Washington

American International Group Inc. Chairman Edward Liddy says he agreed to pay bonuses to the financial products unit employees to keep the unit from collapsing.

Liddy says he understands public anger about the bonus payments, and about the government providing $173 billion in cash to keep AIG solvent, but he says the only way the government can get its money back is to stay the course.

Liddy made his comments in sworn testimony today before the House Financial Services Committee capital markets subcommittee.

The committee room and an overflow room above the committee room were packed.

A dozen photographers were waiting for Liddy at each of the two entrances he could use to come into the committee room.

Committee members on both sides of the aisle struggled to express their outrage about the bonuses in the 1 or 2 minutes allotted.

One, Rep. Paul Hodes, D-N.H., declared, “For the American public, AIG now stands for Arrogance, Incompetence and Greed.”

“Obviously,” Liddy said, “we are meeting today at a high point of public anger. I share that anger.”

As a businessman for about 37 years, “I have seen the good side of capitalism,” Liddy testified. “Over the last few months, in reviewing how AIG had been run in prior years, I have also seen evidence of its bad side. Mistakes were made at AIG on a scale few could have ever imagined possible.”

The most critical mistake was the creation of a credit default swap portfolio, “which eventually became subject to massive collateral calls that created a liquidity crisis for AIG,” Liddy said.

Although AIG has wound down AIG Financial Products Corp. unit arrangements with a total notional value of more than $1 trillion, $1.6 trillion in exposure remains, Liddy said.

“The financial downside for taxpayers is potentially very large and very real, and that’s why we’re winding this business down,” Liddy said.

Liddy said that, in an effort to soothe public anger at the AIG bailout, he has asked the employees of AIG Financial Products “to step up and do the right thing.”

Specifically, he said, he has asked those who received retention payments of $100,000 or more to return at least half of those payments.

In response, he said, some already have stepped forward and offered to give up 100% of their payments.

“The action we are taking today is the result of discussions with numerous parties, including Attorney General [Andrew] Cuomo of New York,” he said. “We will work to ensure the highest level of employee participation in this effort in the days ahead. And we will keep the Congress and the American people informed of our progress.”

Liddy said, “We are essentially operating AIG on behalf of the American taxpayer so that we can maximize the amount we pay back to the government. We weigh every decision with one priority in mind: Will this action help our ability to pay monies back to the government or hurt it?”