NEW YORK (Reuters) - The $173 billion government rescue of American International Group Inc is stoking resentment among investors who see it as a backdoor taxpayer bailout of Goldman Sachs and other banks.

Six months after the government stepped in save an insurance giant overwhelmed by derivative losses, AIG continues to bleed red ink. Its stock and bond holders have been crushed, but one group has suffered almost no damage: banks that bought credit protection from AIG Financial Products.

Regulatory filings show that since the Federal Reserve announced its rescue of AIG on September 15, about $50 billion of government money has passed through the company to banks.

"Treasury is providing a massive wealth transfer from taxpayers to Goldman Sachs and other parties, and it's something that absolutely should be investigated," said Eric Hovde, chief executive of Hovde Capital Advisors, where he manages financial services-focused hedge funds.

Once the world's largest and most powerful insurance company, AIG for more than a decade aggressively insured credit and mortgage exposure for banks around the world. At its peak, AIG was backstopping a $2 trillion derivatives trading business.

That business proved its undoing as credit markets broke down in 2007, leaving AIG on the hook for huge losses. At the year-end, it had $302 billion of outstanding credit default swaps, which are contracts that insure against debt default.

Filings show that in the final months of 2008, as it unwound its money-losing credit derivative portfolio, AIG purchased from banks $46.1 billion of assets underlying swaps. With government financing, it paid $20.1 billion cash and surrendered $25.9 billion of collateral — a 99.8 percent recovery rate.

On the September weekend that investment bank Lehman Brothers collapsed, the US Treasury and Federal Reserve arranged an unprecedented insurance company bailout: $85 billion in loans for AIG in exchange for an 80 percent stake in the company.

The Treasury and the Fed worried that an AIG collapse could further drag down world financial markets. As markets continued to deteriorate and AIG's derivative losses mounted, Uncle Sam extended ever-more-lenient rescue packages.

The bailout has stirred resentment not just in Congress but on Wall Street, where investors speculate that Goldman and its connections helped it get a better deal.

"The whole point of the bailout is to save Goldman Sachs," said Christopher Whalen, head of financial advisory services for Institutional Risk Analytics. "The whole thing is so rancid and so hideous."

A Goldman Sachs spokesman declined to comment on the AIG bailout or how much of the government funds it has received.

Goldman CFO David Viniar in September and in December told investors the firm had no material losses from AIG. The bank says its AIG exposure was either collateralised or hedged.

Last week, AIG chief executive Edward Liddy told investors "the vast majority" of taxpayer funds "passed through AIG to other financial institutions" as it unwound transactions.

During a hearing in Washington last week, legislators demanded the Federal Reserve identify the financial firms that received money from AIG. Fed vice-chairman Donald Kohn refused.

The Wall Street Journal, citing unnamed sources, reported on Saturday that more than $50 billion of payments went to counterparty banks between September and December. Goldman and Deutsche Bank AG were the largest trading parties, each receiving about $6 billion, the newspaper said.

Goldman has been singled out for criticism amid reports that CEO Lloyd Blankfein attended the September 15 meeting that negotiated the government's initial rescue of AIG. Then-Treasury Secretary Henry Paulson, who left Goldman in 2006 as CEO, played a lead role in the negotiations.

The chairman of the Federal Reserve Bank of New York, which hosted the meeting and invited Goldman officials to attend, is former Goldman head Steve Friedman.

Officials from Morgan Stanley and JPMorgan Chase & Co were also in attendance, but Blankfein was the only bank chief there, people familiar with the meeting said.

The results, investors say, have been poor. With no end in sight for the losses, some investors argue that taxpayers would be better off letting AIG go bankrupt.

"AIG should be put through bankruptcy and the federal government should stop funding of all these losses," Hovde said. "I'm opposed to seeing parties that should be taking some financial consequences walking away free and clear off the taxpayer's back."

Seacliff Capital LLC President James Ellman, who manages a financial services hedge fund, said the government could take over the AIG derivatives portfolio. While that would wipe out stockholders and generate losses, the government could then sell off AIG's healthy insurance businesses to investors.

That may be preferable to the government's latest bailout, announced last Monday, which effectively cut the interest and dividend payments AIG must make to the government. The cost to taxpayers is about a billion dollars a year.

"We have the Fed chairman saying he's angry with AIG and yet he consistently rewrites the bailout to make it worse for us and better for a party which is increasingly in a weaker bargaining position," said Ellman.

Whalen, who once ran foreign exchange trading at the New York Fed, concurred that markets would be better served by forcing AIG into liquidation and following the model set by Lehman.

Unlike Bear Stearns and AIG, Lehman was not rescued and filed for bankruptcy on September 16. While many analysts say this event sparked last year's market freefall, the bank's toxic assets are being sold off while healthy businesses found new homes.

Keeping sick patients like Citigroup and AIG on life support, investors say, only increases risks for taxpayers.

"Every time the government tries to save us, they make the problem worse," Whalen said. "We should just get on with it, resolve AIG now and get them into a restructuring. If we don't, we will muddle through this crisis for a decade."