WASHINGTON–Treasury Secretary Tim Geithner and FederalReserve Board Chairman Ben Bernanke today both disclosed toCongress that their agencies examined possible legal action to stoppayment of the bonuses to American International Group's FinancialProducts Group but retreated from the idea.

Both also said in testimony before the House Financial ServicesCommittee that they were counseled by their legal staffs as well asAIG's legal staff that such legal action could backfire.

At the same time, Secretary Geithner said he is working with theDepartment of Justice to determine "what legal avenues may beavailable to recoup retention bonuses that have already beenpaid."

He told members of the committee Treasury will also impose onAIG a contractual commitment to pay the Treasury, from theoperations of the company, the amount of the retention awards justpaid.

Finally, he said, Treasury will deduct from the $30 billion inrecently committed capital assistance an amount equal to the amountof those payments.

In his testimony, Secretary Geithner related that when he foundout March 10 that the bonuses were scheduled to be paid soon, "Icalled Ed Liddy [AIG chairman and chief executive officer] andasked him to renegotiate these payments."

He explained, Mr. Geithner said, "that the contracts for theretention payments were legally binding and pointed out the riskthat, by breaching the contracts, some employees might have a claimunder Connecticut law to double payment of the contractedamounts."

In his testimony, Chairman Bernanke said that when he wasinformed the payments would soon be made, "my reaction…was that,notwithstanding the business purposes that might be served by thisaction, it was highly inappropriate to pay substantial bonuses toemployees of the division that had been the primary source of AIG'scollapse."

He then asked that the AIG-FP payments be stopped but wasinformed "they were mandated by contracts agreed to before thegovernment's intervention."

When he asked "that suit be filed to prevent the payments," Mr.Bernanke said that "legal staff counseled against this action, onthe grounds that Connecticut law provides for substantial punitivedamages if the suit would fail; legal action could thus have theperverse effect of doubling or tripling the financial benefits tothe AIG-FP employees."

He said he was also told the company had been instructed topursue all available alternatives and that the Federal Reserve Bankof New York "had conveyed the strong displeasure of the FederalReserve with the retention payment arrangement."