Edward M. Liddy, chairman and CEO of American International Group Inc. since last fall, has become the reluctant defender of princely employee bonuses that members of Congress – and much of the American public – find indefensible.

AIG, the giant insurance company that has received $170 billion in government assistance, is paying more than $200 million in bonuses to keep employees from fleeing its troubled financial products division. On Wednesday, Liddy was to pull up a chair at a congressional witness table and take the heat.

The retention payments – ranging from $1,000 to nearly $6.5 million – were not his idea. Liddy himself is not getting a bonus. The deals were cut early last year, long before then-Treasury Secretary Henry Paulson asked Liddy to take over the company.

“I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them,” Liddy wrote to the current treasury secretary, Timothy Geithner, over the weekend.

But the payments went out. Congress is in a lather and wants the money back. And Liddy, who had been scheduled to testify about AIG before the bonus story took root, is a timely target.

Appearing on CBS’ The Early Show, Rep. Barney Frank, D-Mass., said Congress should rewrite a Depression-era law that the Federal Reserve used to give AIG its initial government bailout.

“The federal government is a major owner of this company. We’re the owners, not just the regulators,” said Barney, the chairman of the House Financial Services Committee.

“It is my hope that before much further, we will amend that statute,” he said. Frank said the mere existence of the 1932 statute enabling the Fed to make the direct payment rendered a no-strings bailout as “a fait accompli.”

Rep. Carolyn Maloney, a New York Democrat who is on Frank’s committee, said that “Congress is going to recoup this money.”

Maloney said this will happen one way or another, “whether it’s through taxes, through a contract change. They say you can’t change a contract. We change contracts all the time.”

Maloney said on NBC’s “Today” show that “we’re looking at a number of proposals.”

The clamor over compensation overshadowed AIG’s weekend disclosure that it used more than $90 billion in federal aid to pay out to foreign and domestic banks, including some that had multibillion-dollar U.S. government bailouts of their own. AIG is the single largest recipient of government assistance – a company whose financial transactions were so intricate and intertwined that it was considered simply too big to fail.

In an essay published Wednesday in The Washington Post, Liddy wrote: “The company’s overall structure is too complex, too unwieldy and too opaque for its component businesses to be well managed as one entity. So the strategy we continue to pursue … is to isolate the value in the company’s component parts, capture that value to pay back money owed to the government, and allow AIG’s healthy insurance companies to continue to prosper for the benefit of policyholders and taxpayers.”

Lawmakers already were troubled by the idea of an institution that could single-handedly topple the financial system. Now, Liddy will appear before a House Financial Services subcommittee just as lawmakers from both parties are casting his company as the symbol of excess and abuse of taxpayer dollars.

Congress and the Obama administration on Tuesday appeared to race each other to find ways to strip bonus recipients of their money. The Democratic chairman of the Senate Finance Committee, Max Baucus, and the panel’s top Republican, Charles Grassley, immediately proposed legislation that would require companies and individuals to pay a 35 percent tax on all retention awards and on all other bonuses over $50,000. Others suggested even higher tax rates.

“If you don’t return it on your own, we will do it for you,” said Democrat Sen. Charles Schumer.

Geithner said he was working with the Justice Department to find ways to recover some of the payments. He cited a provision in the recent economic stimulus law that gave him authority to review compensation to the most highly paid employees of companies that already have received federal assistance.

Explaining the sudden burst of official outrage, the White House for the first time on Tuesday night said Geithner learned of the impending bonus payments a week ago Tuesday; he told the White House about them last Thursday, and senior aides informed President Barack Obama later that day.

But news of the bonuses was publicized last fall, prompting questions about how genuine any of the outrage directed toward AIG really is.

As talk of Geithner’s possible resignation swirled around Washington, White House officials were obliged to say that he still retained the president’s full confidence.

Overall, AIG has paid $220 million in retention awards to its financial products employees; it distributed $55 million in December and $165 million had to be paid by Friday. Documents provided by AIG to the Treasury Department said the awards ranged from $1,000 to nearly $6.5 million.

Seven employees were to receive more than $3 million. New York Attorney General Andrew Cuomo said AIG last week paid bonuses of $1 million or more to 73 employees, including 11 who no longer work there.

But even as the White House continued to label the payments outrageous, Geithner noted that Liddy, the former CEO of Allstate Corp., took the helm of AIG at the government’s request.

“He inherited a difficult situation, including these … retention contracts, which were entered prior to his or the government’s involvement in AIG,” Geithner wrote in a letter to congressional leaders Tuesday.

In his own letter to Geithner on Saturday, Liddy wrote that if it had been up to him, he would have designed the retention payments differently and at lower levels. But, he said, his hands were tied.

“Honoring contractual commitments is at the heart of what we do in the insurance business,” he said.

(Source: Associated Press)