Both sides of the Capitol erupted Tuesday over American International Group’s decision to award $165 million in executive bonuses, with lawmakers in both parties calling for the giant insurer that benefited from a federal bailout to return the money voluntarily or be forced to do so.

“For a company that would not exist anymore but for a $170 billion taxpayer-funded rescue, it is simply morally unacceptable to spend $165 million on bonus payments,— a group of 12 Democratic Senators wrote in a letter to AIG Chief Executive Officer Edward Liddy, calling the company’s actions “the grossest perversion of the idea of a performance bonus’ imaginable.—

Senate Majority Leader Harry Reid (D-Nev.), who signed on to the strongly worded letter, declared that “Congress is taking several affirmative steps to deal with this outrage— if it did not receive a response from Liddy quickly.

Liddy is scheduled to appear before the House Financial Services Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises today.

The Democratic Senators’ outrage was echoed throughout the Capitol on Tuesday, and from the White House, with all sides promising to block the bonuses, one way or the other.

The Senate Finance Committee went to work drafting legislation to tax AIG’s bonuses at a severe 91 percent, while lawmakers in both parties on the House side offered up proposals of their own to reverse the payments.

Speaker Nancy Pelosi (D-Calif.) called on the chairman of the Ways and Means, Judiciary and Financial Services committees to move on legislation that would seize the pay outs.

At the White House, Press Secretary Robert Gibbs quickly offered — even though the reassurance was unsought — that President Barack Obama maintains “complete confidence— in Treasury secretary Timothy Geithner.

That assurance, remarkable in only the first few weeks of a presidency, came under questioning about Geithner’s role in informing Obama about the bonuses, which were being paid even as the administration provided funding to the company approved during the Bush administration.

While contracts establishing the bonuses were entered into last April, Geithner appears to have only become aware of them recently. Gibbs seemed unable to explain why the Treasury secretary and Obama were not apprised earlier of the compensation, though he emphasized that Geithner had done everything he could under the law to try to alter the arrangement.

But Gibbs indicated that because the contracts were entered into last year, there may not be a lot that can be done to keep money from going out the door and rein in funds that have already gone out. He suggested that Congress should move, as part of its effort to legislate financial system overhaul, to find ways to allow the renegotiation of financial arrangements by large companies that are receiving government funding.

Lawmakers at least appeared headed in that direction. Within days, House Democrats are hoping to move ahead with legislation to increase taxes on bonuses passed out by companies that benefited from federal bailout money. There currently are a handful of proposals that could be voted on.

“I think we’ll probably move something in the next couple of days,— said Rep. Chris Van Hollen (Md.), chairman of the Democratic Congressional Campaign Committee.

Rep. Richard Neal (D-Mass.), who chairs the Ways and Means tax-writing subcommittee, said one issue still to be worked out is distinguishing between banks that were solvent but forced to take federal money so they could increase lending, and those that were bailed out to stay afloat.

“This has to be thought through comprehensively,— Neal said.

At a joint news conference to unveil two separate bills, one introduced by Rep. Steve Israel (D-N.Y.) and the other introduced by Rep. Carolyn Maloney (D-N.Y.), a geographic cross section of House Democrats took turns vilifying AIG executives.

“Someone, quite frankly, has got to take these people to the woodshed,— Rep. Tim Ryan (D-Ohio) said.

“We saved you from bankruptcy. Now we’ve got to stop you from incompetency,— Israel said.

But Republicans weren’t letting the Democrats hold court on the controversial issue. GOP leaders in both chambers called the bonuses outrageous, attacked Obama for allowing them to go out under his watch and threw out legislative proposals to stop the checks. Reps. Erik Paulsen (Minn.) and Leonard Lance (N.J.), for instance, introduced a bill to recoup AIG bonus money within two weeks, and prevent other companies from using bailout funds for golden parachutes.

As Members gritted their teeth and issued tersely worded statements, some also noted that the Treasury Department should have issued tighter restrictions when distributing money in the $700 billion Troubled Assets Relief Program, enacted last year.

“I’m disturbed that the Treasury Department didn’t exercise its authority,— Sen. Susan Collins (R-Maine) said. “The Treasury could have issued money with a contract that would have explicitly prohibited this kind of behavior.—

Collins’ seat mate, Sen. Olympia Snowe (R), and Ron Wyden (D-Ore.) will reintroduce a measure this week that would force financial institutions that used TARP funds to pay bonuses to either return the funds or face an excise tax. The measure was included in the Senate-passed TARP bill but was stripped out in committee.

Reid sent a letter to the Treasury Department last week asking they establish guidelines regarding executive pay, and he reiterated that request Tuesday. But Reid also noted the Senate could revisit the issue of executive compensation in a later package of Wall Street regulations.

“AIG’s attitude represents everything that’s wrong with Wall Street. Greed and perhaps corruption,— the Majority Leader said, adding that the insurance firm’s “decision underscores the urgency with which we must demand reforms to ensure these abuses never happen again.—

Steven T. Dennis, David M. Drucker, Keith Koffler and Jackie Kucinich contributed to this report.