WASHINGTON (Reuters) - President Barack Obama voiced outrage on Monday over large bonus payments awarded to top employees of insurer AIG and ordered his treasury secretary to legally block them if possible.

The insurance giant is being kept alive by taxpayer dollars, having received a government bailout of up to $180 billion, and is now paying $165 million in bonuses.

This is a corporation that finds itself in financial distress due to recklessness and greed, Obama said.

Under these circumstances, it's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay, he said in remarks at the White House.

How do they justify this outrage to the taxpayers who are keeping the company afloat?

Obama said he had asked Treasury Secretary Timothy Geithner to pursue every single legal avenue to cancel the bonuses.

I want everybody to be clear that Secretary Geithner's been on the case. He's working to resolve this matter with the new CEO, Edward Liddy, who, by the way, everybody needs to understand, came on board after the contracts that led to these bonuses were agreed to last year, Obama said.

Liddy told Geithner in a letter the insurer was legally obliged to fulfill 2008 employee retention payments but had agreed to revamp its system for future bonuses.

Obama said overall financial regulatory reform was vital to ensure this did not occur again.

He said the government needed some form of resolution mechanism in dealing with troubled financial institutions, so that we've got greater authority to protect American taxpayers and our financial system in cases such as this.

Pausing to cough, Obama said he was choked up with anger.

We don't have all the ... regulatory power that we need. And this is something that I expect to work with Congress to deal with in the weeks and months to come. (Editing by Alan Elsner)

Barack obama Timothy geithner Aig