Fallen Giant E-Book

Ronald Shelp

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 490

Veröffentlichungsjahr: 2009

Beschreibung

A unique insider view into the recent AIG crisis and HankGreenberg For nearly 40 years, Maurice "Hank" Greenberg was one of themost powerful CEOs in America. He built American InternationalGroup (AIG) from a second-rate insurer with a great Chinesefranchise into one of the world's most profitable companies. Buttimes have certainly changed, and now, in the Second Editionof Fallen Giant, author Ronald Shelp-who worked alongsideGreenberg and within the AIG organization for many years-with thehelp of Al Ehrbar, sheds light on both AIG, the company, and HankGreenberg, the man. This fully updated Second Edition digs deep to uncoverthe latest developments for both Greenberg and AIG, such as themany lawsuits underway, including a criminal trial that will sendfive men-one who still works for Greenberg-to prison. It alsochronicles the incredible story of how AIG was rescued by the Fed,and why the government had no choice in the matter. * Includes new insights into the latest developments for both AIGand Hank Greenberg * Reveals the real reasons behind the U.S. government'sunprecedented bailout of AIG * Explores AIG's history, starting in Shanghai in 1919, alongwith the downfall of its CEO * Offers rare insights into how AIG almost collapsed Filled with international intrigue and expert business acumen,the Second Edition of Fallen Giant paints acompelling portrait of both the past successes and current crisesof Hank Greenberg and AIG.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Acknowledgements

Prologue

Introduction

Praise

Chapter 1 - How Hank Greenberg Did It

Chapter 2 - Shanghai Starr

Chapter 3 - Secrets to Building the Chinese Empire

Chapter 4 - Starr and “Wild Bill” Donovan Use Insurance to Fight the Japanese

Chapter 5 - Turning the War to Advantage

Chapter 6 - Business Is Pleasure and Pleasure Is Business

Chapter 7 - Preparing to Be a Public Company

Chapter 8 - A Nobody Beats the Ivy Leaguers

Chapter 9 - Life with Hank Greenberg

Chapter 10 - Morefar

Chapter 11 - The Mystery of What Happened at AIG

Chapter 12 - Greenberg’s Fall from Grace

Chapter 13 - The Great Survivor Vows to Bounce Back

Chapter 14 - Fighting for Honor and Managing from Afar

Chapter 15 - The Battle of the Lawyers

Chapter 16 - A Losing Struggle to Save a Lifetime’s Work

Conclusion

The Cast of Characters

Timeline

References

Books by Ron Shelp

About the Author

Index

Copyright © 2009 by Ronald Shelp. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Shelp, Ronald Kent.

Includes bibliographical references and index.

eISBN : 978-0-470-53566-0

1. Greenberg, Maurice R. 2. Businesspeople—United States—Biography. 3. Insurance executives—United States—Biography. 4. Insurance companies—United States—History. 5. American International Group, Inc.—History. 6. Adler, Rodney. I. Ehrbar, Al. II. Title.

HC102.5.G717S.0092—dc22 [B] 2009020120

For my wife, June, and my sons,Kent and Russell, who also love to write.

Acknowledgments

Writing the kind of story I set out to write about AIG and the fascinating characters that shaped its history required cooperation from AIG executives and alumni, some of whom I had not talked to for 20 years.Yet I never doubted they would talk to me—and I was not disappointed. First, we were and are friends and colleagues who have been through our share of AIG wars together. Second, all of us loved the company and enjoyed exchanging tales about our adventures. As a result, I met with or talked to virtually everyone on my list.That made a huge difference in the book I was able to write.

First and foremost, I have to thank Hank Greenberg, CEO of AIG for nearly 40 years, for meeting with me, along with Edward Matthews, AIG CFO. Even though we are friends, I could understand that for legal reasons he might hesitate seeing anyone writing about AIG. But he did not.

I also appreciate the generosity with his time that then New York State Attorney General Eliot Spitzer gave me.

There are executives who prefer to go unidentified, even in the acknowledgments, and I will respect that. I am deeply grateful to my old friend Oakley Johnson, head of AIG’s government relations operations in Washington, for his enthusiasm and encouragement and for obtaining some background material about AIG for me.

Others I can identify are John Roberts, chairman of American International Underwriters and vice chairman of AIG; Houghton “Buck” Freemen, president of AIU and an AIG director; and Ernest Stempel, former CEO of AIRCO. All were full of wonderful stories about the history of the company. Artemis Joukowsky, now at Brown University, but previously in charge of operations in Eastern Europe, among other things, met me in Providence and we had a great reunion. I had fun conversations with the late Ken Nottingham, chairman of ALICO and someone I worked with on many AIG problems. Pat Foley, counsel and director of State Relations, was helpful, as was Robert McCourt, advertising director. Finally, I talked to several directors, including Bernard Aidenoff, retired from Sullivan and Cromwell.

Jeff Greenberg, Hank Greenberg’s son and formerly a top executive at AIG and subsequently CEO of Marsh McLennan, was generous with his time.

My old friend Clare Tweedy, who grew up in the AIG family, told me wonderful stories about the involvement of her father and mother and about Starr. She directed me to people I did not know.

Robert Youngman, son of Bill Youngman, Starr’s original heir apparent, and I spent considerable time together. My younger son and I had a nice lunch with Mike Murphy in Bermuda.This visit with Mike, SICO counsel, brought back memories of the work Mike and I used to do together in Washington. I also had a helpful talk with T.C. Hsu, formerly head of the Starr Foundation, and Marion Breen, Starr’s cousin and assistant and a foundation officer.

But I also had help outside the AIG family. Leslie Gelb, president emeritus of the Council on Foreign Relations, gave me insights on Greenberg’s involvement with and generosity to the council. Ronald Abramson, partner with Hughes Hubbard and Reed, helped me sort through the many lawsuits the AIG matter has engendered. And Doug Ellis, my longtime financial advisor, worked with me in sorting through the AIG numbers and the growth of the company. My good friend John Higgins provided guidance, insight, marketing advice, and many other things throughout the process. I appreciate the attitude of my former business partner, Dwight Foster, in understanding my neglect of our business and his enthusiasm for my book.

