U.S. House Rep. Barney Frank, D-Mass., on Friday called on the regulator for Fannie Mae (FNM) and Freddie Mac (FRE) to cancel bonuses paid to employees at the companies under a retention program.

In a letter, Frank urged Federal Housing Finance Agency Director James B. Lockhart to rescind any bonuses already paid under the program and to prohibit any further payments.

"The public, having provided significant support for the purpose of restoring trust and confidence in our country's financial system, rightfully insists that large bonuses such as these awarded by institutions receiving public funds at a time of a serious economic downturn cannot continue," Frank wrote in the letter.

The move comes after $165 million in bonuses paid to employees at American International Group Inc.'s (AIG) financial products division set off a political firestorm this week.

The House on Thursday approved legislation to tax at 90% any bonuses earned by employees earning more than $250,000 at firms that have received at least $5 billion in aid from the government's financial rescue program. Fannie and Freddie, which together have received $60 billion in taxpayer funds under a separate government program, are covered under the legislation. A similar bill is gathering momentum in the Senate.

Fannie's and Freddie's regulator established a retention program when the companies were taken over by the government last fall. Under the program, a broad swath of employees at each firm were promised bonuses, to be delivered over three periods. Lockhart defended the bonuses this week, saying the program ensured the companies wouldn't lose key employees just as they play a central role in stabilizing the U.S. housing market.

"As the previous senior management teams left, it would have been catastrophic to lose the next layers down and other highly experienced employees," Lockhart said in a statement earlier this week. "This retention program is pay for specific efforts underway now to meet national goals."

-By Jessica Holzer, Dow Jones Newswires; 202-862-9228; jessica.holzer@dowjones.com