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The Special Inspector General for the U.S. government's financial system bailout said Wednesday that the $168 billion in retention payments to American International Group Inc. (AIG) represented a "failure" that occurred when the U.S. Treasury Department "outsourced its oversight" to other agencies.

"This was a failure of communications, a failure of management," inspector general Neil Barofsky told the House Committee on Oversight and Government Reform. He highlighted the fact that the Treasury Department did not find out from better-informed officials at the Federal Reserve Bank of New York about the $168 billion of retention payments for employees in the insurance company's troubled financial services division until two weeks before they were issued last March. And even when Treasury Department officials found out about the imminent payments, they did not alert Treasury Secretary Timothy Geithner for an additional 10 days, he said.

Committee Chairman Edolphus Towns, D-N.Y., asked Barofsky if he would characterize the lack of cooperation as a break-down in communications between the Treasury and the New York Federal Reserve.

"I think that would be kind, to have it as a breakdown," Barofsky said. "Communications were virtually nonexistent." As guardians of the taxpayer-funded bailout, the Treasury Department had specific responsibilities to oversee executive compensation that the New York Fed did not, Barofsky said.

"Their concern was paying back the debt," he said. "The Federal Reserve was looking at this as a creditor."

-By Kristina Peterson, Dow Jones Newswires; (202) 862-6619; kristina.peterson@dowjones.com