Working closely with Al Ehrbar has been a delight. He constantly gave me good guidance and good ideas.

My executive editor, Debra Englander, and assistant editor, Greg Friedman, helpfully guided me through this elaborate process, as did Michael Lisk, senior production editor. None of this would have occurred without the success of my agent, James Levine, of Levine/ Greenberg Literary Agency, in selling the book.

When I look at the number of people involved, I conclude that the old story about the lonely writer slaving away in his carrel is a bit of a canard. Lots of people help write a book. It is not the product of one person.

Prologue

When Hank Greenberg had to resign as chairman and CEO of American International Group (AIG) after 37 years because of an apparent accounting scandal, those of us who knew and worked closely with him were stunned.

If you read and believed what the headlines were claiming, more than four decades of outstanding success in the global insurance industry were being forgotten. A man who had walked and talked with kings, presidents, and premiers was being turned out of the financial powerhouse that had charmed Wall Street for decades.

As I continued to follow the daily AIG headlines closely, an idea began to emerge and take shape: Why not write a book about the rise of AIG? After all, I had been a trusted insider for many years and was likely to be the only insider who would dare to write about the company’s difficulties. I could bring a very different perspective from that of journalists or management observers.

At the time, I was thinking about writing a novel based on a thinly disguised version of AIG—a company founded in China, the first reverse multinational, operations in 130 countries, and zany adventures such as employees imprisoned in Iran and Nigeria. It had all the hallmarks of an adventure story, with legendary characters based on C.V. Starr, the company founder, Hank Greenberg, and others.

But friends said no: Write a nonfiction book about AIG instead. With the company so prominently in the news, readers, and therefore publishers would be interested.

Even though I hadn’t worked at AIG for a number of years, I had spent the better part of my career there. No one who had ever worked at AIG would have foreseen the day that Greenberg would be forced to resign. And, of course, could anyone fill Greenberg’s shoes? Someone might run the largest insurance company in the world but could he hold his own with heads of state, politicians, and other powerful leaders?

I reported directly to Hank Greenberg for 12 years and enjoyed it. And though I have been gone from AIG for many years, it is amazing the hold that he has over you. A call from Hank Greenberg or a meeting with him almost always puts you on edge. I felt it when he called late in the process of writing this book. Placing a return call was nerve-racking. While I have had some exciting jobs in my career, none was as exciting, stimulating, demanding, wacky, or fulfilling as my job there. It offered intellectual challenges, worldwide travel, international intrigue and diplomacy, and more.

My only regret is that since I joined the company five years after C.V. Starr’s death, I never knew or worked with him. He was another unique leader—like Greenberg—who had laid the foundation for the AIG empire.

In writing this book, I hoped to learn what happened at AIG—the place employees call the most exciting organization in the world.Was it Greenberg’s hubris that ultimately led to his downfall or was it a combination of complex reasons and people—the “perfect storm,” where business meets regulation and political ambition?

I asked Al Ehrbar, former editor of Fortune, to work with me on this project.Al’s first instinct was to say that AIG’s situation was brought on by Greenberg’s “hubris.” As we spent time on the project, however, Al realized the situation was much more complex. After dozens of interviews with current and former AIG executives and many late nights reviewing documents, a byzantine and multifaceted picture began to emerge.

Throughout this project my mood shifted from anger at Greenberg and disappointment in the Board of Directors to outrage over Spitzer’s heavy regulatory hand. I changed my mind many times while writing and the conclusions I drew, as you will see, are more gray than black and white. But in the complicated international world in which we live, a world where AIG grew and prospered dramatically, every shade is gray. But to show how compelling the AIG story is, Al stood by what he said when we first had lunch to discuss working together. “This is the most exciting project I have worked on in years.”

I always kept up with developments at AIG, long after leaving the company. From time to time, I had lunch in the fabulous Chinese dining room, and occasionally saw Hank Greenberg and others. Writing this book gave me a chance to return to a company that had always fascinated me. It has indeed been gratifying and worth every exhilarating and frustrating moment that writing a book brings.

For years, outsiders as well as those who work at AIG have had a perverse fascination with Hank Greenberg. They are astonished at the results he has achieved year in and year out.They are appalled and a bit frightened by his temper. They begrudgingly admire his unblemished outspokenness and knowledge on a variety of diverse topics.

And while they may not understand his difficult personality, they do respect his demanding ways. And they wonder whether it takes these kind of personal traits to produce his achievements.

Hank Greenberg followed in the footsteps of another brilliant leader of a different kind but just as demanding in his own way. And over the past 90 years AIG has been fortunate to have a series of “characters” of many nationalities and talents to work in the company. They conceived of a truly international company before anybody was really interested in international. And they and their long-time leaders—Starr and Greenberg—had to constantly stay ahead of the curve and adjust to changing economic trends, regulatory rules, and political situations. They did so remarkably well—again and again.

In the end, though, this time Hank Greenberg failed to adjust to a changing regulatory climate quickly enough. As a result, he had to give up leading his beloved AIG. While that is unfortunate, he still has the satisfaction of knowing that no one is likely to even approach his record.

Introduction

AIG May Be Forced to Declare Bankruptcy Within a Few Days.

This headline on the weekend of September 13-14, 2008, was far more shocking than the provocative headline that sparked me to write this book in 2005. The earlier one said: Greenberg Forced Out as CEO of AIG. How—in just the three years since Hank Greenberg left the mammoth company he built—had his successors, Martin Sullivan and Robert Willumstad, run the world’s largest insurance company into the ground?

Initially, this book was written to tell the story of how Eliot Spitzer, then New York’s attorney general, felled Maurice “Hank” Greenberg, who had held the position of CEO of American International Group (AIG) for 37 years. I intended to explain what Greenberg allegedly did, trace the impact of those actions on AIG and various executives, and suggest that a new regulatory era is upon us. Finally, it would trace the company to its beginnings in Shanghai where it was founded by C.V. Starr and grew into an Asian powerhouse and force around the world.

