AIG bonuses came after worst had passed: report

WASHINGTON (Reuters) - The work of defusing the most dangerous bets placed by American International Group Inc was largely concluded long before the company gave bonuses to employees it said it needed to retain to avoid a financial meltdown, The Washington Post reported on Thursday, citing documents and interviews.

In testimony before Congress on Wednesday, AIG chief executive Edward Liddy said the payment of $165 million in retention bonuses was necessary because the departure of key employees could result in catastrophic losses.

The bonuses have sparked outrage from the White House to Main Street since AIG is surviving on three federal bailouts worth up to $180 billion. The Obama administration and lawmakers are looking for ways to recoup the money.

The Washington Post said AIG used almost $50 billion from the Federal Reserve to end contracts with other financial firms by the end of 2008 in a move to extricate the company from a central role in the U.S. financial system with minimal collateral damage.

The most explosive contracts largely were the creations of AIG's Financial Products unit, and employees of that division -- the recipients of the controversial bonuses -- worked through the fall to unwind old deals, the report said.

By the end of December, the outstanding volume of risky and highly complex derivatives had been reduced to roughly $13 billion from $78 billion, the Post said, citing the company's financial filings.

Two Financial Products executives were cited as saying the hardest work has been completed and their focus has shifted to the resolution of a vast but less risky portfolio of bets on more straightforward financial instruments.

A company spokeswoman told the Post that when Liddy made his comments at Wednesday's hearing, he simply wanted underscore the seriousness of the remaining challenge.