Fed's Dudley: Consumers pay price on bailout furor

NASHVILLE, Tenn, April 18 (Reuters) - Political furor over lavish bonuses paid to executives at institutions bailed out with U.S. taxpayer funds is making investors wary of emergency programs and will hamper consumers' ability to borrow at reasonable rates, a top Federal Reserve policy-maker said on Saturday.

The effectiveness of some of the U.S. central bank's emergency lending programs has been "undercut by stigma or worries about what other strings are or might be attached" to their use, William Dudley, president of the Federal Reserve Bank of New York, said in remarks prepared for a conference at Vanderbilt University in Nashville.

The U.S. central bank's most ambitious lending program to date, the Term Asset-Backed Securities Loan Facility, which aims to spur consumer and small business lending, has been suffering from such concerns, he said.

The program kicked off in March, shortly after a furor erupted over bonuses paid to executives of American International Group, the insurer that has received billions in government bailout funds, and investors have worried they could become the focus of the political anger.

"I think it is worth emphasizing actions that lead investors to shun taking risk, especially in this environment, are ultimately detrimental to the ability of households and businesses to secure credit at reasonable borrowing rates," Dudley said.

In the first two rounds of TALF, investors requested less than $7 billion in loans, a program that the Fed has said could grow to $1 trillion.

"One reason why the TALF has gotten off to a relatively slow start is the reluctance of investors to participate," Dudley said, noting that some investors worry they could become subject to scrutiny on their pay similar to that on banks receiving bailout money through the Troubled Asset Relief Program.

"My own view is that these fears are misplaced. The TARP funds in the TALF program only come in on the back end of the program when loans are put back to the Fed," said Dudley, who prior to becoming the New York Fed's president ran the bank's markets group.

But, even with the tepid start, the TALF has helped restart securitization markets, Dudley said.