The post-Greenberg era has proved to be anything but simple for AIG or Greenberg. There have been more curves and twists than could ever have been imagined. For one thing, Hank Greenberg did not slip quietly into retirement. He kept three of the jobs he had held prior to his ouster from AIG-chairman of Starr International (SICO), C.V. Starr & Co., and the Starr Foundation. When he was running AIG, the first two were treated as part and parcel of the company, even though they were legally separate. In fact, today SICO is AIG’s biggest shareholder—with about 10 percent of the company’s shares. SICO’s AIG stock was worth about $20 billion before the collapse.The matter of who really owns SICO’s AIG shares is the subject of litigation.

There also are other lawsuits between AIG and Greenberg’s companies. For example, after Greenberg left AIG, C.V. Starr & Co., an operating company that wrote more exotic risks in marine, aviation, and other fields for AIG, soon became a fierce competitor of AIG’s. It is generally considered that Greenberg won the feud with AIG in an out-of-court settlement over who and what entity would handle the exotic insurance written by C.V. Starr.

For a long time after he left AIG, Greenberg, while striving to restore his reputation, worked behind the scenes and through surrogates. But with suits pending and the onus of being discussed negatively in the press so often, it is tough to do. Perhaps that is why, after remaining silent for so long, over a year ago he finally went public. He has appeared on numerous television shows and given press interviews, not only about the allegations against him, but about his frustration or outright disgust with AIG management, the presidential election, and numerous other matters. This has been even truer as AIG ended up in shambles.

There has been one extraordinary development that surely gave some satisfaction to those many Wall Streeters, like Greenberg, who suffered from Eliot Spitzer’s imperious rule. Spitzer was elected governor by the largest margin in New York history in 2006, but within a year had to resign because of his admitted patronizing of prostitutes. Since then, Andrew Cuomo, who succeeded Spitzer as attorney general, has aggressively prosecuted wrongdoing, seemingly in the Spitzer mode, but with a gentler, more deft touch (although he can be just as hard-hitting). Yet Cuomo cannot find a wrong to right as mesmerizing and publicly appealing as Spitzer’s involvement with Wall Street. He recently took a several-day deposition from Greenberg over the long-pending case involving the General Reinsurance charges, the one AIG settled long ago for $1.5 billion but Greenberg has never settled. Greenberg had managed to postpone this deposition for over three years, apparently because his lawyers were fearful it could harm him. But although he could have avoided it by paying a large fine, he opted to be deposed as part of his relentless campaign to salvage his reputation.

Meantime, Martin Sullivan, Greenberg’s initial successor, was trying to lead AIG’s recovery, mainly focusing on the company’s considerable regulatory problems. He had started working at AIG in London when he was 18 years old with no college education. Over the next 30 years, he worked his way to the top, becoming Greenberg’s chief operating officer. He was described to me by one AIG executive as very likable, charming, and a thousand times easier to work for than Greenberg. (I remember that at the time I did not consider those to be favorable characteristics for leading the company to new heights, or for that matter, just plain leading it.)

But Sullivan is credited with doing a good job in resolving the regulatory mess. He reached agreement with Attorney General Spitzer and other regulators and paid a fine of $1.5 billion. With the help of longtime SEC Chairman Arthur Levitt, AIG put into place an exemplary corporate governance program.The company was praised by government officials such as the attorney general and the superintendent of insurance as having turning the corner from the Greenberg years. Sullivan had constant legal distractions—lawsuits against Greenberg, a countersuit against AIG by Greenberg, shareholder suits, and others. Clearly, he did not have time or he did not find time to focus enough on business.

When Greenberg finally emerged from an uncharacteristic silence, he vigorously criticized AIG for spending what he termed as an exorbitant amount of shareholders’ money to settle with state authorities. But given the alternative, which could have been a criminal suit bought by the attorney general’s office, Sullivan and the board of directors had little choice. If the past is precedent, the outcome of criminal action likely would have been bankruptcy.

By early 2007, it was clear AIG wasn’t the bright spot it had almost always been. For one thing, the core business of AIG—insurance, which Sullivan knew inside out—was not doing as well as it should. But the first real setback came when AIG reported its fourth-quarter earnings for 2007. The losses, almost all from derivative credit swaps, amounted to $ 5.29 billion. Then, three months later, the first-quarter earnings for 2008 reported a $7.81 billion loss. These were AIG’s largest ever quarterly losses. The firm announced it would raise $12.5 billion in capital, and ultimately did raise $20 billion. In releasing the earnings, Martin Sullivan made a mistake a CEO should never make. He basically said to the world that this was the last write-off, that the problems coming from London-based AIG Financial Products were at an end. In December 2007, Sullivan had said that AIG did not expect material losses from its investments linked to subprime mortgages. Later, he summed up his rosy view that all was great: “Excluding these external market issues, the underlying fundamentals of our core businesses remain solid.”

AIG’s board issued the usual reassurance about Sullivan continuing as CEO, but many inside and outside the company concluded that his days were numbered. Until this point, the only large shareholder who had publicly complained was the biggest shareholder—Hank Greenberg. But in June 2008, three major shareholders wrote a scathing letter to the board demanding a change in the CEO and in the board itself. The next day, the three came calling—Eli Broad, who had sold his company, Sun America, to AIG and was a director for a while (and a much admired collector of modern art); Shelby Davis of Davis Selected Advisors, a firm based on fortunes made in insurance-related investments; and Bill Miller of Legg Mason. They met with Robert Willumstad, nonexecutive board chairman, and Morris Offit, a fairly new and widely respected board member with a financial background.

The two AIG directors got an earful, both about the CEO and about the board. They made no commitments, but in a short time Sullivan was out. Willumstad lobbied to succeed him and won. At long last, he had achieved his lifelong goal of becoming a CEO, but with a company embroiled in intrigue and turmoil of Shakespearian dimensions. Ultimately his CEO experience was very short-lived, as he was ousted three months later. His tenure would prove to be far shorter than that of his predecessors; he was elected June 15 and it was announced he was leaving on September 17.

