Liddy said he had no legal choice over paying out the "distasteful" bonuses of 165 million dollars, but vowed that American International Group was learning from its mistakes after it was saved from bankruptcy last September.
"Mistakes were made at AIG on a scale few could have ever imagined possible," the government-appointed CEO was to tell a packed hearing of the House subcommittee on capital markets, according to his prepared remarks.
"We are meeting today at a high point of public anger. I share that anger," he said, as Obama vies to navigate the worst political storm of his young presidency just as his administration readies new bailout funds for banks.
Subcommittee chairman Paul Kanjorski, a Democrat, said Treasury Secretary Timothy Geithner and Federal Reserve chairman Ben Bernanke would appear before the full financial services committee next Tuesday on the AIG mess.
"They are now the overseers of AIG, and we need to hear from them directly and publicly," he said.
"They have much to explain not only to us, but also to the American people. I look forward to their appearances," Kanjorski said.
Liddy, formerly chief executive of the Allstate insurance firm, said his managers were working hard to restore AIG to its core insurance business so that it can refund the US taxpayer nearly 180 billion dollars in bailout money.
"In order to do that, we have to continue managing our business as a business -- taking account of the cold realities of competition for customers, for revenues and for employees," he said.
"Because of this, and because of certain legal obligations, AIG has recently made a set of compensation payments, some of which I find distasteful."
Geithner said late Tuesday that he was demanding AIG repay the lavish bonuses it gave out last week, mainly to the very London-based traders who crippled the company and helped trigger the global financial crisis.
In a letter to House Speaker Nancy Pelosi, the Treasury secretary said the government would "impose on AIG a contractual commitment" to repay the money out of its latest bailout infusion of 30 billion dollars.
But Geithner indicated that the administration was powerless to take back the bonuses from the executives and traders themselves, 73 of whom became millionaires overnight.
Lawmakers in both the House and Senate Wednesday threatened to issue subpoenas if Liddy fails to name the recipients.
Ahead of Liddy's testimony, Democratic Congressman Paul Hodes said AIG now stands for "Arrogance, Incompetence and Greed."
Fellow Democrat Brad Sherman alleged a ""criminal conspiracy to withhold information from the American people" while his colleague Carolyn Maloney blamed AIG for "one of the worst disasters in American corporate history."
"It is morally reprehensible and fiscally irresponsible to expect bonus money for bringing a corporate giant to its knees and paralyzing a national economy," she said.
Liddy got a measure of sympathy from Republican Spencer Bachus, who noted that the current AIG boss only took over last September at the urging of then Treasury secretary Henry Paulson in return for a salary of one dollar a year.
And while other Republicans vented their own fury at AIG's antics as millions of recession-hit Americans agonize over their futures, their true target became apparent in a coordinated offensive on the Obama administration.
"Where was the outrage" at Geithner's handling of the controversy, the subcommittee's top Republican Scott Garrett demanded, accusing Obama of lacking an "exit strategy" from multiple bailouts for Wall Street.
He added on MSNBC television: "Where is the outrage over the fact that AIG is paying billions of dollars for 100 percent of what it owes to (European banks) UBS and to Barclays and Deutsche Bank?"
"This is what a political economy looks like, and it's a very dangerous place to be," fumed Republican Tom Price.