The Chairman of the House Financial Services Committee told RTTNews Tuesday that the Federal Reserve's handling of retention bonuses at American International Group (AIG) is causing some to question the central bank.

AIG recently announced that it has paid $165 million in bonuses to staff in its financial products arm, the wing of the company whose risky, unregulated use of credit default swaps is blamed for bringing the company to its knees, needing $170 billion in federal funds to stay afloat.

The move provoked outrage in Congress and around the country aimed at federal regulators who had not done enough to block the payments.

Treasury Secretary Timothy Geithner has said he was only made aware of the full size and scope of the payments a week before they were made.

However, AIG's caretaker CEO Edward Liddy recently told a congressional panel that Federal Reserve officials had known about the bonuses, and given at least tacit approval for much longer.

Rep. Barney Frank, D-Mass., speaking to RTTNews after his committee had grilled Geithner and Federal Reserve Chairman Ben Bernanke on their oversight of the company, which is now 80 percent taxpayer owned, said the scandal reflected poorly on the Fed.

It causes some concern about the Fed, he said. It underscores the need for reform. It makes clear the need a means of resolving failed non-bank institutions . but it does shake some confidence in the Fed.

Frank added that his committee plans to revisit a provision of the recently passed economic stimulus legislation that banned bonuses for employees of companies receiving large amounts of federal aid.

That legislation has come under fire because it was drafted in a way to only affect bonuses in contracts made after the federal intervention, whereas the controversial contracts at AIG were in force before the bailout of the company.

Frank also defended Sen. Chris Dodd, D-Conn., the chairman of the Senate Banking Committee, who wrote the provision with advice from Treasury staff so as to avoid potentially being sued over retroactive changes in the contracts.

If he hadn't done that, there wouldn't have been anything to exempt [the AIG contracts] from, Frank said. He moved the ball. He shouldn't be attacked for not moving it as far as he might have.

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