By the time Willumstad had taken over the helm, there had been two quarters of losses and the stock had declined more than 50 percent during the prior year. He announced that he would study the company closely, travel far and wide, and have a plan to restructure AIG by Labor Day. Shortly thereafter, September 25 became his D-day. But Willumstad was gone from AIG just a few days before he could have presented his plan.

AIG had begun to unravel three weeks earlier, however, when Willumstad learned that Moody’s would lower its rating of AIG in mid-September unless the company raised billions of dollars.This news sparked a panic inside AIG headquarters as senior executives and bankers huddled hoping to raise the money to save the company. But once Lehman Brothers began its decline toward bankruptcy,Willumstad realized his time was short. Investment bankers and other potential investors were invited in to look at the books. In no time, their estimates of the financial needs of AIG ballooned from $20 billion to $80 billion or even more.

One early positive response for AIG was New York Governor Patterson’s approval of the recommendation of Eric Dinallo, New York insurance superintendent, for AIG to borrow $20 billion from company funds backing the operating insurance companies and move them to the holding company, AIG. At the time, this infusion seemed significant; but as the shortfall AIG faced kept multiplying, it became a pittance of what AIG needed.

The company and those involved worked night and day over the weekend of September 13-14 to come up with the funds, but made no progress. Investors such as Henry Kravis turned them down. On Monday, September 15, the rating agencies lowered AIG’s rating, handing it a devastating blow. Estimates for what the company needed went as high as $100 billion. Frequent calls to Federal Reserve officials and the Treasury secretary were not getting attention because of the concurrent crises at Lehman Brothers and Merrill Lynch.

Finally, on Tuesday afternoon, Secretary Henry Paulson took charge, concluding that an $85 billion loan was needed. He and Fed Chairman Ben Bernanke informed the president and briefed congressional leaders. By Tuesday night word had leaked out that the Fed would give AIG an $85 billion loan at an interest rate of about 12 percent and take 80 percent of the company.

As part of the deal, Robert Willumstad had to leave, and Edward M. Liddy, former CEO of Allstate but also an investment expert, having worked with Goldman Sachs and others, would become chairman and CEO.

The most electrifying Wall Street week since the Great Depression finally came to an exhausting conclusion. Hank Greenberg and other shareholders dissatisfied with the takeover of AIG by the government would not give in.They hired former Commerce Secretary Mickey Cantor to lead a fight in Washington to reverse this decision and considered options like buying AIG themselves.They lost and AIG is being broken up, with the decision to give retention bonuses having so ruined the brand that it needs restructuring even more than it did before. But the amazing story of Hank Greenberg an AIG is not over yet.

“Life is too short to be little.”—Benjamin Disraeli

“You can’t be less wicked than your enemies simply because your government’s policies are benevolent”

—John le Carré, The Spy Who Came in from the Cold

Chapter 1

How Hank Greenberg Did It

The Four Seasons restaurant on East 52nd Street is an uncommonly rich venue for celebrity spotting. On the first Wednesday in May 2005, midday diners could glance around the room and see Tom Brokaw, Barbara Walters, Colin Powell, and a bevy of other big names, but the person turning the most heads that day wasn’t a famous broadcaster or politico. It was Hank Greenberg, the man who built American International Group into the world’s largest insurance company. Greenberg had long been a celebrity CEO, at least among the financial cognoscenti, one whose singular accomplishments lifted him above his peers and gave him a stature that overshadowed all but a handful of other corporate chieftains.

Greenberg’s celebrity, like that of most business moguls (and insurance executives, in particular), was not the type that turned heads as he walked down the street. Some might know the name, but few knew the face.

Not until 2005, that is, when scandal at AIG put Greenberg’s photo in the New York Times almost daily, and a line-drawing of him appeared on the front page of the Wall Street Journal at least once a week. Suddenly, Hank Greenberg was the highly recognizable malefactor of the moment, accused of cooking the books at AIG to inflate profits and make the balance sheet look stronger than the underlying reality. That afternoon at the Four Seasons—on his 80th birthday, of all days—Greenberg was having a new kind of power lunch. His companions were two attorneys, Robert Morvillo and Kenneth Bialkin, and they weren’t talking deals. Morvillo is a criminal lawyer whose new assignment was to keep Greenberg out of jail, something he had failed to do for Martha Stewart, his last celebrity client.

After finishing his broiled fish and fresh vegetables, Greenberg worked the crowd as he made his way from the Grill Room balcony to the exit. He chatted with Brokaw, stopped by the table of Sir Howard Stringer, who had just become CEO of the Sony Corporation, and exchanged a few words with Richard Grasso, the New York Stock Exchange chairman who was forced out when the shocking magnitude of his compensation became public. Greenberg had been on the NYSE compensation committee that approved Grasso’s pay package, including a $180 million lump-sum pension payment. As he led his lawyers down the stairs to the doorway and the street, several of Greenberg’s friends were pleased to note that his unaccustomed troubles had not taken the slight swagger from his step.

Faced with Greenberg’s woes, most mortals would be staggering instead of swaggering. Even in the context of the rampant scandals of recent years, few executives have fallen so far, so fast, and from such a seemingly unassailable aerie. In February 2005, AIG received a subpoena from Eliot Spitzer, New York State’s hyperactive attorney general, for documents relating to what he believed was accounting chicanery having to do with a recondite kind of transaction known as finite insurance. Spitzer suspected that Greenberg himself had arranged the specific transaction in question to add a phony $500 million to AIG’s reserves for the year 2000. The party on the other side of the deal was none other than Warren Buffett of Berkshire Hathaway. Spitzer was saying that the sage of Omaha had done no wrong, though executives of a Berkshire subsidiary, General Re, may have been culpable. What Spitzer was saying—on Sunday morning network television, no less—was that Greenberg had committed fraud.

