Barack Obama has ordered his treasury secretary to take all legal measures to stop insurance company American International Group (AIG) from paying its traders millions of dollars in bonuses.

AIG says it is contractually obliged to pay $165m in bonuses, despite taking $173bn of taxpayer bailout money to keep the company from collapsing.

"Under these circumstances, it's hard to understand how derivative traders at AIG warranted any bonuses, much less $165m in extra pay," the US president said on Monday.

"How do they justify this outrage to the taxpayers who are keeping the company afloat?"

The US treasury is now set to modify a planned $30bn capital infusion for AIG. A treasury official said the move was aimed at recouping the bonuses.

Edward Liddy, AIG's chairman and chief executive, told Timothy Geithner, the US treasury secretary, in a letter that the insurer had to make the 2008 employee "retention payments", but had agreed to revamp its system for future bonuses after the Obama administration objected.

Grilling expected

Liddy is expected to be grilled over the bonuses and Sunday's disclosure that billions of dollars of taxpayer money had been paid to investment firm Goldman Sachs and several European banks when he testifies at a US congressional hearing on Wednesday.

The bonus issue has been criticised by both Democrat and Republican politicians.

Barney Frank, a Democrat in the House of Representatives, suggested the executives should be fired.

"These people may have a right to their bonuses; they don't have a right to their jobs forever. The federal government now is the 80 per cent owner. One of the things we can do to make sure this doesn't happen again," he told NBC's Today show.

Mitch McConnell, the Republican senate minority leader, said that the Obama administration should work to ensure there was no repeat of the "absolutely appalling" bonuses.

"The American taxpayer needs to have complete certainty that their tax money is not going to be spent in this way ever again," he said.

Threat of subpoenas

Meanwhile, the New York attorney-general has threatened to issue subpoenas to obtain details of the bonuses.

Andrew Cuomo, who has been pressing troubled banks and financial institutions such as AIG since last October for details of their bonus payments, said he was investigating whether the AIG payments could be voided under New York law.

"We need this information immediately in order to investigate and determine whether any of the individuals receiving such payments were involved in the conduct that led to AIG's demise and subsequent bailout," he wrote in a letter to Liddy.

Robin Amlot, the managing editor of Banker Middle East magazine in Dubai, told Al Jazeera that the issue of executive bonuses is not a new problem, but is one that needs to be addressed.

"Perhaps with the impetus of this major financial crisis behind us, something will actually be done to tie performance to pay properly, so that if you perform badly you are penalised, just as if you perform well, you are rewarded."

In early 2008, AIG agreed to pay certain employees of AIG Financial Products retention bonuses totalling $450m. Nearly 50 per cent of that has now been paid, with $55m paid in December and another $165m on Sunday.

AIG argues that if it does not pay, it risks lawsuits by disgruntled employees and risks losing workers trying to clean up the company's financial mess - some $1.6bn in derivatives linked to toxic mortgages.

AIG declared earlier this month that it had suffered a loss of $61.7bn for the fourth quarter of last year, the largest corporate loss in history.