Troubled insurance giant American International Group, or AIG, which has received more than $170 billion in U.S. taxpayer money, will pay $165 million in employee bonuses and retention pay.  And while senior administration officials and lawmakers are calling it an outrage, There may be little they can do to stop the pay outs.

U.S. Treasury Secretary Timothy Geithner has been in talks with AIG Chief Executive Edward Liddy to limit the millions of dollars worth of bonuses promised to employees, including some who worked in the financial product unit responsible for bringing the company to the brink of collapse.

In a letter sent Saturday to Secretary Geithner, Liddy argued that while the arrangement was both "distasteful and difficult," the retention bonuses were put in place at the beginning of 2008, before AIG received any bail-out money.

A top economic adviser to President Barack Obama, Lawrence Summers, said Sunday on ABC television although he thinks the compensation is outrageous, AIG is contractually obligated to pay them.

"We are a country of law," said Lawrence Summers. "There are contracts.  The government cannot just abrogate contracts.  Every legal step possible to limit those bonuses is being taken."

The bonuses and other seemingly corporate excesses are a source of frustration for the Obama administration as it seeks to rescue financial firms while maintaining public support for these efforts.  AIG has received more public funds to stay afloat than any other firm, with the government owning an 80-percent stake in the company.

Also appearing on ABC's This Week With George Stephanopoulos program, Republican Mitch McConnell of Kentucky sharply criticized Summers' response, saying other troubled institutions receiving taxpayer dollars will get the idea it is okay to use this money for employee bonuses.  

"We all know that contracts are valid in this country, but they need to be looked at," said Mitch McConnell. "Did they enter into these contracts knowing full well that, as a practical matter, the taxpayers of the United States were going to be reimbursing their employees?  Particularly employees who got them into this mess in the first place.  I think it is an outrage."

Seeking to reassure the Treasury Secretary, AIG's Liddy said the company would reduce its bonuses in 2009 by 30 percent.  Liddy also said the top 25 executive positions at the financial products division will earn a $1 salary for the rest of 2009.