The head of AIG said on Wednesday the cold realities of competition compelled the insurer to pay $165 million in bonuses, and acknowledged that bailout-weary Americans' patience was running thin.

American International Group Inc has come under intense fire from the public, politicians and President Barack Obama for accepting up to $180 billion in government aid and then handing out multimillion-dollar bonuses, but Edward Liddy said the best hope for recouping taxpayer money was to keep running AIG as a business.

No one knows better than I that AIG has been the recipient of generous amounts of government financial aid, he said in remarks prepared for delivery to a congressional committee.

We have been the beneficiary of the American people's forbearance and patience. And we are acutely aware not only that we must be good stewards of the public funds we have received, but that the patience of America's taxpayers is wearing thin, he said.

Fury over the bonuses threatens to undermine Obama's efforts to solve the credit crisis and pull the economy out of a deep recession. Many voters view the financial rescues as free handouts to wealthy executives who made bad decisions, and the fat bonuses -- although relatively small compared to the government's $700 billion bailout fund -- have fueled that anger.

The situation has put Obama in a tight spot as he tries to strike the right balance between sharing the public's outrage and keeping his focus on the bigger issue of repairing the economy. Some economists have warned that the bonuses could become a distraction that delays recovery efforts.

AIG has argued that the payouts were necessary to retain top employees with the specialized knowledge to dispose of $2.7 trillion in complex securities that ended up dragging the company to the brink of collapse last year.

Liddy, who took over as chairman and chief executive six months ago when the government first stepped in to try to stabilize AIG, said the company had made mistakes on a scale few could have ever imagined possible.

That stark admission did little to dull the anger directed toward him on Wednesday. Senate Republican leader Mitch McConnell called the bonus situation an offense to the taxpayers, and we're going to get to the bottom of it, even if the Department of the Treasury hasn't.

U.S. Treasury Secretary Timothy Geithner said late on Tuesday that AIG would have to promise to compensate taxpayers for the bonuses as a condition for receiving a planned $30 billion expansion of its bailout.

But Geithner said anger toward Liddy was unjustified because he had joined AIG at the government's behest and the problems there predated him.

(Additional reporting by Corbett Daly and Jeremy Pelofsky; Writing by Emily Kaiser)

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