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Geithner: AIG must pay back bonus money

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  • NEW: AIG will have to return bonuses given to executives, Treasury secretary says
  • AIG paid 73 people bonuses of $1 million or more each, New York AG reports
  • New plan proposes retention bonuses would be subject to a 35 percent excise tax
  • Grassley: Plan would address taxpayer feeling of "salt in their wounds"
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(CNN) -- Insurance giant AIG will have to return to the Treasury Department the $165 million it just paid out in executive bonuses, Treasury Secretary Timothy Geithner said Tuesday in a letter to congressional leaders.

Sens. Max Baucus, left, and Chuck Grassley, announced a plan to tax bonuses of firms that got bailout money.

Treasury Secretary Timothy Geithner said AIG will have to return $165 million in bonuses for executives.

"We will impose on AIG a contractual commitment to pay the treasury from the operations of the company the amount of the retention awards just paid," Geithner wrote. "In addition, we will deduct from the $30 billion in assistance an amount equal to the amount of those payments."

That would be a double payment, essentially a $165 million penalty on AIG for issuing the bonuses.

The move comes after New York Attorney General Andrew Cuomo confirmed in a letter to Congress that this year, after receiving federal bailout money, AIG paid 73 employees bonuses of more than $1 million each. Video Watch congressional reaction to AIG bonuses »

Cuomo also wrote that 11 of the employees no longer work for the company. The largest bonus paid was $6.4 million; seven other people also received more than $4 million each.

AIG is under fire for awarding the bonuses while being kept afloat by more than $170 billion from the U.S. government's financial bailout.

On Tuesday, two key senators also announced a plan to impose a hefty tax on retention bonuses paid to executives of companies that received federal bailout money or in which the United States has an equity interest.

Sens. Max Baucus, D-Montana, and Chuck Grassley, R-Iowa, are the chairman and top Republican on the Senate Finance Committee, respectively. They said companies would not be allowed to restructure the payments to those executives through deferred compensation to avoid the tax.

Grassley and Baucus said all retention bonuses would be subject to a 35 percent excise tax for excessive compensation to be paid by the company and an additional 35 percent tax to be paid by the individual.

"Millions of Americans are losing their jobs -- millions. And to some degree, they're losing their jobs because of actions taken by some of these firms," Baucus said. "At the same time, they're giving themselves bonuses. I mean, give me a break. What are these people thinking? That's part of the problem. They're not thinking."

All other nonretention bonuses of more than $50,000 would be subject to the same tax, the senators said.

"We're trying to address what I think taxpayers would say is salt in their wounds," Grassley said. "The taxpayers are bearing a great deal to get this economy going, help get these corporations turned around, and I think taxpayers are willing to help.

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"But when they see the lack of sensitivity on the part of corporate directors -- by giving these bonuses and doing other outrageous things -- there's just so much that the taxpayers of this country are going to stand for."

The provisions would apply to bonuses paid out after January 1, 2009, so it would affect the AIG bonuses in question.

"We should not be here. We should not be in this position," Baucus said. "AIG should not have promised those payments to retain those employees, and the Treasury should have blocked the issuance of the checks. It did not. And employees themselves should not have cashed them in. We should not be here, but unfortunately we are."

Senior Finance Committee aides said the senators had not yet worked out whether individuals would pay income tax on the bonuses as well as the proposed excise tax, or if a combination of the two would be used. Video Watch why Americans are angry »

"You'll have to wait to see when we introduce the legislation," one of the aides said.

"If our bosses had made a decision, we'd tell you what it was," said another. See a snapshot of facts, attitudes and analysis on the recession »

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On Monday, President Obama said he planned to attempt to block bonuses to executives at ailing insurance giant AIG, payments he described as an "outrage."

Obama said he asked Geithner to "pursue every single legal avenue to block these bonuses and make the American taxpayers whole." Obama said he would work with Congress to change the laws so that such a situation cannot happen again. Video Watch Obama say he's outraged by bonuses »

The president spared AIG CEO Edward Liddy from criticism, saying he got the job "after the contracts that led to these bonuses were agreed to last year."

But he said the impropriety of the bonuses goes beyond economics. "It's about our fundamental values," he said. iReport.com: Sound off on AIG

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Under pressure from the Treasury, AIG scaled back the bonus plans and pledged to reduce 2009 bonuses -- or "retention payments" -- by at least 30 percent. That has done little to temper outrage over the initial plan, however. Who's insured by AIG? »

Liddy will face intense questioning about the bonuses when he testifies Wednesday before the House Financial Services subcommittee on capital markets.

CNN's Ted Barrett, Dana Bash and Elaine Quijano contributed to this report.

All About Timothy GeithnerAmerican International Group Inc.

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