The head of embattled insurance giant American International Group told Congress Wednesday that he had personally asked AIG employees to voluntarily give back part of about $165 million in bonuses, payouts that were made even as the company was getting more than $170 billion in taxpayer bailout aid.
But with lawmakers and President Obama expressing outrage over the bonuses, Edward M. Liddy insisted that he had no legal grounds for canceling the payments and that denying the retention bonuses to keep key personnel on board could put the entire company at risk.
“The judgment was made we would lose all the progress we had made if we didn’t make these bonuses,” he said during a long afternoon of testimony Wednesday before a House Financial Services subcommittee, adding that having to honor the bonus contracts was personally “distasteful.”
The AIG chief’s testimony did little to calm smoldering anger on Capitol Hill or curb a fresh round of partisan finger-pointing. Democrats and Republicans sparred over who was at fault in permitting the bonuses to be paid and in allowing one of the country’s biggest financial firms to engage in risky investments that have so far required a federal bailout of more than $170 billion in taxpayer loans and investments.
“I think the biggest bonus for these people right now is that they’re not in jail,” said Rep. Bill Posey, Florida Republican.
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Mr. Obama told reporters at the White House that he was furious over the AIG payouts but said the episode should be used to push new financial oversight reforms and to tighten conditions on future taxpayer bailouts.
“I think people are right to be angry. I’m angry,” Mr. Obama said. “What I want us to do, though, is channel our anger in a constructive way.”
House and Senate Democratic leaders have promised quick legislative action to grab back at least some of the $165 million in bonuses, including new targeted taxes to reclaim virtually all of the bonus money.
The House Judiciary Committee Wednesday hustled through a bill that would give Attorney General Eric H. Holder Jr. the authority to seek repayment of past bonus agreements from companies such as AIG that have received more than $10 billion in federal aid.
Both the House Ways and Means and Senate Finance committees are preparing bills that would tax virtually all of the AIG bonus money, with confiscatory tax rates of 90 percent or higher. House Democrats set a vote for Thursday.
But legal experts Wednesday raised concerns about the rush to legislate, questioning whether the effort to seize legally awarded pay passed constitutional muster. Some challenged the assertion by lawmakers that the government’s huge ownership stake in companies like AIG because of the bailout gave the government the right to modify or abrogate compensation agreements unilaterally.
“A contract is a contract,” said Jesse M. Fried, a law professor at the University of California at Berkeley, adding that past payments made as part of a valid legal agreement would be protected.
Mr. Liddy, the retired chairman of Allstate Corp. who was recruited by regulators in September to take over AIG, said he agreed to pay the bonuses primarily because of the risk of losing critical employees, with the legal consequences as a secondary concern.
The new AIG executive team “has to continue managing our business as a business - taking account of the cold realities of competition or customers, for revenues and for employees,” he said. “Because of this and because of certain legal obligations, AIG has recently made a set of compensation payments, some of which I find distasteful.”
AIG recently paid $1 million or more to 73 people in its financial trading unit, including a top recipient who got $6.4 million. Risky investments in the division are blamed for dragging down the company’s long-established and financially stable traditional insurance lines.
The AIG bonuses sparked partisan sniping and questions about the Obama administration’s approach to the financial crisis. Rep. Tom Price, Georgia Republican, said he was disappointed that Treasury Secretary Timothy F. Geithner had declined to testify at the hearing.
“Make no mistake, everyone is up in arms over the bonuses paid to AIG,” Mr. Price said. “But the real outrage is that the taxpayer was put in this position in the first place.”
Mr. Liddy said that he had approved the bonuses in consultation with the Federal Reserve and that not paying the bonuses could have left taxpayers with an even bigger tab if the company went under.
“I’m trying desperately to prevent an uncontrolled collapse of this business,” he said.
Mr. Liddy revealed that some AIG employees had already agreed to return their bonuses but said it was too early to say how much money would be returned.
House Financial Services Committee Chairman Barney Frank, Massachusetts Democrat, said he plans to ask the committee to issue subpoenas to obtain the names of the individual AIG employees who received the bonuses - a list that the company has not released.
“We do intend to use our power to get these names,” he said.
Mr. Liddy said he was willing to supply the names of AIG officials who had been given the bonuses, but only if their names were kept confidential.
“I’m really concerned about the safety of our employees,” he said, reading the committee an anonymous threat sent to the company warning that “all the [AIG] executives and their family should be executed with piano wire around their necks.”
The retention bonus contracts were signed before Mr. Liddy was recruited by Bush Treasury Secretary Henry M. Paulson Jr. to revamp the company. He said AIG has adopted a series of executive-pay restrictions, eliminated federal lobbying activities and stopped political contributions since he took over.
Mr. Liddy said there was one part of AIG that was probably beyond salvation, despite all the bonuses and taxpayer aid.
“I think the AIG name has been so wounded and disgraced, we’ll probably have to change it,” he said.
• Kara Rowland contributed to this report.