March 14 (Bloomberg) -- American International Group Inc., the insurer saved from collapse by taxpayer bailouts, was ordered by the U.S. Treasury to scale back bonuses and reimburse the government for some 2008 payments, according to a person briefed on the matter.

Treasury Secretary Timothy Geithner telephoned Chief Executive Officer Edward Liddy on March 11 to demand changes to New York-based AIG’s bonus payments, an administration official said separately. The people declined to be identified because discussions weren’t public. Liddy told Geithner in a letter that retention payments for 2009 -- designed to keep employees from leaving AIG -- will be cut at least 30 percent, and that some payments can’t be stopped because they’re binding contracts.

“I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them,” Liddy wrote to Geithner in the March 14 letter, which said that the agreements predated his appointment by the U.S. “With the benefit of hindsight, I would have designed these differently and at significantly lower levels.” Liddy wasn’t among those entitled to a bonus.

AIG had expected its retention payments would cost about $1 billion, according to a March 2 regulatory filing. The payments, reported earlier by Bloomberg, drew criticism from U.S. lawmakers who objected to giving individual employees as much as $4 million at a company whose wrong-way bets on credit- default swaps helped deepen the global credit crisis. AIG had said the payments were needed to keep talented people.

The insurer’s plan to repay the U.S. for its bailout package included selling subsidiaries. The retention payments would benefit taxpayers by making the units attractive to buyers, Liddy had said earlier. AIG scaled back plans for those sales when few bidders emerged.

To contact the reporters on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net; Hugh Son in New York at hson1@bloomberg.net;

Last Updated: March 14, 2009 19:34 EDT