Spitzer’s snoops also wanted to know whether AIG had improperly kept some Caribbean subsidiaries off its books in order to understate the true leverage in its operations and hide the full magnitude of the risks it had insured, questions that raised the specter of Enron’s notorious “off-balance-sheet entities.” Spitzer wasn’t alone. AIG also found itself under investigation by the New York Insurance Department, the Securities and Exchange Commission, and the U.S. Justice Department, and was at least peripherally involved in investigations by insurance regulators in England, Ireland, and Australia. Among other things, the SEC wanted to know whether Greenberg had tried to manipulate the price of AIG stock. In one case, he reportedly had put pressure on the NYSE specialists who handle AIG’s stock to support the price during an acquisition in 2001, and had lobbied Richard Grasso to put his arm on the specialists as well. More recently, Greenberg had ordered an AIG trader to buy 250,000 shares of stock on the day the company disclosed its receipt of the Spitzer subpoena.

Once Spitzer turned his guns on AIG, bad things happened to Hank Greenberg in rapid succession. On March 14 the AIG directors forced him to step down as chief executive, a move that shocked nearly everyone familiar with AIG. Greenberg had personally selected each of these directors, in most cases because they were close business friends or because they could use their prestige and influence to help the company in the United States and around the world, or both. Now they had decided that the best way to help AIG was to strip their friend Hank of his power. Two weeks later, under mounting pressure from Spitzer, the directors insisted that he relinquish the chairmanship as well.

After he was ousted, Greenberg, in a conversation with a senior executive at AIG, talked about a conversation he once had with company founder Starr about the risk of public companies. He wistfully said, “I should have listened. This would not have happened if we were still private.”

Removing the boss has become standard procedure in twenty-first-century corporate investigations, especially ones mounted by Spitzer. In this case, Spitzer promised he would not bring criminal charges against AIG if the company cooperated in his investigation. Translation: Help me nail the bad guys, your bad guys, and you get off with a slap on the wrist; otherwise, you’re toast. AIG’s directors gave Spitzer what he wanted, and then some. At the end of April the board released the results of its own investigation of accounting irregularities. Though the language was vague, the report made clear that bad things had been done, and that they had been done by Greenberg and Howard I. Smith, the chief financial officer who also was forced out in March.AIG didn’t name the two, but said all the malfeasance was carried out at “the direction of former senior managers.”

Through all this, AIG treated Greenberg in much the same way that companies regularly deal with executives suspected of selling trade secrets or embezzling.The company would not let Greenberg clean out his office until mid-May, and even then held back papers pertaining to two other companies Greenberg chaired that are independent of AIG but closely linked to it. AIG also kept a Van Gogh and some antique furniture pending a clear determination of ownership.

All standard procedure, except that there is nothing standard about Hank Greenberg or AIG. When the board forced him out, Maurice Raymond Greenberg had been running AIG longer than the CEO of any other major U.S. corporation. (Greenberg appropriated his nickname from Hammerin’ Hank Greenberg, a Depression-era slugger for the Detroit Tigers.) He had been No. 1 at AIG for 37 years, ever since founder CorneliusVander Starr turned over the then-private company to him in 1968.The closest to him in tenure among large-company chairmen was Richard Schulze, who founded Best Buy in 1966. Schulze, however, relinquished the role of chief executive in 2002.

Greenberg also was far older than any of his peers. At 80, he was long past the age when most people slow down at least a bit. Not Hank. He was determined to stay on the job as long as his health permitted, and it seemed that nature might allow him to reign at AIG for quite a while longer. Greenberg is a remarkably young man for his years. His mind, everyone close to him agrees, is as sharp as ever. His face looks more like 70 than 80, and his physical condition is said to be that of a very healthy 60-year-old. He is notoriously impatient and short-tempered, like many older persons, except Hank has always been that way. Moreover, Greenberg comes from long-lived stock. His mother lived to 105 and her mother, by some accounts, worked until she died at 108.

Greenberg is much more than a survivor, of course. In the nearly four decades that he ruled AIG, he transformed a modest company in the insurance business into not just the largest insurer in the world, but also the No. 9 company (ranked by revenues) on the Fortune 500. AIG’s $850 billion of assets at the end of 2005 made it the fourth largest company of all kinds in the United States when measured on that basis. Back in 1968, AIG was best known for being an insurance agency, selling the policies of other insurers to customers in Asia, Latin America, and Europe. It also operated its own life insurance companies in Japan, Hong Kong, the Philippines, and around Asia and owned the majority of several domestic companies, but all of that didn’t stack up much next to the giant insurers in Hartford, New York, and Boston. By the turn of the new century, AIG had totally eclipsed Equitable, John Hancock, Aetna, Travelers, Continental, and all the other companies that had towered over it 30 years before. In the process, Greenberg provided long-term returns to his shareholders that only a handful of companies (Buffett’s Berkshire Hathaway is one) could top. Greenberg also made himself seriously rich. His holdings of AIG stock alone were worth more than $3 billion, and he ranked No. 47 on the Forbes list of the 400 richest Americans.

Given his accomplishments, it may seem somewhat surprising that Greenberg isn’t routinely ranked in the Parthenon of business titans, men like Henry Ford, Alfred P. Sloan, and Samuel Colt, or at least among lesser heroes of the modern age, like Warren Buffett, Walter Wriston, or Louis Gerstner. The reasons for so few accolades are several. First, Greenberg’s stellar success came in insurance, and insurance is inherently recondite and dull (even if it wasn’t dull as practiced at AIG). More important, Greenberg’s innovations weren’t ones that are readily transferable to other industries or even, it appears, to other insurance companies. Many AIG executives left for other insurers over the years to apply what they had learned from Hank, but none managed to duplicate what he had wrought.

