Spitzer claims veteran’s scalp

NEW YORK - Maurice "Hank" Greenberg fought on Omaha Beach on D-Day and earned a Bronze Star fighting in Korea.

Over four decades, he built American International Group into the world's largest insurer, often scrapping publicly with state officials, investigators and prosecutors.

But this week, the most powerful insurance executive in the US learned that conflict isn't a survival strategy against New York Attorney-General Eliot Spitzer and federal regulators, who are investigating whether AIG manipulated earnings and rigged insurance bids.

"He was playing chicken with the regulators," says Robert Haines, an insurance analyst at New York-based CreditSights, a debt-research firm. "He should have taken a more conciliatory tone."

Greenberg, 79, has stepped down as AIG's chief executive officer and been replaced by co-chief operating officer Martin Sullivan.

Frank Zarb, chairman of the executive committee of the board, said it was time for a "new generation of leadership". Greenberg will remain as non-executive chairman.

Since taking over AIG in 1967, Greenberg had boosted its assets more than 1000-fold and transformed the insurance business while building the company through US$50 billion ($67 billion) of acquisitions in 130 countries.

 

Greenberg and AIG did not recognise the growing power of Spitzer and federal regulators fast enough, says Albert Yu, who helps manage US$2.5 billion at Rochester, New York-based Clover Capital Management, including shares of AIG.

"The regulatory environment is a lot tougher, and perhaps AIG was a little slow to react to those changes."

In the past four years, Spitzer - working with the US Securities and Exchange Commission and regulators from other states - has wrested US$4.4 billion in penalties from Wall Street banks for tainted research and from mutual fund companies for trading irregularities that cheated small investors.

Last October he turned his attention to the insurance industry, announcing a lawsuit against Marsh & McLennan, the world's largest insurance broker. It accused Marsh of rigging bids to increase fees.

A week later, responding to questions about Spitzer's legal complaint, Greenberg warned that the action risked damaging the entire insurance market. "If you have a boil on your arm, you don't cut your arm off, you lance the boil," Greenberg said.

During a conference call last month, Greenberg accused overzealous regulators of "turning foot-faults into murder charges".

Those retorts were a mistake by Greenberg and AIG, says Damon Silvers, associate general counsel of the Washington-based AFL-CIO labour federation, whose member unions control funds with assets of about US$400 billion.

"Where have these guys been the last four years?" says Silvers. "Don't mess with Eliot; that's certainly true. The most important thing about Eliot is that he's afraid of no one."

The commission and Spitzer are investigating a four-year-old reinsurance transaction between AIG and Berkshire Hathaway's General Reinsurance unit. Greenberg was due to testify today.

It is understood that Spitzer learned of Greenberg's involvement in the General Reinsurance transaction within the past two weeks.

By last Friday, events were unfolding so rapidly within AIG that the company's lawyers had to cancel a meeting scheduled for the following day with commission investigators, according to a source.

Two days later, AIG told the commission that the board would meet the next day to consider Greenberg's future role at the company.

The agency had not asked the AIG board to oust Greenberg.

Greenberg has hired lawyer Robert Morvillo, who represented Martha Stewart during her criminal trial on charges of lying to investigators about a stock sale.

Spitzer's probe of the insurance industry, like the earlier investigations of mutual fund companies and Wall Street stock research, is aimed at changing long-established practices that hurt consumers, says Samuel Hayes, an investment-banking professor at Harvard Business School.

He says the regulatory environment has previously been "comfortable".

Spitzer, a Democrat first elected to New York state's top law-enforcement position in 1998, is running for New York Governor next year.

He used similar approaches in his probes of mutual funds and Wall Street stock research, picking an initial target company, then releasing internal emails. The emails sparked public outrage.

Greenberg is the longest-serving chief executive to leave in any of the investigations led by Spitzer. Earlier departures included Richard Strong, the founder, chief executive and chairman of Strong Capital Management, based in Menomonee Falls, Wisconsin, who resigned in December 2003 during Spitzer's mutual fund probe.

Lawrence Lasser, the chief executive of Boston-based Putnam Investments, which is owned by Marsh, was ousted in November 2003.

Chairman Sanford Weill of New York-based Citigroup announced in July 2003 that he was stepping down as chief executive. The announcement followed Citigroup's agreement in April 2003, along with eight other securities firms, to settle allegations that the company's analysts published misleading stock research to win investment-banking business.

"The public-relations effect of a Spitzer attack is so dramatic that the companies are forced to settle rather than defend themselves," says Robert McTamaney, co-chairman of the corporate department at the law firm Carter, Ledyard & Milburn LLP in New York.

"That's why the investment banks settled, and I think that's why the insurance companies and brokers were so quick to settle."

Spitzer wants chief executives to understand that just because certain practices have been accepted by regulators for years doesn't mean they will be accepted indefinitely, says William Galvin, secretary of the Commonwealth of Massachusetts, the state's top securities regulator.

"The reality is that most of the industry seems to have missed it," says Galvin. "They still act like it's the old days, like this is just a temporary thing and the people are just going to go away. I haven't sensed any sense of contrition in the industry."

Greenberg's way of dealing with Spitzer resembled the moves of skilled poker players, says David Schiff, a former reinsurance broker.

"They may have a straight flush or nothing at all," says Schiff. "For a long time, the company did things its own way.

"Ten years ago, they would have quashed this whole thing. It's sad seeing Hank going out in this manner. He's the greatest man of the last 50 years in the insurance business."

- BLOOMBERG