Republican Sen. Chuck Grassley (IA) has asked the Treasury Department inspector general (IG) to open an inquiry into senior officials' knowledge of AIG's plans to pay out $450 million in bonuses to employees of its disgraced Financial Products unit.

In a letter to the Treasury IG today, Grassley singles out the department's general counsel as the office "largely involved" in the decision to let AIG proceed with its bonuses. Treasury chief Tim Geithner has said he became aware of the bonuses last Tuesday and notified the White House two days later, but Grassley also has asked the IG to examine that timeline.

Grassley's full letter to the IG, Eric Thorson, can be read after the jump.

Dear Inspector General Thorson: I am writing to ask you to initiate an inquiry, in whatever form you believe most appropriate, into the role, if any and actions of the Department of the Treasury (Department) in the decision by American International Group (AIG) to pay bonuses of over $160,000,000 to AIG employees. AIG is largely funded and controlled by the U.S. Government, after having incurred massive losses from ill-conceived and executed investments and transactions. Indeed, AIG received more than $170 billion in government rescue funds and I am concerned to see taxpayer money being used to pay bonuses to employees associated with these massive problems. I request that you, among other things: • determine the terms by which the Department provided funding to AIG, and particularly whether or not Treasury officials made any effort to forestall payments of bonuses or demanded waivers of bonuses prior to releasing any taxpayer funds; • determine when the legal obligations were incurred; and • whether these bonuses are compelled by contracts between AIG and its employees. In so doing, I request that you obtain and analyze such contracts and determine how the obligation to pay bonuses is established, for example by individual performance or overall corporate performance. In addition, it has been reported that the Treasury Department and the Federal Reserve took every legal step possible, but unfortunately were unable to stop AIG's decision to pay out the bonuses. As it appears that the Department's Office of General Counsel and others, were largely involved in these matters, I believe it is appropriate that you obtain the information I am seeking. I appreciate your cooperation and assistance in getting the facts regarding this troubling matter. Sincerely, Charles E. Grassley of Iowa United States Senator Ranking Member of the Committee on Finance