March 21 (Bloomberg) -- Democratic U.S. Senator Mark Warner challenged the Office of Thrift Supervision to block $165 million in bonuses at American International Group Inc. as lawmakers seek a tax on more than 70 percent of the payouts.

Warner, a member of the Senate Banking Committee, asked OTS Acting Director Scott Polakoff in a letter yesterday to use his authority to declare the bonuses an “unsafe and unsound” practice. The Virginia senator said that if the regulator doesn’t use its cease-and-desist powers, it should justify the reasons for not acting.

“I’m going to push them to explain to me why they haven’t used this tool,” Warner said in a telephone interview. “When you don’t have the response coming out of the regulators, what you have now with the AIG case, you’ve got Congress rushing to fill the void on kind of a one-off circumstance.”

Congress this week chastised New York-based AIG and Chief Executive Officer Edward Liddy for paying bonuses after getting more than $170 billion in federal aid. Senators on March 19 proposed a 70 percent surtax on employee bonuses paid by companies that received more than $100 million in aid. The House approved a 90 percent levy covering fewer employees.

Warner asked Polakoff about the agency’s authority at a Senate Banking Committee hearing March 19. Warner told Polakoff regulators had the power, under the Federal Deposit Insurance Act, to issue cease-and-desist orders “if somebody engaged in unsafe or unsound practices.”

Polakoff responded that the $85 billion Federal Reserve loan, made in September to prevent AIG from collapsing, also terminated AIG’s charter as a savings-and-loan holding company and ended OTS oversight of the company.

‘Unsafe, Unsound’

If AIG had retained that status, the OTS “would have taken enforcement actions under safety and soundness to say those bonuses were an unsafe-and-unsound practice,” Polakoff told Warner.

Warner sought clarification in the letter for OTS’s justification that it no longer regulates AIG and show documents that support the assertion.

“I believe that we are in a new era, and that the financial failures of the recent past provide clear evidence that the incentives and payments created by existing compensation practices were unsafe and unsound,” Warner wrote.

“I believe that the AIG bonus issue may be resolved to the satisfaction of the OTS, Treasury, the Congress and the American taxpayer with this tool,” Warner wrote.

OTS spokesman Bill Ruberry declined to comment on the letter.