AIG plans to pay $450 million in bonuses to finance executives who led the US insurance giant to a $99.3-billion loss last year, US media reported on Sunday.
The payments have dismayed the US government as AIG has received $170 billion in federal aid.
The bonuses are for staff at the London subsidiary AIG Financial Products, which helped trigger the collapse and then the nationalization of the former world number one insurer, The Wall Street Journal reported.
American International Group CEO Edward Liddy told Treasury Secretary Timothy Geithner bonuses could not be cancelled due to a risk of lawsuits for breaching employment contracts, The Washington Post said.
In a letter to Geithner, Liddy also indicated a refusal to pay bonuses worth tens of millions of dollars would prompt an exodus of senior employees.
"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 US treasury," Liddy wrote, according to the Post.
Some of the bonuses are as samll as $1,000 but seven executives at AIG Financial Products were to receive more than $3 million in bonuses, The New York Times reported.
For the fourth quarter, AIG announced a loss of $61.7 billion -- the biggest ever for a US firm in one quarter -- pushing up its net loss for 2008 to $99.3 billion.