AIG has infuriated the Obama administration by paying "retention" bonuses of $450m (£322m) to staff at the London-run financial products division that has crippled the company with its vast losses on toxic derivatives.
AIG is handing out the money to 400 executives under a programme drawn up before the scale of its difficulties became clear. Those receiving the money are trying to unravel enormous liabilities that have forced the insurance company to accept four government bailouts totalling $150bn.
The payouts are to be paid over several years, with a tranche of $165m due this week. In addition, AIG is providing $121m to 6,400 employees across the rest of its sprawling global empire.
The US treasury secretary, Timothy Geithner, attempted to block the payments last week. He is said to have "berated" AIG's chief executive, Ed Liddy, over the scale and timing of the handouts.
Liddy responded that they are contractual requirements AIG could not find a legal way to escape. "I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them," he said in a letter to the US treasury, which owns 80% of AIG.
AIG has been teetering on the brink of bankruptcy since September. The company crashed $61bn into the red in the final quarter of 2008 – the biggest loss in US corporate history.
A big chunk of its problems has been blamed on AIG Financial Products, which is based in Connecticut but largely operates out of an office in Mayfair. The division specialised in credit default swaps – complex deals to insure banks against default on loans – which have spectacularly backfired since the global economic crisis kicked in.
Senior figures close to the White House made it clear yesterday that the administration is deeply unhappy.
Larry Summers, director of President Obama's national economic council, told ABC television that the treasury had done its best to scale back the payments, forcing concessions including a future salary cut to $1 for the division's top 25 staff.
"There are a lot of terrible things that have happened in the last 18 months, but what's happened at AIG is the most outrageous," said Summers. But he added: "We are a country of law. The government cannot just abrogate contracts."
The furore comes on top of controversy over vast bonus payouts at Merrill Lynch, which was bought by Bank of America after huge losses last year.
Barney Frank, chairman of the house financial services committee, said the Bush administration ought to have attached tighter conditions to bailouts provided in the final days of its regime.
"This is an example of people at the commanding heights of the economy misbehaving and abusing the system," said Frank. "Things have gotten tougher under the Obama administration."
AIG's financial products division was run by Joseph Cassano until February 2008, when he stepped down amid early signs of losses. Insiders said that the retention scheme was set up because of fears that key staff would follow Cassano out of the door.