Greenberg’s remarkable, sustained success at AIG and his consummate skill at manipulating situations to his advantage make his downfall all the more surprising, as we shall see, but the way he achieved his victories may actually have made his comeuppance all but inevitable in the post-Enron era. To say that Greenberg ruled AIG understates the measure of control he kept over the company. He was an archetypal autocrat, one who knew every detail of the company’s operations and, incredible as it seems, persisted in trying to micromanage the business even as it grew to nearly $100 billion in annual revenues. He was demanding, exacting, and frequently explosive with subordinates, so much so that he drove two of his sons out of the company after they had risen to its highest ranks, by all accounts on merit rather than favoritism. Nevertheless, those who tolerated his frequent sarcasm and occasional tirades, and also delivered the goods in terms of growth and profitability, were rewarded more richly than CEOs at other large companies.

Over the decades, Greenberg worked indefatigably to be recognized as the smartest, canniest, and most successful insurance executive in the world, the brilliant exception in what normally is a numbingly mundane business. Insurance, after all, is the domain of actuaries, people who are said to choose their profession because they lack the personalities to be accountants. Greenberg’s brilliance manifested itself in several departures from the normal course of the insurance business—none all that revolutionary on its own, but dynamite in combination—in relentless execution of his strategy, and in demanding that his people regularly achieve goals that others treat as mere aspirations.

Throughout modern times, the insurance industry periodically has had a plague visited upon it known as the underwriting cycle. The cycle works like this. As competition heats up, especially in commercial coverage, insurers cut their premiums (the price of their services) to maintain or increase market share. Inevitably, it seems, premiums across the industry drop to imprudently low levels, ones insufficient to cover the subsequent claims. When those claims—and losses—materialize, typically from a rash of natural disasters, the freshly scorched insurers jack their prices back up and walk away from business that they fought over the year before. Then, as profits recover, the insurers once again bid premiums down to potentially ruinous levels. Many insurers are willing to let their income from investing the premiums cover the difference between the premiums and the claims they later have to pay. Not Greenberg and AIG.

Greenberg, who spent his entire career in insurance and understands its economics as well as or better than anyone, knows that success depends absolutely on getting adequate compensation for the potential loss one is underwriting—and preferably getting a premium that is much more than just adequate. AIG always wanted a bigger book of business than its competitors, but not if that meant suffering underwriting losses that ate into the investment returns from its premium income.

One way to reinforce pricing discipline was to eschew the lines of coverage that other insurers were chasing most aggressively. Another was to insure risks that others didn’t want, business where the lack of competition enabled AIG to keep premiums quite comfortably high. As a result, AIG became the leading seller of directors and officers liability coverage, which insures corporate officers and directors against claims for personal malfeasance. Few companies actually file claims under the coverage, but no prudent executive will accept a board seat without it. AIG also has been the leader in kidnapping and ransom insurance for First World executives posted to Second and Third World operations in places like Colombia, Mexico, and the former Eastern bloc. Greenberg once commented that many executives are kidnapped each year, but many, many more aren’t kidnapped but do buy insurance.

While one part of the Greenberg profit formula was to charge high premiums, another was to pay as few claims as possible. To that end, AIG has always had a notoriously tough claims department that is famous for finding reasons to send policyholders away empty-handed. The company was so tough, in fact, that some portfolio managers joked that they loved to buy AIG stock, but they would never consider buying an AIG policy. There is nothing wrong with that approach, of course, provided that it isn’t carried to such lengths that it drives business away. Management’s first and foremost obligation is to make as much money for its shareholders as it can. Its only real obligation to policyholders is to honor the contract.

Another of Greenberg’s signal innovations was in the area of incentive compensation. A congenital quandary in any business is how to motivate salespeople most effectively. How do you get them to focus on the true profitability of what they sell rather than just top-line sales? Too often, salespeople will give away the store—in the form of price cuts, promises of extra service, or generous payment terms—in order to land the business and collect a commission. The problem is particularly acute in fields like banking and insurance, where the ultimate risks—loan defaults or policy claims—are not truly knowable until long after the sale is made, and often do not happen until the seller has moved on to a new territory or even a new company.

Greenberg’s solution was a unique compensation scheme, one that “differentiated AIG from all other companies and created a culture that was unique in corporate America.” He rewarded AIG’s top producers with interests in two outside companies called C.V. Starr and Starr International (SICO), both named after Cornelius Vander Starr. (It was their papers that AIG would not let Greenberg remove from his office.) The two entities owned significant blocks of AIG stock and C.V. Starr did lucrative business with the company, but they were technically independent of AIG. Participation in SICO for good performers, and in C.V. Starr for the company stars, acted as both a long-term incentive and a highly contingent form of deferred compensation. The power of these incentives to feed the bottom line of AIG hinged in part on the fact that SICO and C.V. Starr prospered only so long as AIG prospered as well. The participants got some current cash from the entities, but the real payoff came from the appreciation in the companies’ holdings of AIG stock. If AIG did not do well, neither did the participants.

The myth of AIG with its founding in China, the belief in its uniqueness and the thought that it could never fail created a cadre of true believers. They believed in the company, were assured it would always be a success and had confidence they would be well taken care of as a result. And many were for a long time. But AIG’s near collapse in September 2008 was a stunning blow to many.

One was Jack Lancaster, a charming, brilliant Bermuda custom officer who rose to the Presidency of AIU and whose son is married to Norman Mailer’s daughter. Jack is not despondent, but he will never have the wealth he had before. One of many believers in the company knocked for a loop.

That was just one of the wrinkles in Greenberg’s system. Another was that the actual ownership of interests in the two entities did not vest until an executive reached the age of 65. Anyone who departed before then forfeited his or her interest, leaving more money in the pot for those who stayed. What’s more, the participations were not fixed. If the business a person wrote ultimately went sour, or if profitability faltered in one’s division, Greenberg could, and did, adjust the participation downward.The system forced managers to focus on sustained, long-term performance and provided ample motivation to deliver the “three 15s” that Hank demanded—15 percent revenue growth, 15 percent profit growth, and 15 percent return on equity. And the costs of the compensation didn’t show up on AIG’s income statement.The rewards for those who delivered year after year were truly enormous: Many in the C.V. Starr club became centi-millionaires, and one in addition to Greenberg reportedly is a billionaire. Indeed, C.V. Starr was known within AIG as the billionaires club (although as several current AIG executives pointed out to me, more money could be made out of SICO).When it came to everyone else, though, Greenberg was a classic skinflint. AIG was famous for paying its rank and file substantially less than the norm at other large insurers. Even basic pay for its executives was low. They made up for it with stock options and participation in the private incentive plans.

