WASHINGTON (MarketWatch) -- American International Group is set to pay $450 million of bonuses to employees of the unit that was largely responsible for the New York insurer's near collapse last fall.

The decision to pay bonuses elicited howls of protest in Washington, which has prevented the failure of AIG by providing the insurer with more than $173 billion in aid. The federal government now owns 80% of AIG AIG, -1.23% .

Larry Summers, one of President Barack Obama's top economic advisers, called the payments "outrageous," and a key House lawmaker, Barney Frank, D.-Mass., told Fox News that the government should examine whether the bonuses are "legally recoverable."

Another Democrat, Rep. Elijah Cummings, D.-Md., renewed his call for AIG Chief Executive Edward Liddy to resign.

Liddy, in a letter to Treasury Secretary Timothy Geithner dated Saturday, said AIG had committed to paying the bonuses to employees of the financial-products unit and that they were "binding obligations" the company cannot legally rescind. The first payments are due March 15.

"I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them," wrote Liddy, citing the recommendation from the insurer's legal counsel.

The payments to 400 employees of the financial-services unit -- some of whom no longer work at the insurer -- were promised last year before the federal government bailout. Bonuses range from as little as $1,000 to as much as $6.5 million.

Summers said the government would examine its options, but he acknowledged it might not be able to terminate prior bonus agreements.

"We are a country of law. There are contracts. The government cannot just abrogate contracts," he said in an interview Sunday on ABC's "This Week."

AIG is already scheduled to pay $121.5 million in incentive payments for 2008 to senior executives and 6,400 of its employees. And AIG is laying out another $619 million for 2009 in retention payments to more than 4,000 employees.

Total expected payments amount to almost $1.2 billion.

Regarding future incentive payments Liddy told Geithner the company cannot retain its best employees if their compensation is subject to "continued and arbitrary adjustment by the U.S. Treasury." If AIG loses its best employees, he indicated, it would make it harder for the company to recover and help the government recoup its investment.

Liddy also pointed out he won't receive a bonus and that the company cut bonus payments for it senior executives. The top 25 executives in the financial-product unit, moreover, have agreed to accept a salary of just $1 for the rest of 2009, his letter said.

AIG nearly collapsed under the weight of contracts that the financial-products units sold to protect other institutions against losses from securities backed by subprime mortgages.

Since so many financial firms around the world were insured by AIG, the failure of the firm could deal a devastating blow to the global financial system, Treasury and Federal Reserve officials say in justifying the most expensive bailout ever.