Liddy told Geithner the bonuses were negotiated in early 2008 and "outside counsel has advised that these are legal, binding obligations of AIG, and there are serious legal, as well as business, consequences for not paying."
He said he is not taking a bonus for his work and the company is "committed to seeking other ways to repay the American taxpayers" for the bonus payments.
He added that there's more at stake than the prospect of having to spend more money to settle potential lawsuits by executives seeking unpaid bonuses. Liddy said that although he said he found it "difficult," AIG had to keep its contract to pay the bonuses because "honoring contractual commitments is at the heart of what we do in the insurance business."
AIG is scheduled to pay another $230 million in bonuses to employees in March 2010, according to a letter from Federal Reserve Bank of New York President William Dudley to Liddy on Friday.
AIG expects the amount to be smaller because of employee departures and the reduction of the financial products unit, Dudley said. "You have committed to aggressively pursue alternatives for reducing and restructuring" the 2010 bonus program, Dudley wrote to the company.
'I'm losing patience'
Bruce Ellig, author of The Complete Guide to Executive Compensation, said AIG probably is contractually obligated to pay the bonuses. "This is a very good reason why companies should be very careful in such contracts," he said. "They should include an escape clause for bona fide reasons, such as when the company loses money."
Tim Haidinger, president of the website WhatAreTheyPaid.com, said companies must have compensation packages that include bonuses, stock options, and retirement benefits to be competitive. "Sadly these packages often seem completely detached from company performance," he said.
Other companies, including Citibank, also have been taken to task for doling out executive bonuses after receiving federal bailout money.
AIG has faced criticism on other counts as well, including for having a sales meeting at a luxury resort in Phoenix after taking public funds. And lawmakers have argued for months that the company should be more open about what it was doing with the government money.
On Sunday, the insurance firm for the first time announced who it was paying to settle its debts with the funds, an array of major firms that include Merrill Lynch and Bank of America.
"I'm losing patience with the whole operation," said Kanjorski, the subcommittee chairman who will grill Liddy this week.
Rep. Scott Garrett, R-N.J., the senior Republican on the panel, said the bonuses raise questions about what the Fed knew when it decided to prop up AIG. He said lawmakers will have to raise those same questions when they are presented with future proposed bailouts.
That skepticism could spill over onto Obama's agenda. Next month, he is expected to propose a detailed budget that will propose spending that will lead to a $1.75 trillion deficit in the name of ending the recession. He also wants to overhaul the nation's health care system.
Those ambitious goals could be threatened if Congress rejects more heavy spending.
William Black, a senior bank regulator during the 1980s savings and loan crisis, said Obama needs to be honest about the depth of the financial crisis to restore trust in government. "The way you build public confidence is to find the truth, tell people about the truth," he said.
Rep. Elijah Cummings, D-Md., said that's already Obama's strong suit. "He's not going to sugarcoat it," he said.
Contributing: Reuters, The Associated Press, Mimi Hall, Barbara Hagenbaugh, John Fritze and Del Jones, USA TODAY