But Grebeck, who teaches a course on credit default swaps at New York University, adds that the employees in AIGFP "just blindly used" actuarial insurance models to price credit risk, and are now being rewarded for those mistakes.

Public officials took pains on Monday and over the weekend to distance themselves from the compensation decision-making. Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Commission, said bonuses were "going to people who screwed this thing up enormously" and implied that if the government couldn't prevent them from being distributed, AIG employees could simply be fired.

President Barack Obama said he intends to prevent the bonuses from being paid out, while New York Attorney General Andrew Cuomo demanded details of the planned payouts on his desk by the end of the day.

As AIG works to disconnect itself from the toxic securities and mitigate losses, it is also in the process of shuttering or selling off its AIGFP business as part of its restructuring plan. But six months into the government rescue, it's questionable how long this process will take, and how much it will ultimately cost.

It also remains unclear why AIG is paying up to maintain a competitive edge in a business it is dismantling and hanging onto employees whose analysis and decisions brought the firm to its knees. The company's stock closed Monday up 66% to 83 cents and was rising another 15.7% to 96 cents on Tuesday.

Charles Trzcinka, chair of the Indiana University Kelley School of Business finance department and a former economist at the Securities and Exchange Commission, says the government could have kept itself from the sticky political situation -- and had less of a hands-on role in the private market -- by simply establishing a clearinghouse for CDS.

"The political effect of $170 billion," says Trzcinka, "is that it was not used wisely."

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