The Federal Reserve Bank of New York doesn't have the ability to control American International Group Inc. (AIG) on a day-to-day basis and must instead exert its influence over the company in its role as creditor, the bank's president said Tuesday.

New York Fed President William Dudley said the bank's position as a lender does allow it to take steps to ensure repayment of its loans to the insurer, but that "these creditor's rights do not create an ability to manage AIG."

"It was clear from the beginning that the New York Fed - which had never been engaged in any regulatory oversight of the company - was not in a position to exert day-to-day management control over the company," Dudley said in prepared remarks for a hearing before a U.S. House committee.

The question of who runs AIG has been thrown into stark relief in recent weeks after the company - which has been propped up with roughly $170 billion in government funds - paid out $165 million in controversial retention bonuses. Dudley said the New York Fed "did not see reason to disagree" with the decision made by AIG's current management to pay out the bonuses because of legally binding contracts, but said the bonuses were "extremely distasteful."

Despite the hiccups that have occurred, including the government having to frequently rework its aid to AIG, Dudley said he expects the government to eventually be repaid for its aid.

"Although it will take time, we still expect that the proceeds from asset sales should enable AIG to repay the New York Fed in full," Dudley said.

-By Michael R. Crittenden, Dow Jones Newswires; 202-862-9273; michael.crittenden@dowjones.com