When he asked "that suit be filed to prevent the payments," Mr. Bernanke said that "legal staff counseled against this action, on the grounds that Connecticut law provides for substantial punitive damages if the suit would fail. Legal action could thus have the perverse effect of doubling or tripling the financial benefits to the AIG-FP employees."

"I respectfully disagree with Federal Reserve Chairman Ben Bernanke's statement today that Connecticut law prevented a Federal Reserve lawsuit to block AIG bonuses," Mr. Blumenthal countered in a statement.

"The Federal Reserve never contacted me or my office concerning the applicability of the Connecticut wage law to the AIG bonuses. If the Fed had called, we would have given the green light for litigation blocking these unconscionable bonuses," he added.

"My office has reviewed AIG's claim and state law, concluding that these bonuses were not wages under the Connecticut Wage Protection statute," he said. "AIG used this joke of a justification to squander $218 million of taxpayer money, rewarding monumental failure."

Mr. Blumenthal revealed on Monday that his office was in discussions with AIG to set the terms and timing of their employees to appear as potential witnesses at a bonus inquiry hearing before the state's Banks Committee.

"We are mindful of security and safety concerns, seeking to be responsive and responsible in addressing them. We cannot comment at this point on who may testify," he said Monday, referring to reports that AIG employees had received threats because of the bonus payments.

The attorney general said if the company fails to cooperate, "we will take appropriate and aggressive action to enforce these lawful subpoenas. The public has a right to know facts relevant to bonuses made from taxpayer funds by a company that would not exist without a [U.S.] taxpayer bailout."

This information is vital for lawmakers seeking to reform Connecticut banking, finance and other laws and regulations–assuring stronger scrutiny and oversight–to protect jobs and prevent irresponsible systemic risk.

"We will be reasonable, respecting the security and privacy concerns of individuals who may be involved," he said.