Even if no one told Geithner about the payments, "this is a failure of communication and a failure of management," Barofsky told the House Committee on Oversight and Government Reform on Wednesday. Geithner has been "the head of an organization that was involved in the bailout of AIG" since last September, he added.
A Treasury Spokeswoman would not address the comments about Geithner's leadership. She said in a statement that the Obama administration's pay czar continues to develop compensation plans for AIG and the other companies that received the costliest bailouts.
Geithner helped lead Fed efforts starting last fall to prop up AIG with billions in emergency financing. After becoming Treasury secretary, his department and the Fed continued unveiling new aid packages for AIG.
The government has committed a total of more than $180 billion to wind down the New York-based insurance and financial services conglomerate, and Treasury now owns about 80 percent of the company.
In a report released Tuesday, Barofsky wrote that Treasury did not understand AIG's pay structures when it gave the firm billions in aid last fall. He said Wednesday that officials at the New York Fed "still did not have their arms wrapped around" AIG's compensation structure when he finished his audit last month.
Officials discovered 620 bonus programs totaling $455 million, and 13 retention plans allocating $1 billion, according to the report. AIG has asked employees to return some of the money voluntarily.
Barofsky criticized Treasury, under then-Secretary Henry Paulson, for "outsourcing" its oversight duties to the Fed, which he said had different priorities from Treasury. As a financial institution, the Fed "didn't really view these (bonuses) as being much of a big deal," he said, because they were a tiny part of the aid AIG received.
Treasury was charged with recovering taxpayer money, and would have been "more sensitive" to the appearance that AIG used taxpayer money to grant large bonuses, Barofsky said.
Lawmakers questioned Geithner's leadership on AIG and whether he was truthful in saying he learned about the bonuses in March. Several said Geithner should have known, and that Treasury should have done more after the March news to recover the bonus money.
Geithner "failed to know what he should have known, failed to do what he should have done, and failed to give us transparency" by cooperating fully with Barofsky, said Rep. Darrell Issa of California, the committee's top Republican.
Barofsky's report said the Obama administration's pay czar recently has asked AIG not to pay some bonuses that have been promised to employees. Geithner said in March that the employees' contracts prevented Treasury from stopping the payouts.
Barofsky agreed that Treasury might have done more to recapture the money, millions of which went to employees in the unit whose bets helped sink the company.
The report said that Kenneth Feinberg, the special master for executive compensation, "has informally advised AIG not to pay the full $198 million" employees expect to receive.
Feinberg is locked in negotiations with the seven companies that received the most expensive taxpayer bailouts. AIG's was by far the largest. To secure its bailouts, AIG argued to Treasury that its failure would doom the broader financial system.
The company is talking to Feinberg about matters "including future payments to employees of AIG Financial Products," the division whose bets helped sink the company, spokeswoman Christina Pretto said in a statement Tuesday. Employees have until the end of the year to return voluntarily some of the bonus pay they received in March, she added.
Barofsky's report recommends that Treasury work closely with officials from the New York Fed, which is funding parts of the AIG bailout. It also suggests Treasury improve oversight of companies that it owns, including reviewing compensation programs before buying major ownership stakes in companies.
In a written response, Herbert M. Allison Jr., Treasury's assistant secretary in charge of the government bailout, said the department is implementing the guidelines and "has no present intention" of buying another financial company.
"We welcome your comments and suggestions as Treasury continues to strengthen oversight of financial institutions" receiving government assistance, Allison wrote.
AP Economics Writer Martin Crutsinger contributed to this report.