The collapse of giant United States insurance company American International Group could have resulted in a 1930s-style global economic meltdown, Federal Reserve chairman Ben Bernanke has told a Congressional committee
Mr Bernanke and Treasury Secretary Timothy Geithner have been telling lawmakers about the need to reform the US financial system.
Mr Bernanke told the committee he wanted to sue AIG to block the payouts, but was talked out of it by his lawyers.
The two men want Congress to approve legislation giving the government the ability to take control of big financial institutions.
On Tuesday, 15 of 20 senior AIG executives agreed to return their bonuses after widespread anger over the payments. The executives in the firm's financial products division agreed to return $US30 million in bonuses amid an outcry over the use of taxpayers' money for executive perks.
AIG has been lambasted after it emerged the insurance giant had used $US165 million of government bailout funds to pay for staff bonuses, despite massive losses at the firm.
In the final quarter of 2008, AIG posted a $US61.7 billion loss, the largest quarterly loss ever recorded in the US.
AIG's financial products division was widely blamed for the company's downfall through its investments in complex financial derivatives that turned out to be worth a fraction of their on-book value.
News that some of the unit's staff had received retention bonuses derived from taxpayers' cash prompted US lawmakers to propose a 90% tax on the premiums.
The US government has so far pumped around $US170 billion into AIG to keep it afloat, fearing its collapse could deepen a market-wide liquidity crisis.