UPDATE 4-Millions in AIG bonuses ignite bipartisan fire

AIG agreed on Saturday to revamp its system for paying bonuses after the Obama administration objected to plans for hundreds of millions of dollars in such payouts, but it said it had no choice but to pay out the $165 million due by Sunday.

AIG (AIG.N) will sharply cut remaining 2009 salaries for top executives of its AIG Financial Products unit and realign 2008 bonuses to tie them to restructuring and repayment targets, AIG Chairman Edward Liddy wrote Geithner.

AIG had promised to pay about $1 billion in retention bonuses over a period of several years, half of which has already been paid.

Liddy, in his letter to Geithner, said the firm was legally obligated to make already-committed 2008 employee-retention payments, the value of which were set early last year before problems at its Financial Products unit became public.

Financial Products was the unit that made bad bets on toxic mortgages and credit default swap contracts that led to the company's near collapse -- and the first of a series of taxpayer-funded bailouts in mid-September.

"We need to find out whether these bonuses are legally recoverable," said Democrat Barney Frank, chairman of the Financial Services Committee in the House of Representatives.

Appearing on "Fox News Sunday," Frank said the government also needs answers from AIG.

"Who said and at what point, 'We're going to give these bonuses no matter what.' And I do think it's inappropriate for those people to stay in power at that company," he said.

Republican Senator Bob Corker, appearing with Frank, said corporate recipients of federal bailouts should "have to play by a different set of rules, and hopefully that will cause institutions across this country not to want to take government money" and face increased federal scrutiny.

Rep. Paul Kanjorski, a Pennsylvania Democrat who chairs a House subcommittee on capital markets, said the bonuses would be a topic at a hearing on Wednesday at which Liddy will testify.

The bailout of AIG not only propped up the insurer but benefited a range of big banks, including some of Europe's largest, who were conducting transactions with the insurance giant.

Under pressure from lawmakers, AIG disclosed on Sunday that more than $90 billion had been paid to various banks, including Deutsche Bank (DBKGn.DE), France's Societe Generale (SOGN.PA) and U.S. investment powerhouse Goldman Sachs (GS.N), since the insurer nearly went bankrupt in September. [ID:N14474055] (Reporting by Thomas Ferraro, Jim Vicini, Philip Barbara and John O'Callaghan; writing by Thomas Ferraro, editing by Bill Trott, Philip Barbara and Paul Simao)