AIG’s famous aggressiveness as a competitor has been matched by an equally aggressive approach to government and politics. Few industries are as regulated as insurance. Each of the 50 states has its own insurance department, with its own rules governing companies doing business in its territory. More important, AIG also had to deal with governments and regulators in more than 100 countries around the globe. Its middle initial, after all, stands for International, and AIG’s roots are abroad. The company started not in the United States, but in Shanghai in 1919, and virtually all its operations were outside the United States for the first 30 years of its existence. One senior AIG executive insists that Greenberg was a liberal Democrat until McGovern was nominated. Then he became a conservative Republican. Hard to believe.

From its inception, AIG had to court regulators and politicians to win permission to do business in their countries. Even when it succeeded, it still had to wrangle again and again over specific business practices, over moving profits out of the country, and at times over attempts to expropriate its businesses. As the company grew, it developed a highly evolved culture of political exploitation. Step one, wherever possible, was to cultivate critically important relationships with political leaders. Step two was to fortify its influence abroad by cultivating even stronger relations with the U.S. foreign policy establishment. One manifestation of that was Greenberg’s leadership role with the Council on Foreign Relations in New York. His interest in foreign affairs plainly is genuine; the head of a company as far-flung as AIG has to care deeply about world affairs. Fortunately, his very active role happens to be one that served the interests of AIG as well.

The tight relations with U.S. policymakers gave AIG the genuine clout to pursue a take-no-prisoners policy when cajolery failed to get what it wanted. If a country threatened to seize AIG’s assets, as various nations did over the years, AIG could credibly respond with a counterthreat of U.S. trade sanctions against the country. All this was done quietly, of course, but quite effectively. AIG even secured legislation in Washington that could cut off a country’s textile exports to the United States if it denied insurance licenses to U.S. companies. AIG played hard-ball at home as well. One famous case involved the Delaware Insurance Department, which in the mid-1990s was investigating whether a supposedly independent Caribbean reinsurance company was actually controlled by AIG and should be consolidated on its books (a question very similar to ones Spitzer was asking in 2005). AIG responded by having private investigators snoop on the snoopers in Delaware.

Areal asset in advancing AIG interests abroad was Hank Greenberg himself. His contacts around the world are legendary and are sorely missed by the new AIG management team. Whenever he went to the Philippines in the 1970s and early 1980s, he dined with President Marcos and then was debriefed by the CIA, part of the continuing symbiotic relationship with the intelligence community that started with Starr and continued with Youngman, Tweedy, Greenberg, and others. The New York Times magazine once ran an interview with CIA Director Bill Casey in which he commented on the few individuals outside government he tapped most often for advice. One was former Nevada Senator Paul Laxalt. Another was Hank Greenberg, who, needless to say, was absolutely furious over the article. “How in the hell,” he asked me, “can you possibly conduct covert operations when you end up in theNewYork Times?”

One consequence of AIG’s intense political involvement, and of having to live in a world defined by myriad rules, was an odd sense of entitlement. When possible, AIG shaped the rules to its interests; when not, it bent them to its purposes. On occasion, it flouted the rules. In many cases, it operated as close to the edge as it had to in order to achieve its business goals. Given that mind-set, it hardly is surprising that Greenberg may have pushed the envelope on finite insurance contracts or stretched accounting principles to report the earnings he wanted. If someone did object, the company could defend, rationalize, or explain away just about any action. Greenberg would make his stock reply to almost every criticism (“You don’t understand insurance”), and then the lawyers and lobbyists would make the problem go away.

Whatever the case, the actions in question cost Greenberg dearly, and not just at AIG.The scandal compelled him to give up his leadership positions at some of the nonprofit institutions that are an integral part of the New York power structure and had been an important source of prestige and influence for both Greenberg and AIG, but where he would now have to deal with some of the same directors who forced him out of his own company. He quit the board of the American Museum of Natural History, an organization to which the Starr Foundation, which he chairs, gave $35 million and whose president, Ellen Futter, is on AIG’s board. He also resigned from the board of the Asia Society. Hank used to head that board, but it now is chaired by former U.N. Ambassador Richard Holbrooke, another AIG director.

One board seat Greenberg did not relinquish was at the Council on Foreign Relations, the old-line bastion of the foreign policy establishment. Greenberg served as its vice chairman for many years, and was elected an honorary vice chairman when his last term ended. When the scandal broke, the council quickly amended the Greenberg biography on its website, euphemistically describing him as the “retired” chairman and CEO of AIG. Less kindly, the council quietly removed the flattering portrait of Greenberg from the gallery of current and past leaders in the Rockefeller Room of its East 68th Street headquarters.

Something I had never noticed was pointed out to me by a high-powered member. All the other portraits—from David Rockefeller to John J. McCloy—show conservatively suited dignitaries seated in a library or what looks like a library, while Greenberg is standing outside on the top balcony of his headquarters at 70 Pine Street with a view of Manhattan behind him. It not so subtly conveys his powerful role in the business capital of the world—a striking contrast to the other leaders in the room. He looks dynamic, attractive.The woman who pointed this difference out to me claimed she heard Greenberg had demanded this distinctive portrait. Did he really demand this painting? Les Gelb, president emeritus of the council, says absolutely not. He explained that when a picture is commissioned, the honoree is given several artists to work with. Greenberg picked one he liked and delivered this picture. It is certainly in stark contrast to every other painting in the David Rockefeller Room, and it is the only portrait of a vice chairman hung in the room. The rest are chairmen and presidents of the council. But, as Gelb points out, there are also portraits of lesser than vice chairmen in this room—such as past directors of the council.

