WASHINGTON (Bloomberg) — Treasury Secretary Timothy Geithner should explain what taxpayers gained by accepting units from American International Group Inc. in exchange for reducing the insurer's debt by $25 billion, Senator Chuck Grassley said.

"Exchanging debt for equity still leaves taxpayer dollars at substantial risk," the Iowa Republican said in a letter to Geithner released yesterday.

Republican lawmakers are stepping up a campaign to put a spotlight on Geithner's role in AIG's bailout. The rescue, which began last year when he was president of the Federal Reserve Bank of New York, swelled to $182.3 billion. AIG transferred American International Assurance Co. and American Life Insurance Co. to Fed vehicles to lower its debt, the firm said on December 1.

The units are to be sold, and New York-based AIG is entitled to a portion of the proceeds if the sales reap more than $25 billion.

Grassley is concerned about "the status of the billions of dollars in taxpayer money that is in jeopardy" due to actions by both Treasury and the Fed, he said in the letter. The request for information was also addressed to William Dudley, president of the New York Fed.

Treasury spokesman Andrew Williams said the department will respond to Grassley's letter and one from Representative Roy Blunt asking about the bailout. Jack Gutt of the New York Fed declined to comment.

The plan to transfer the businesses was disclosed in March amid the company's fourth bailout. The deal permitted AIG to pay down its debts while waiting for a recovery in credit markets, which may allow for higher sale prices for the units. Treasury's preferred share investment of as much as $69.8 billion was changed in March to allow "non-cumulative" dividends which may permit the insurer to avoid making payments, Grassley said, citing a September report by the Government Accountability Office.

"There seems to be no reason for this give-away of taxpayer funds other than to manipulate the rating agencies into giving AIG an artificially higher rating than it deserved," Grassley said. "I would greatly appreciate getting a detailed explanation about how and why this decision was made."

Treasury is entitled to appoint two directors to AIG's board because the company missed four straight dividend payments, and Grassley asked about efforts to find candidates.

AIG has tapped more than $40 billion from two Treasury facilities. The bailout also includes as much as $52.5 billion to buy mortgage-linked assets owned or backed by AIG and a $60 billion credit line. The line was reduced to $35 billion after AIG turned over the life units.

Blunt, a Missouri Republican, asked Geithner to appear before Congress to discuss payments AIG made to banks that bought credit-default swaps from the insurer.

Before the Fed stepped in late last year, AIG tried to persuade banks to accept so-called haircuts of as much as 40 cents on the dollar, according to people familiar with the matter. The Fed's decision to pay the banks in full may have cost taxpayers $13 billion, or 40 percent of the $32.5 billion AIG paid to retire the swaps, the people said.

"Thirteen billion in wasted taxpayer dollars at a time of economic crisis cries out for explanation, as you and the president seek to regain the trust of the American people on the economy," Blunt said in a letter to Geithner.