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Hank's last stand

Maurice "Hank" Greenberg made AIG an indispensable company. When the board forced him out, he began a furious campaign to reclaim his good name. But no one foresaw how strange the last chapter of this tale would be.

By James Bandler, editor at large, with Roddy Boyd and Doris Burke
Last Updated: October 7, 2008: 10:10 AM ET

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Maurice "Hank" Greenberg with his dog, Snowball, near his vacation home in Switzerland
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Celebrated trial lawyer David Boies is a leader of Greenberg's legal defense.
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Nicholas Gravante Jr.of Boies Schiller & Flexner heads up Greenberg's legal team with David Boies.

(Fortune Magazine) -- On Sept. 11 of this year, an eerie morning stillness envelops lower Manhattan as a deep-blue Mercedes sedan pulls up alongside the state courthouse building on the outskirts of Chinatown. A spry, gray-haired man in a dark suit emerges from the car. He strides to a back entrance, too preoccupied to notice the small cluster of elderly Chinese Americans doing tai chi.

These are wrenching times for 83-year-old Hank Greenberg, former chairman and chief executive of American International Group (AIG, Fortune 500). Four years ago he was one of the most powerful men in the world. He controlled a company with $800 billion in assets. U.S. Presidents, foreign heads of state, and intelligence chiefs sought his counsel. His foundations dispensed hundreds of millions of dollars each year to charities.

Today he is Maurice R. Greenberg, defendant.

For the next day and a half, amid on-again, off-again settlement negotiations, Greenberg will politely answer questions from New York State prosecutors about one of the transactions that precipitated his forced departure. But his mind is elsewhere, and not just because of the bagpipes skirling outside the courthouse on this dark anniversary. AIG's stock is gyrating wildly. Every few hours Greenberg takes breaks to get updates on the growing crisis. Anxious, he calls the company's embattled CEO, Robert Willumstad, and urges him to take dramatic steps to save the world's biggest insurance company. "What the hell are you people waiting for?" Greenberg demands.

On Friday the 12th, during the time Greenberg is testifying, AIG loses 30% of its value. When he leaves the deposition room, he is $276 million poorer.

A day later, at a conference in Cambridge, Mass., Greenberg's lawyer, David Boies, flips open his cellphone to find six messages from his client. Boies cuts the conference short and flies back to New York on Greenberg's jet, which he has borrowed for the weekend. In the air Boies dials Greenberg. "If they'd only let me raise capital six weeks ago, David," Greenberg says. The desperation and frustration in his voice are unlike anything Boies has ever heard from his client before.

"Yes, I know, Hank," Boies replies. "They should have listened."

The next week, as AIG's share price disintegrates, Greenberg takes to the airwaves to try to save the company, which he describes on CNBC as a treasure. "It's in our national interest that AIG survive," he says. A day later the U.S. government acquires 80% of AIG when it extends a two-year loan of up to $85 billion. But the plan is designed to allow only an orderly liquidation of the company, which will probably be sold off in pieces. Greenberg says shareholders would have been better off if the company had filed for bankruptcy protection. "I just think it is disgusting," he says. "This is not American."

* * *

Maurice Greenberg, son of a taxi driver, built a thing so big and important that the U.S. government wouldn't let it fail. AIG greases the wheels of the global economy. Without it, farming cooperatives in South America, Kansas, and Eastern Europe would see their grain hedges fail. Shipping companies would dock their fleets over insurance concerns. Banks from Tokyo to Tallahassee would be unable to lend or borrow money. AIG pays claims for earthquakes, floods, and hurricanes.

The company was designed to cope with almost any shock. Greenberg's lieutenants even drew up plans for AIG to survive a revolution in the U.S. or a nuclear holocaust. But no one understood the danger that was ticking away deep in the company's financial products unit. It was a bomb that Greenberg unwittingly helped build by venturing into the world of credit default swaps tied to mortgages. (For more on those dangerous derivatives, see "The $55 Trillion Question.") Like many brilliant men who gambled with such complex and sophisticated financial products, he thought he had a handle on the risks. After all, the risk models always seemed to show the same thing: No matter what historical default scenario was plugged in, the hazards were small. Generations of data didn't lie - American homeowners paid their mortgages.

Until they didn't.

AIG's financial calamity occupies a special place in the storm that reshaped Wall Street in the past month. It was where Treasury Secretary Hank Paulson drew the line on letting companies die, after letting Lehman Brothers go under and Merrill Lynch (CRJ) be sold. The government took action swiftly, appointing a new CEO and stopping AIG's dividends.

The way the loan is structured, AIG will be forced to draw down the entire $85 billion quickly, forcing it to sell off assets to repay the government within the two-year time frame. That almost certainly shuts out any possibility of a rescue by a private-sector investor.

But Greenberg, while devastated, is determined to play a role in the endgame. The man simply will not give up. He has been fighting since his public disgrace nearly four years ago, enlisting armies of lawyers, publicists, and paid academics to restore his reputation. Many times friends have implored him to settle with the government. But a stubborn, almost self-destructive pride makes him balk. He is willing to pay tens of millions of dollars to put litigation behind him. But he insists that he has not, at any point, done anything wrong. He won't agree to any settlement payment that is described as a penalty or fine.

Fortune spent the past four months talking to Greenberg and his advisors, meeting with the former CEO at his office on Park Avenue, his vacation home in Switzerland, and his Fifth Avenue apartment, and reviewing hundreds of pages of documents unavailable to the public. At the outset, AIG stock was trading at $37 a share; at presstime the price was $3. During that span the entire financial industry was turned upside down, and AIG got its 15 minutes of infamy.

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