve Chairman Ben Bernanke strongly backed Geithner in testimony before the same committee, and President Barack Obama took the case public in remarks to reporters.

In the absence of that capacity you end up with the situation we've been in ... an institution that poses systemic risks to the system but a lack of capacity to close it down in an orderly fashion, renegotiate contracts, sell off bad assets, Obama said.

AIG ran a global insurance company but also had a division dealing in derivatives contracts that has been likened to a hedge fund. That unit took a big hit when the U.S. housing sector imploded, putting the entire firm at risk of a collapse that could have endangered the whole financial system.

Geithner said the government needed the same types of tools to deal with failing non-bank institutions that it already has to deal with struggling banks. Under his proposal, the Treasury chief would determine whether emergency action was needed in consultation with the Fed and the relevant regulator.

As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can, he told the House of Representatives Financial Services Committee.

Congress has already begun working on a revamp of financial regulations that is expected to include authority to wind down non-bank firms. Aides at the House panel said on Monday the committee would likely vote on a bill as soon as March 31.

House Republican leader John Boehner told reporters the Treasury's request for authority to shutter non-banks sounded like an unprecedented grab of power.

But other lawmakers were more supportive.

I welcome it, Senate Banking Committee Chairman Christopher Dodd told reporters. We've got to figure out a way to deal with this.

AIG POSTER CHILD FOR WIND DOWN AUTHORITY

AIG, which has been propped up with up to $180 billion from taxpayers, has become the poster child for U.S. regulatory reform. Geithner, Bernanke and New York Federal Reserve Bank President William Dudley all painted a dire picture before lawmakers of what could have happened if AIG had failed.

Conceivably, its failure could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income and jobs, Bernanke said.

Fury at the $165 million in bonuses recently paid by the insurer threatens to undercut efforts to stabilize the rickety financial sector.

Geithner laid out a plan on Monday to sop up as much as $1 trillion in toxic assets sitting on bank books, but success hinges on the willingness of investors to participate.

Last week, the House passed legislation to claw back most of the AIG bonus money, and investors are wary of partnering with the government out of fear the rules could later change.

Senate Finance Committee Chairman Max Baucus said on Tuesday the Senate put the AIG bonus bill on pause, suggesting lawmakers were having second thoughts, but Senate Majority Leader Harry Reid said action was still possible.

The proposal sketched by Geithner would let the government step in to act as a receiver for troubled non-banks. It would be able to deal with non-banks in the same way the Federal Deposit Insurance Corp, a banking regulator, does with banks.

When the FDIC seizes a bank, it typically holds it until it gets it in shape to reopen under new ownership or to be taken over by a healthy bank. FDIC Chairman Sheila Bair has hinted that her agency might be suited to play a similar role for other financial firms.

Officials say if they had authority to shut non-bank firms, the collapse of Lehman Brothers, which touched off the most virulent phase of the credit crisis, could have been avoided.

(Additional reporting by Alister Bull, David Lawder, Corbett B. Daly, Karey Wutkowski and Susan Cornwell; Editing by Dan Grebler)