In a report last week, the General Accounting Office advisedTreasury to withhold $30 billion from American International Groupuntil the company agrees to renegotiate contracts with employeesand final counterparties.

The report was just one more component of a multipronged federalprobe into AIG contracts, including a call to action by U.S.banking officials from a key congressman related to derivativecontracts and an initiative by the Department of Justice whichseeks to recover bonus payments to employees.

The government secured a 79.9 percent interest in AIG inSeptember of last year when it began extending billions in loansand credit to keep the firm afloat.

In its new report on the Troubled Asset Relief Program, the GAOsaid the Treasury Department should withhold $30 billion inadditional aid that has been promised to AIG until the financiallytroubled insurer agrees to "seek additional concessions fromemployees and existing derivatives counterparties."

Meanwhile, Barney Frank, D-Mass., chair of the House FinancialServices Committee, sent a letter to Treasury Secretary TimothyGeithner and Federal Reserve Board Chairman Ben Bernanke, askingthem to investigate whether foreign institutions receivedpreferential treatment over U.S. banks.

Rep. Frank said he asked for the investigation because he hasreceived a letter from the committee's ranking minority membercharging that foreign institutions, which were counterparties toAIG, were paid in full while U.S. banks, which were also AIGcounterparties, are now being asked to accept "severe reductions inthe debt owed them."

The letter Rep. Frank forwarded from Rep. Spencer Bachus,R-Ala., said, "I am being told in some cases that…U.S. banks arebeing asked to accept reductions of over 70 percent of the totaldebt owed them."

In asking for the investigation, Rep. Bachus said the "disparityin treatment between foreign banks and U.S. banks is troubling,particularly since the U.S. banks now being asked to take suchreductions are some of the very taxpayers that have been fundingAIG."

In addition to the "clear inequity involved, this conductobviously runs counter to our efforts to stimulate credit in theU.S. economy through bank lending," Rep. Bachus said in hisletter.

In his letter to Secretary Geithner and Chairman Bernanke, Rep.Frank said, "I do not know what basis there is for the point he[Rep. Bachus] makes, but it is a serious issue and must beaddressed.

"Clearly, any discrimination against American-owned financialinstitutions compared to the treatment being received byforeign-owned institutions would be unacceptable to the Congress,and I believe to the American public," Rep. Frank wrote.

Earlier in the week, Neil Barofsky, Special Inspector General ofthe Troubled Asset Relief Program, disclosed probes into bonuspayments in testimony about his oversight of the TARP programbefore the Senate Finance Committee.

Last Tuesday, Mr. Barofsky said his office is coordinating withthe DOJ on the options available to recover the bonuses paid AIGexecutives. He also said his agency has an audit underway thatseeks to determine the federal monitoring and enforcement ofexecutive compensation restrictions imposed as a condition offederal financial assistance to organizations such as AIG.

As part of this audit, he said, "we will be looking closely toensure that the bonuses to AIG employees are not inconsistent withAIG's legal or contractual obligations."

He said he also plans to report to Congress "the sequence ofevents" which led to the approval of these payments by governmentofficials, including the general approval of retention payments inAIG's agreement with Treasury in November 2008 when Henry Paulsenwas Treasury secretary.

"To the extent that we find that there were miscommunicationsamong AIG, Treasury and Federal Reserve officials regarding thesepayments, we will make recommendations to ensure that all partiesinvolved in TARP-related programs effectively communicate with oneanother," he said.

HOUSE ACTS, PENSION FUNDS REACT

Separately, on Wednesday, the House in a 247-171 vote passed abill to restrict bonuses paid to executives of any companies thatreceive federal bailout money from TARP. The bonus restrictionbill, which was introduced by Rep. Alan Grayson, D-Fla., a memberof the House Financial Services Committee, prohibits "unreasonableand excessive" compensation as determined by the TreasuryDepartment and financial regulators and compensation not based onperformance standards.

Also on Wednesday, three pension funds asked government trusteesoverseeing the U.S. loan to AIG to withhold their support for anAIG board member who served on the company's compensationcommittee.

Officials from The American Federation of State, County andMunicipal Employees union, the AFL-CIO and the Treasurer of thestate of Connecticut sent a letter to the three trustees askingthem not to vote for James Orr III, a director at AIG.

In the letter, they said Mr. Orr was a member of the company'sCompensation and Management Resources Committee during the time"when it approved of the structure and the payouts for AIG seniorexecutive compensation and retention plans" to those executives"who were culpable for massive losses incurred by the creditdefault swaps."

While the trustees do not have control over the day-to-dayfunctions of the company, as representatives of the majorityshareholders, U.S. taxpayers who are fronting the $85 billion loanto AIG, they do have the ability to effect change in the company asshareholders.

The letter, directed to Jill M. Considine, Chester B. Feldbergand Douglas L. Foshee, noted the furor recently caused by the $160million in bonuses paid to executives at AIG Financial Productsgroup and other examples of what it says are unjustifiedcompensation to executives.

The letter noted the payment of $34 million to Joseph Cassano,head of the financial products unit, and the $1 million per monthsalary as a consultant after he left the company in February afterAIGFP had brought the company to its knees throughmultibillion-dollar losses from investments in credit defaultswaps.

It also noted the $47 million severance given to MartinSullivan, the former chief executive officer of AIG, after heresigned, and $22 million in severance to Mr. Sullivan's successor,Robert Willumstad. After leaving as CEO Mr. Willumstad returned themoney saying he did not deserve it.

The three trustees, appointed in mid-January by the FederalReserve Bank of New York, receive $100,000 a year for theirservices from the trust established to oversee the loan agreementwith AIG.