President Obama has asked Treasury Secretary Timothy Geithner to stop American International Group Inc. from paying $165 million in retention bonuses to financial products unit employees.

AIG, New York, says it is “contractually obligated” to pay the previously negotiated bonuses, which were due Sunday, to AIG Financial Products Corp. unit employees. AIG Financial Products sold many of the arrangements, such as credit default swaps, that led AIG to seek federal financial assistance in September 2008.

AIG “is a corporation that finds itself in financial distress due to recklessness and greed,” Obama said in remarks at the White House. “Under these circumstances, it’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay.”

Geithner should use every legal means to try to block the bonus payments, Obama said.

“All across the country, there are people who work hard and meet their responsibilities every day, without the benefit of government bailouts or multi-million dollar bonuses,” Obama said. “And all they ask is that everyone, from Main Street to Wall Street to Washington, play by the same rules.”

Another official, New York Attorney General Andrew Cuomo, D, has asked AIG to show him the contracts “you now claim obligate you to make those payments.”

Cuomo wants to know who negotiated the contracts and who developed the retention bonus plan, “so we can begin to investigate the circumstances surrounding these questionable bonus arrangements.”

Cuomo also wants information concerning whether the payments “may be considered fraudulent conveyances under New York law,” Cuomo writes in a letter to Liddy.

Cuomo asks in the letter that the information be submitted by 4 p.m. today. If AIG were to miss the deadline, Cuomo would “issue subpoenas and seek, if necessary, to enforce compliance in court,” Cuomo writes. “We owe it to the taxpayers to take every possible action to stop unwarranted bonus payments to those who caused the AIG meltdown in the first place.”

After the original version of this article appeared, Cuomo said at a press conference that he had not received the information and had started the process of issuing subpoenas.

“We are in contact with the attorney general and will of course respond to his request,” an AIG spokesman said earlier in the day.

Earlier, an aide to Rep. Elijah Cummings, D-Md., said Cummings is planning to send a letter to Geithner expressing outrage over the bonus payments.

AIG Chairman Edward Liddy defended the bonuses payments in a letter sent to Treasury Secretary Timothy Geithner.

AIG executives do not like the bonus arrangements “and find it distasteful and difficult to recommend to you that we must proceed with them,” Liddy writes.

But “outside counsel has advised these are legal, binding obligations of AIG, and there are serious, legal as well as business, consequences, for not paying,” Liddy writes. “On the one hand, all of us at AIG recognize the environment in which we operate and the remonstrations of our President for a more restrained system of compensation for executives. On the other hand, we cannot attract and retain the best and brightest talent to lead and staff the AIG businesses – which are now being operated principally on behalf of the American taxpayers – if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.”

A supplement to the letter shows that AIG has already issued $55 million in retention pay to about 400 AIG Financial Products unit employees.

Liddy confirms in the letter to Geithner that Geithner criticized the payments Wednesday, during a telephone call.

“I admit that the conversation was a difficult one for me,” Liddy writes.

Liddy writes that he believes “there will be considerably greater flexibility to reduce contractual payments in respect of 2009, and AIG intends to use its best efforts to do so.”

Liddy writes that he personally does not participate in any AIG bonus or retention program, has never attended an AIG sales event or conference, and, before September 2008, did not have a relationship with AIG.”

“I was asked to serve by your predecessor in connection with the acquisition by the government of almost 80% of AIG’s outstanding shares,” Liddy writes. “My only goals are to have AIG repay, with interest, to the maximum extent possible, the assistance the American taxpayers have given it and to continue AIG’s main insurance companies as strong, thriving businesses and contributors to the economy. My only stake is my reputation.”

AIG “commits to use best efforts” to reduce expected 2009 retention payments by at least 30%, Liddy writes.

AIG also is taking “other significant steps to limit overall compensation at AIG Financial Products where we can,” Liddy writes.

Liddy says the 25 highest-paid active contract employees at AIG Financial Products have agreed to reduce their remaining 2009 salary to $1.

The remaining 2009 salary of all other officers – that is, anyone with a title of associate vice president or higher – will be reduced by 10%, subject to local law requirements, Liddy writes.

In addition, Liddy writes, other forms of non-cash compensation will be reduced or eliminated.

Additional information was contributed to this article by Daniel Hays.