Much of the discussion regarding the AIG bonus debacle is revolving around who in the government knew that the bonuses were coming and when they knew it.

During his appearance before Congress today, AIG CEO Edward Liddy said that the Federal Reserve was aware the bonuses would be paid out and “acquiesced in that decision.” In fact, Liddy claimed that Federal Reserve members were present at AIG’s “compensation committee meetings” with the ability to say “yea or nay”:

REP. KANJORSKI (D-PA): Am I to understand that you’re saying that Chairman Bernanke or his designated person at the Federal Reserve was informed that you were going to make these payments and acquiesced in that decision?

LIDDY: Yes, everything we do, we do in partnership with the Federal Reserve. The Federal Reserve is at our board meetings and our compensation committee meetings, at our various meetings on strategy and they have the ability to weigh in — either yea or nay — on anything that we decide.

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Rep. Mike Castle (R-DE) later asked for clarification on whether the Fed “did not say nay as far as the bonuses were concerned.” Liddy replied that “there was great angst over the payment of these bonuses,” but that the Fed and AIG ultimately decided that “the risk was too great that we would lose all the progress we made if we didn’t pay these bonuses.”

In November 2008, Liddy penned a letter to New York Attorney General Andrew Cuomo in which he claimed that the top 60 AIG executives “will forego any salary increase through 2009 and their 2008 and 2009 bonuses will be restricted.” During his opening statement today, Liddy asked the employees who received bonuses to give half the money back.

Earlier this week, after the AIG bonuses were revealed, Rep. Barney Frank (D-MA) called for the replacement of company executives. “Since the federal government … now essentially owns that company, maybe it’s time to fire some people.” Frank told ThinkProgress that, “when you are trying to undo something, it is often not the case that the people who did it are the ones to put in place.” So far, however, the administration has not embraced Frank’s call.

Last fall, as Wall Street crumbled and just one week after the federal government bailed out AIG, the firm’s executives spent $440,000 on manicures, facials, pedicures, and massages at a luxury resort in California. At the time, Obama was a vocal proponent of firing AIG executives. During an October 7, 2008 presidential debate with Sen. John McCain (R-AZ), candidate Obama declared, “those executives should be fired”:

OBAMA: It means we are cracking down on CEOs and making sure that they are not getting bonuses or golden parachutes as a consequence of this package [TARP]. In fact, we just found that AIG — a company that got a bailout — just a week after they got help, went on a $400,000 junket. I’ll tell you what. Treasury should demand that money back, and those executives should be fired.

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In October, the revelations about AIG’s luxury retreat sparked widespread outrage, just as the AIG bonuses are doing today. That didn’t stop AIG, however. In November, the Washington Post reported that AIG “plans to pay out $503 million in deferred compensation to some of its top employees, saying it must tap the funds to keep valuable workers from exiting the troubled insurance giant” — the same rationale AIG CEO Edward Liddy is using today.

Today, the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises is holding a hearing featuring AIG CEO Edward Liddy. Before getting to the main event and grilling Liddy about AIG’s bonuses, the committee heard from some of the regulators and credit agencies responsible for monitoring AIG’s activities.

Scott Polakoff, Acting Director of the Office of Thrift Supervision, admitted that his agency should have stopped AIG from messing with credit default swaps in 2004. He also advocated for a systemic risk regulator to watch out for (and potentially nationalize) companies like AIG that threaten the entire economy:

At the 2004 assessment, we should have done it. We didn’t do it. There are a lot of people walking around that failed to understand how bad the real estate market was going to get…We do believe this kind of company deserves the oversight of what we’ll call a systemic risk regulator. And that systemic risk regulator has three parts to it — the ability to examine, the ability to provide liquidity if there’s a liquidity crisis, and the ability to place an institution into receivership if that is a necessary outcome.

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In an interview with ThinkProgress yesterday, Rep. Barney Frank (D-MA) explained how a risk regulator would work.