When you are surviving on handouts from the government - rather the tax payer's money - you don't reward incompetence through bonuses. But is AIG CEO Edward Liddy to blame for the mess? By Sourya Biswas

The AIG bonus issue is a sordid saga that has shown corporate American greed in its most shameless light. When you are surviving on handouts from the government - rather the tax payer's money - you don't reward incompetence in the form of bonuses, say irate US commentators and citizens at large.

Propelled by widespread public anger, American lawmakers have taken the AIG management to task, especially its current CEO Edward Liddy. (See: Failed AIG's bonuses to employees draw flak)

Unfortunately for him, not only isLiddy working on a pittance (he's taking a salary of $1 this year), he has also become the most vilified executive in the country.

Fittingly, one analyst has called his position as ''the worst job in the world.'' This public humiliation escalated yesterday when Liddy was grilled in the Congress for the recent $165-million bonus payout. But, from an objective viewpoint, how much is Liddy to blame?

After being accused by Congressman Stephen Lynch of ''malfeasance'', Liddy responded that he took offence at the word. His defence: the contracts had been drawn up before his tenure, and he was legally bound to honour them.

Liddy was CEO at home and auto insurer Allstate Corp. for eight years through 2006, Last year, the then-treasury secretary Henry Paulson chose him to run AIG. Paulson knew Liddy from the executive's service on the board of Goldman Sachs Group Inc., where Paulson was CEO. Liddy has vowed AIG will repay ''every penny'' of its bailout package to the US.

''Six months ago, I came out of retirement to help my country,'' Liddy said at yesterday's 'house financial services' subcommittee hearing in Washington. ''As a businessman of some 37 years, I have seen the good side of capitalism. Over the last few months, in reviewing how AIG had been run in prior years, I have also seen evidence of its bad side.''

He had also tried to defend himself earlier. In an exchange of letters with Timothy Geithner last week, Liddy reminded the current treasury secretary that he is getting no bonus and has attended none of the resort conferences.

''My only goals are to have AIG repay, with interest, to the maximum extent possible, the assistance the American taxpayers have given it, and to continue AIG's main insurance companies as strong, thriving businesses and contributors to the economy,'' Liddy wrote. ''My only stake is my reputation.''

Liddy said he knew the company would be attacked for paying the bonuses, but he decided it would be better to pay them because the firm needed workers who understood the complex transactions on AIG Financial Products (FP) division's ''book'' to make sure the contracts could be closed out.

Many lawmakers wanted AIG to fire everybody working for AIG FP and hire new ones to close the AIG FP unit. But Liddy said it wasn't that easy. ''People don't want to work at AIG. They are not cheap if you try to get them,'' he told the outraged members of Congress.

So Liddy decided to keep the existing employees and pay them extra money for staying at the firm instead of walking out. ''If we keep those people, we have a higher probability of running this book down and not costing the American taxpayer more,'' he contended.

Even though Liddy had no hand in drawing up the contracts, he could have at least tried to convince the recipients of the bonuses to delay the process until AIG was on firmer ground. If that was not possible, he could have informed lawmakers and the general public of the situation before actually handing over the money.

Liddy's predecessors at AIG, the executives who are directly to blame for the crisis, have already left. That leaves him holding the can of worms.

Justified or not, that's the way it will be, as it always has.