AIG's government appointed chief executive, Edward Liddy, is expected to be grilled when he goes before a congressional hearing on Wednesday over the bonuses and Sunday's disclosure that $90bn of the bailout money had been paid to other financial institutions such as Goldman Sachs and several European banks.
Rosiland Jordan, Al Jazeera's correspondent in Washington DC, said: "He will get a roasting at this hearing.
AIG has been kept afloat with more than $170bn of taxpayers money since September.
The US federal govermment now owns over 80% of the insurance company.
The current row is over $165m worth of bonus payments made to 418 executives.
AIG says it is a legal obligation to honour contracts drawn up before the government bailout.
But the so-called "retention bonuses" include over $33m for 52 people who have left the company.
"Even though he was called in by the previous [Bush] administration to try to manage AIG's affairs and manage their derivatives - bringing the company to the brink of bankruptcy - he still went ahead with these bonuses."
Geithner said the treasury was working with the justice department to determine whether provisions of a recently passed economic stimulus bill covering compensation for bailout recipients might be used to get back the bonuses.
"Our review will determine whether we can recoup these bonuses" under that authority, Geithner said.
But he acknowledged the stimulus law would only pave the way for negotiations with the company and the treasury was moving ahead with other steps to ensure repayment.
"We ... want to ensure that taxpayers are compensated for any monies we cannot recover," Geithner said in his letter.
New laws proposed
Angry US legislators scrambled to devise new laws to stop bailed-out firms from giving staff massive bonuses on Tuesday, with Nancy Pelosi, the House of Representatives speaker, saying that legislation could come up within days.
The legislators proposed various options to try to recoup the money, including a 70 per cent tax on bonuses paid to executives at companies that received taxpayer bailout money.
AIG, whose murky and complex financial dealings have contributed to the global financial meltdown, is the largest recipient of the government bailout with $173bn so far.
The company that made a $61.7bn loss for the fourth quarter of last year said it risked being sued if it did not pay the bonuses to staff of AIG Financial Products, the unit of the company that sold credit default swaps, the risky contracts that caused massive losses for the insurer.
Andrew Cuomo, the New York attorney-general, said 73 of those employees got bonuses of at least $1m.
Urged to return money
Legislators called for those who received bonuses at AIG to voluntarily give up the money.
"Let the recipients of these large and unseemly bonuses be warned: if you don't return it on your own, we will do it for you"
Charles Schumer, Democratic senator
But they also threatened other measures such as using the government's new majority shareholder position – some 80 per cent - to sue the company to recoup the money or authorising the US attorney-general to recover excessive compensation payments.
"Let the recipients of these large and unseemly bonuses be warned: if you don't return it on your own, we will do it for you," Charles Schumer, a Democratic senator, said.
Criticised by Republicans for not doing enough, the White House said on Tuesday it was considering ways to retrieve the money, "whether it's changing the tax code or whatever ideas" that are being raised in congress.
"The president finds it outrageous and offensive that any of these bonuses exist," Robert Gibbs, the White House spokesman, said.
On Monday, Obama had said it was "hard to understand how derivative traders at AIG warranted any bonuses, much less $165m in extra pay".
"How do they justify this outrage to the taxpayers who are keeping the company afloat?"
Pressure on Obama
Jane Hamsher, a blogger and political commentator, told Al Jazeera that "Obama has been largely immune" to political fallout from the AIG situation so far and that it had largely been absorbed by Geithner.
"Obama is going to be in a situation very soon, where some of the stories Geithner has been telling are going to be a little suspect and he's going to have to either stick by his man or incur some of the damage"
"But going forward, Geithner's word isn't sounding so good, people are beginning to lose faith in him," she said.
"And I think Obama is going to be in a situation very soon, where some of the stories Geithner has been telling are going to be a little suspect and he's going to have to either stick by his man or incur some of the damage."
Hamsher said "Geithner's approach to this whole thing is that the system is fundamentally sound and if they just keep pumping money into it, it will be OK".
"But it's not. There are real systemic problems led to these problems."
She cited government deregulation that has been going on since the 1980s and the credit expansion that was made during the Bush administration to allow lending to "people they knew could not repay their loans".
"They haven't done anything to re-regulate or make sure that the system has integrity. So they're just really lighting money on fire as far as a lot of people are concerned."