Washington

Treasury Secretary Tim Geithner says his department is working with the U.S. Department of Justice on recouping the AIG Financial Products Corp. unit executive retention bonuses.

Justice is helping Treasury determine what avenues can be used to get the money back from American International Group Inc., New York, AIG Financial Products’ parent company, Geithner writes in letters sent to House Speaker Nancy Pelosi, D-Calif.; SenGeithnerate Majority Leader Sen. Harry Reid, D-Nev.; Senate Minority Leader Sen. Mitch McConnell, R-Ken.; and House Minority Leader John Boehner, R-Ohio.

To ensure taxpayers are compensated for any bonuses that cannot be recovered, the government “will impose on AIG a contractual commitment to pay the Treasury from the operations of the company the amount of the [$165 million] retention awards just paid,” Geithner writes.

Moreover, “we will deduct from the $30 billion in assistance an amount equal to the amount of these payments,” Geithner writes.

The larger is issue that, under current law, federal officials lack the authority to take control of non-bank financial institutions, Geithner writes.

Even the executive pay guidelines put into the economic stimulus bill by Sen. Christopher Dodd, D-Conn., “allow for the payment of contracts signed before the act went into effect,” Geithner writes. “This situation dramatically underscores the need to adopt, as a critical part of financial regulatory reform, an expanded ‘resolution authority’ for the government to better deal with situations like this. Such a resolution authority should include a comprehensive and broad set of regulatory tools that would enable the government with financial institutions, like AIG, whose failure would pose a significant risk to our financial system, but to do it in a way that will protect the interests of the taxpayer and innocent counterparties.”

Geithner says he had received a commitment from AIG Chairman Edward Liddy that the company would work to “scrap or cut” hundreds of millions of dollars in additional bonus payments due this year and in the future.

Liddy has “committed himself to do this on terms that are consistent with the executive compensation guidance for firms receiving government aid mandated by provisions of the stimulus act enacted by Congress last month,” Geithner writes.

In related news, Sen. Charles Grassley, R-Iowa, asked Treasury Department Inspector General Eric Thorson to investigate the role department officials played in the decision by AIG to pay bonuses to AIG Financial Products executives.

Grassley asks in a letter that the probe determine the terms under which the department provided funding to AIG, and “particularly whether or not Treasury officials made any effort to forestall payments of bonuses or demanded waivers of bonuses prior to releasing any taxpayer funds.”

He also asked Thorson to determine when the legal obligations were incurred and whether these bonuses are compelled by contracts between AIG and its employees.