Federal Reserve Chairman Ben Bernanke told Congress Tuesday that he tried to prevent American International Group from paying out lavish bonuses, and even asked that the company be sued to halt the payments, but was advised against it. 

Bernanke told lawmakers at a tense House Financial Services Committee hearing that he found it "highly inappropriate" for the bailed-out insurer to pay $165 million in bonuses to the very division that was "the primary source of AIG's collapse." 

He said he was told the payments could not be stopped because of contractual obligations -- but he was also warned that legal action, which he wanted to pursue, could end up awarding the same employees more money in punitive damages. 

"I then asked that suit be filed to prevent the payments," Bernanke said. "Legal staff counseled against this action on the grounds that Connecticut law provides for substantial punitive damages if the suit would fail. Legal action does have the perverse effect of doubling or tripling the financial benefits to the (employees)." 

Treasury Secretary Timothy Geithner, appearing with Bernanke, also asked Congress for broad new powers Tuesday to regulate nonbank financial companies like the troubled insurer, whose collapse could jeopardize the economy. 

"AIG highlights broad failures of our financial system," Geithner said. "We must ensure that our country never faces this situation again." 

Geithner acknowledged that the current climate of anger, including the furor over those retention bonuses, will complicate any effort by the Obama administration to get more bailout money from Congress. "We recognize it will be extraordinarily difficult," he said. 

AIG has become a symbol of reckless risk-taking on Wall Street. The House last week voted overwhelmingly to slap 90 percent taxes on the largest bonuses and similar, although not as punitive, legislation is before the Senate.The bonuses came even as AIG reported a stunning $62 billion loss, the biggest in U.S. corporate history. 

The government has bailed out AIG four times, to the tune of more than $180 billion altogether.
New York Attorney General Andrew Cuomo said Monday that 15 employees who received some of the largest bonuses from AIG have agreed to return them in full, totaling about $50 million. 

The Associated Press contributed to this report.