Veteran senator Dodd in the eye of AIG bonus storm

By Steve Holland

WASHINGTON (Reuters) - In a capital always looking for someone to blame, a powerful U.S. Democratic senator has a big bull's-eye on him in the firefight over taxpayer-funded bonuses for executives at insurance giant AIG.

Christopher Dodd, chairman of the Senate Banking Committee and one of the more prominent faces of the Democratic Party, is scrambling to explain how a loophole ended up in legislation that allowed the roundly condemned bonuses to go forward.

At issue is a clause in the $787 billion economic stimulus plan approved by Congress in February that capped bonuses for executives at companies getting federal bailout aid.

A one-paragraph provision tucked into the thick bill modified the cap to apply it only to future bonuses, not those that might have already been legally contracted.

This had the effect of allowing the $165 million in American International Group Inc bonuses to go forward.

Dodd, who is running for re-election in 2010, acknowledged on Wednesday he played a role in developing the legislation after CNN quoted a Treasury Department official as saying Treasury had talked to Dodd about such a clause, while not explicitly recommending it.

But Dodd said he acted at the behest of the Obama administration, although he would not say who made the request -- injecting an air of mystery into this week's political feeding frenzy over the AIG bonuses.

"I did not want to make any changes to my original Senate-passed amendment but I did so at the request of administration officials, who gave us no indication that this was in any way related to AIG," Dodd said.

"Let me be clear -- I was completely unaware of these AIG bonuses until I learned of them last week."

A senior Democrat said the Treasury Department and Federal Reserve pressed Dodd to make changes.

"They felt that it (the earlier language) was too restrictive," said the Democrat, requesting anonymity.

POTENTIALLY VULNERABLE

The back-and-forth is not good news for Dodd, 64, in his potentially difficult re-election race in Connecticut, where newspaper headlines have been blaring about his role in the bonus brouhaha.

In a sign of his potential vulnerability, a recent Quinnipiac University poll showed Dodd's opponent in the Senate race, Republican Rob Simmons, led him by 43 percent to 42 percent.

Adding insult to injury, the watchdog group Center for Responsive Politics reported Dodd -- a senator since 1981 in a state heavily dependent on the insurance industry -- received more than $223,000 in campaign donations from AIG workers between 2003 and 2008.