Gone are the days of luxury California hotel retreats for executives of bailed-out U.S. insurance giant American International Group.

Once mighty AIG has a new employee expense handbook, a special governance committee, and strict limits on executive pay, according to a letter from Federal Reserve Chairman Ben Bernanke to Senator John Kerry that was obtained by Reuters on Tuesday.

The new expense policy was mandated by the U.S. Treasury Department and may be materially amended only with the prior written consent of the Treasury, Bernanke said.

The letter from the Fed chairman to Kerry, a Massachusetts Democrat, opens a window onto how much influence the Fed and Treasury have over day-to-day events at AIG. It also shows that Kerry, at least, can get answers on AIG from the Fed.

During a congressional hearing last week, lawmakers demanded the Fed identify financial firms that received money from AIG. Fed vice chairman Donald Kohn refused.

Almost six months ago, the government stepped in to save AIG from disaster after its credit derivatives businesses was crushed by a crisis in credit markets that continues today.

Despite a taxpayer-backed rescue package worth $173 billion, AIG is still bleeding red ink. It posted a $61.7 billion quarterly loss earlier this month.

If the bailout -- including credit and equity investments by the Fed and Treasury -- has not put the agencies in AIG's driver's seat, they've got their hands on the steering wheel.

Writing in response to an October letter from Kerry, Bernanke said the Fed can insist that AIG meet minimum corporate governance standards, monitor its financial condition and restrict certain major decisions that might reduce the ability of AIG to repay its loan from the Fed.

He said the Fed routinely makes its views known to AIG.

Last fall, for example, we made clear to AIG's management our deep concern about reported incidents of corporate spending and questions surrounding certain executive compensation.

AIG came under fire in October for spending $200,000 on hotel rooms and $23,000 on spa services at an event, just days after it got an emergency government loan to avoid bankruptcy.

AIG has said that 10 employees from its subsidiary, AIG American General, attended the 100-guest event.

Kerry wrote to Bernanke and former Treasury Secretary Henry Paulson in October asking them to ensure AIG did not incur unnecessary or excessive expenses at a cost to the taxpayer.

Bernanke said in his letter to Kerry the Fed supported AIG establishing a special governance committee, issuing a new employee expense policy guidebook, and cancelling meetings, conferences and other events not clearly needed for business.

He added, We also note that AIG remains obligated to repay the full amount of the revolving credit facility from the Federal Reserve with accrued interest.

To assure repayment, he said, the Fed has been pledged a substantial portion of the assets of AIG. We expect that the orderly disposition of certain of these assets will provide the funds for the loan repayment.

(Additional reporting by Lilla Zuill in New York; Editing by Anshuman Daga)