Congress grills Geithner and Bernanke over AIG bonus scandal

US treasury secretary says he was powerless to stop multi-million dollar bonus payouts by the struggling insurer
Treasury secretary Timothy Geithner talks to Federal Reserve chairman Ben Bernanke before testifying about the AIG bonus scandal. Photograph: Matthew Cavanaugh/EPA

The US treasury secretary, Timothy Geithner, today called on Congress for sweeping new powers to seize control of non-bank financial institutions to avoid a repetition of the government's struggle to keep the stricken insurer AIG afloat.

Under hostile questioning from lawmakers on Capitol Hill, Geithner and the Federal Reserve chairman, Ben Bernanke, attacked AIG's use of taxpayers' funds to pay $165m (£112m) in bonuses but insisted they had been blindsided and were powerless to prevent it.

"These were legal contracts and we're a nation of laws," said Geithner, who said he was briefed about the bonus payments only on 10 March. "We have to be very careful about the government intervening in these contracts."

Though the US Federal Deposit Insurance Corporation can take over a failing bank, no such powers exist to seize an insurer such as AIG, the US's two top economic officials told the house financial services committee.

Bernanke said that if such authority did exist, AIG "could have been taken into receivership or conservatorship and the bonus issue wouldn't have arisen".

The distribution of bonuses to scores of top staff at AIG has led to a furious backlash. New York state's attorney general, Andrew Cuomo, has revealed that 15 of the top 20 recipients in the US have agreed to pay back the money but that some in the firm's London office are holding out.

"We have a very aggressive theory about our jurisdiction but we don't have a theory that gets us to London," said Cuomo.

AIG has removed the words "American International Group" from its office skyscraper in Manhattan. The company intends to re-fashion itself as AIU Holdings. Chief executive Ed Liddy recently conceded that its brand had been "wounded and disgraced".

Lawmakers castigated Geithner over the Obama administration's handling of AIG's bonus payouts. Gary Ackerman, a Democrat from New York, demanded broader checks on executive pay. "Even if all these people gave back double the amount they received and spent the week in the public pillory, it wouldn't fix the problem. The real problem is greed."

Others complained that bailout funds provided by US taxpayers to AIG were going to European banks owed money by the US firm under contracts such as credit default swaps.

"My constituents in Kansas have bail-out fatigue," said Lynn Jenkins, a Republican congresswoman, who asked at what point the administration realised that "such a large sum would be sent to foreign institutions".

Bernanke defended the flow of cash to European banks. "The Europeans have also saved a large number of institutions and the issue of whether those institutions owed American companies money has not come up."