Nov. 10 (Bloomberg) -- The U.S. government's restructured bailout of American International Group Inc. was needed to preserve the stability of the financial markets, the head of the Treasury's bank rescue program said.

``This action was necessary to maintain the stability of our financial system,'' Neel Kashkari, the interim assistant secretary who heads the Treasury's office overseeing the bailout, said today at a Securities Industry and Financial Markets Association conference in New York.

Earlier, the Treasury announced it would buy $40 billion in AIG preferred shares using funds from the department's Troubled Asset Relief Program, which Congress approved in early October. The AIG assistance is separate from the continuing effort to invest $250 billion in U.S. banks to help recapitalize firms so they can resume lending.

In response to a question after the speech, Kashkari said today's action with AIG ``was a one-off event that was necessary for financial stability. It was not the establishment of a new program.''

Kashkari said it will take time for banks to get the money and start lending again. The transactions will take ``a few months'' to complete, he said, adding that markets also need time to stabilize.

``Although progress has been made in the last month, our capital markets remain fragile and confidence remains shaky,'' he said. ``As confidence returns to our institutions and our markets, we believe banks will put this capital to use by extending loans to creditworthy businesses and consumers. The last thing we want, however, is to encourage banks to resume the poor lending practices that are the cause of the current economic problems.''

Recruitment

In his remarks, Kashkari added to the list of firms and individuals hired to work on the TARP.

Don McLellan has been tapped as manager of the equity injections, known formally as the Capital Purchase Program. He is a former senior vice president for mergers and acquisitions at Motorola Inc.

Howard Schweitzer, former general counsel of the Export- Import Bank, has been tapped as interim chief operating officer, Kashkari said. Lindholm & Associates has been awarded a contract for human resources support, Kashkari said.

Kashkari said it is ``absolutely necessary'' that the government's rescue programs help homeowners as well as the financial system. He said that the mortgage industry needs to ``do more'' to help homeowners and that Treasury officials will ``help as we can'' to encourage those efforts.

He also said the Treasury will make accommodations so that private banks can take advantage of the capital injection programs. ``It's very important that the private banks participate as well,'' he said.

To contact the reporter on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net; Anthony Massucci in New York at amassucc@bloomberg.net.

Last Updated: November 10, 2008 10:54 EST