WE DON'T HAVE TO WAIT for the outcome of the battle between American International Group (AIG) and its regulators to predict that it will affect how public companies can be governed in a world in which prosecutors are unconstrained by rules designed to protect the rights of the accused.

Maurice "Hank" Greenberg built AIG from a small insurance operation into a $100 billion powerhouse, taking him to the pinnacle of America's financial and philanthropic establishments and becoming one of the "high flying, adored," to borrow from Tim Rice's Evita lyrics. From which perch he has fallen, and is now an unemployed executive scrambling to transfer over $2 billion in assets to his wife to shield them from prosecutors and private litigants.

In rapid order: Greenberg was labeled "a CEO who did not tell the public the truth" and charged with "fraud" on a television broadcast by New York attorney general Eliot Spitzer; was defrocked by his board; and was forced to invoke his Fifth Amendment rights against self-incrimination when hauled before a regulatory inquisition before he had time to study the thousands of documents underlying the charges against him.

The specific issue involves a complicated transaction that may or may not have illegally shored up AIG's earnings. But the way the game is now played, it matters little what the truth will prove to be. Spitzer threatened to destroy AIG by charging the company with criminal violations unless its board fired Greenberg--as he had earlier forced the board of Marsh & McLennan to unseat Hank's son, Jeff, as CEO, and replace him with a long-time Spitzer friend and former associate.

The Spitzerization of companies goes like this: First, public accusation; then, threat of criminal charges and corporate ruin unless the accused waive their right to confidential access to counsel, and the board fires its CEO; and, in the end, a cash settlement in lieu of a trial that would determine the truth of his charges. Even this defender of Sarbanes-Oxley and corporate reform worries whether the happiest of ends justifies these means.

Spitzer has set a pattern that others will follow, especially if his self-described role as a latter-day Theodore Roosevelt, who smote "malefactors of great wealth," propels him into the governor's chair and the White House, as it did Teddy. Which means that only the dimmest of old-dog CEOs will refuse to learn some new tricks.

THE FIRST TRICK is that reputation counts, witness the different treatment received by Greenberg and Warren Buffett, boss of Berkshire Hathaway and its insurance subsidiary, General Re Corp. Both men were involved in the transaction that moved Spitzer to act, but Greenberg is the object of the investigation while Buffett was called merely as a "witness."

One reason is Buffett's reputation as man willing to cooperate with regulators, compared with Greenberg's policy of challenging them when he thinks he is in the right. Buffett long ago helped a leading investment bank to survive a major scandal involving trading of treasury securities by cooperating fully with regulators. This time around, he directed his executives to turn over every scrap of information they had that might be of interest to Spitzer. And when asked to testify, he told regulators "everything I knew" about the transaction, which he contends wasn't very much.

Greenberg, on the other hand, last year riled regulators by refusing to cooperate as fully as they wished with another investigation. Worse still, before resigning as chairman, Greenberg infuriated Spitzer by directing his lawyers to remove 80 boxes of documents from the Bermuda offices of a company that controls the compensation of AIG executives.

So lesson number one for any CEO is to build a reputation of cooperating with regulators, more Buffett than Greenberg. Lesson number two is to realize that old, once-venerated legal protections have been so seriously diluted as to be irrelevant when faced with a regulatory onslaught. Your lawyers might eventually prevail by playing hardball, but by that time you will be unemployed and, most likely, unemployable.

In the end, the same political ambition that prompted Spitzer to attack AIG just might save it. Having already caused massive layoffs at Marsh & McLennan, he does not want to enter the governor's race as the man who destroyed another major New York-based company. So he will settle for a fine, and rely on disgruntled shareholders to pursue AIG for reimbursement for investors.

THAT LEAVES OPEN the question of the fate of two men who might be affected by AIG's problems: Robert Rubin and Martin Feldstein.

Washington and Wall Street gossip has it that Rubin, whose successful career at Goldman Sachs was followed by an even more successful stint as Bill Clinton's Treasury secretary, will be asked to replace Greenberg. A Democrat, Rubin, can be expected to support Spitzer's run for office.

Harvard professor Feldstein has been a leading candidate to succeed Alan Greenspan as chairman of the Federal Reserve Board when Greenspan retires in January. But he is an AIG director and member of the board's finance committee, and can be accused of being asleep at his post when the accounting improprieties occurred and when AIG's unusual executive compensation scheme was in use.

Which means that Ben Bernanke has now moved up in the candidate standings. Bernanke, until recently a Fed governor, has accepted the nomination to chair the president's Council of Economic Advisers, a post which has gone begging for several months. By obliging President Bush, Bernanke has increased his chances of getting the much more important Fed chairmanship. That would mean replacement of Greenspan's flexible, intuitive approach to monetary management with specific inflation targeting, which Bernanke has long espoused.

All these ripples because the attorney general of one state questioned one complicated transaction made by one insurance company.

Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.

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