Treasury Secretary Henry Paulson said over the weekend that the recent turmoil at American International Group Inc. demonstrates the need for federal regulation of insurers.

AIG, New York, has been “very much a hedge fund on top of insurance companies,” Paulson said Sunday on the NBC show “Meet the Press.”

“What has gone on here is terrible,” Paulson said to Tom Brokaw, the show moderator. “It would have been, in my judgment, unthinkable to have AIG declare bankruptcy. And, Tom, they were a few hours away from declaring bankruptcy.”

The government stepped in to provide temporary financing to “protect the taxpayer,” Paulson said.

“What the government did is come in, in a senior position assume the debt well ahead of the shareholders in a $85 billion funding facility, to allow the government to liquidate the company in a way in which we are avoiding a real catastrophe in our money markets,” Paulson said.

The AIG case is a “classic example” of the need for “new regulations, new policies,” Paulson said.

Officials at the National Association of Insurance Commissioners, Kansas City, Mo., argued last week that AIG Financial Products Corp., the AIG unit that triggered the parent company’s financial crisis, was not an insurance company.

Some NAIC officials also have suggested that state insurance commissioners waged a fierce battle to keep the AIG parent company and federal regulators from “raiding” AIG’s insurance company assets to cope with problems that were unrelated to AIG’s insurance operations.

Officials at major insurer trade groups, such as the American Council of Life Insurers, Washington, have cited the recent Federal Reserve Bank of New York effort to shore up AIG as an example of the need for federal insurance regulation.

Paulson said he believes the AIG government financing arrangement shows that the government must take the time to figure out how to revise regulation of the financial system.

Today, “we have a patchwork regulatory system that is outdated,” Paulson said. “It doesn’t match the financial world we are dealing with today.”

Paulson talked about the call for more comprehensive regulation of all financial institutions that was included in the regulatory “blueprint” that Treasury unveiled in March.

The blueprint recommends creating an optional federal charter that would give insurers a choice between state regulation and federal regulation.

But “we can’t deal with that in a week,” Paulson said.

The country needs the $700 billion financial institutions rescue plan bill in a week “because we have a problem in our capital markets that’s urgent to deal with,” Paulson said.