When I told Les why Attorney General Spitzer considered “Greenberg the most powerful businessman in the world and his Council involvement was one reason,” Les was quiet for a minute then said, “I am blushing.” Spitzer had said, “The AIG CEO has relationships with leaders around the world that surpass relations any other CEO has. He was at the vortex of where many different streams merged. A very significant player with the Council on Foreign Relations and others.”

Regarding his portrait at the council—it has been rehung. Les advised me to ask his successor, Richard Haass, how it came to be removed. Les said he asked and was told the Rockefeller Room was being shown to prospective renters of the room and it was decided there were too many pictures, which would discourage those who wanted to use it for events. Therefore, several were temporarily removed. Some speculate that the council precipitously removed it in the embarrassing heat of the Greenberg scandal, got considerable grief from those who felt Greenberg had done a great deal and been very generous to the council, and quietly rehung it. Haass’s office told me he was uncomfortable about discussing council board members and could not meet with me.

He subsequently called and we met but the book was already at the printer. I promised to include the results of our interview in the paperback.

Haass described Hank as a model director who cares about the council, is interested in foreign policy, knows a great deal about Asia, and is generous with his time and resources. I learned from Les Gelb that the Starr Foundation, which Greenberg chairs, has given over $15 million to the council.

Regarding the photos, Haass stated strongly that for events like weddings, since the Greenberg photo was at that time on one wall overlooking 68th Street, it was removed for picture taking. (The picture is now on the opposite wall.) He said paintings only come down because of events where the council rents space or for physical protection if the room is too crowded.

As to whether it was rare for a vice chairman, as opposed to chairmen and presidents, to have their photo in the David Rockefeller room, Haass pointed out that for a number of years Greenberg was a close partner with Pete Peterson, then chairman of the Blackstone Group, who served as council chairman for some 15 years. They worked together in leading the council, so it was natural that Hank’s picture would be hung in recognition.

We talked about the sensitivity of Hank being a director and working alongside Richard Holbrooke, Martin Feldstein, and Carla Hills, directors of AIG, which had ousted him. Greenberg is especially angry at Holbrooke and allegedly says he will give no money to the Asia Society, which Holbrooke chairs, until he leaves. Haass said that directors compartmentalize very well. They come to the council for council business and he has never seen their other agendas intrude on the council.

I noted a senior office of the council told me that whereas Gelb got on famously with Greenberg, Haass does not. Haass disputed this, noting they first met in the 1990s, when the council had a task force on U.S. intelligence policy, which Hank chaired and which Haass served as executive director. They have known each other since and work together well. He described Hank as a strong personality who talks very directly, something he (Haass) is comfortable with.

He summed up by noting the AIG story was one of the great American business stories of the second half of the twentieth century.

The great irony in the AIG affair is the apparently modest degree of accounting chicanery. In the other great scandals of recent years, companies manufactured profits out of thin air to hide reversals that effectively doomed the enterprises. Enron leveraged itself into extinction while pretending to be a money spinner. WorldCom and Adelphia were forced into bankruptcy reorganization and ultimately sold for just a few percent of their former values.

The AIG numbers sound almost as big. The board’s report at the beginning of May said that reversing improper accounting entries since 2000 would knock $2.7 billion off the company’s net worth. That sounds like a lot, but not if you consider how enormous AIG is. The figure comes to only 3 percent of the company’s equity capital, and substantially less than a single year’s earnings. What’s more, corrections of other accounting errors in those same years would add back $2.4 billion, so that the net change came to just $300 million.The net figure is chump change for AIG. Even the bigger $2.7 billion number is not large enough, by itself, to have a material impact on the value of the business.

Legal or not, Greenberg’s actions were nothing like those of the other boardroom bad guys, who tried to fool investors by grossly distorting their numbers. Instead, if Greenberg did anything, he was simply injecting a little Botox into the balance sheet and fine-tuning the earnings reports to maintain the image he found so supremely important. Not so long ago, that kind of earnings “management” rarely brought more than a modest reprimand.The rules changed after Enron, of course, but Hank must have assumed that the changes, like so many other regulatory annoyances, weren’t really relevant, or if they did apply to him, he could bluff his way through them as he had so often in the past.

The bottom line is that Hank Greenberg was forced out of a great company, one of a kind—a company with a dramatic and unusual history, very different management practices, an innovative offering of products, traditions unlike those in other businesses, and an extraordinary system of compensation.

The company was founded on a shoestring in Shanghai, China, before American businessmen really thought of going abroad, by an unusual entrepreneur, C.V. Starr, a young man who had very limited insurance experience but a great deal of self-confidence, moxie, and affection for the Chinese people. Starr’s operating philosophy was not that you needed to know insurance. In fact, that was the least of his concerns. What you did need was to be ambitious, hungry, hardworking, creative, and dedicated to his company. Thus early on he attracted a group of talented people who knew nothing about the business. Among the founding fathers were Russian refugees and Chinese scholars. They would have to learn the business as they went—and they did.

True winners in the Starr companies were the real risk takers. Not only risk takers on what they insured, but risk takers in their other business decisions as well. Starr constantly took risks as he expanded his companies across Asia. Greenberg is the risk taker par excellence right up to the present by bringing lawsuits against AIG to recover $15 million in lost property and to protect $20 billion in stock owned by one of the AIG-related entities he still chairs and whose stock AIG claims rightfully belongs to it.

The company has always held great allure. It was swashbuckling and entrepreneurial, headquartered in Shanghai. Legends and stories naturally grew up around the company and soon were accepted as absolute truths. I get to the bottom of many of these legends in this book—some were bunk, some were partially true, others were absolutely true. Starr eventually had offices in Mexico City, Havana, Hanoi, and Paris and everywhere else exotic, but not in the insurance capital of America—Hartford. The company offered unlimited opportunity. It could grow and expand all over Asia (and later everywhere else). One lived in an exotic locale, places where anyone with even a modest income by U.S. standards could live like a king with a huge home full of servants, club memberships, and other perks of living abroad. Upper middle managers enjoyed a life reserved for only those at the very top of the wealth chain back home.