Following on these earlier posts regarding the increasing threat of criminal indictment that is being place on American International Group executives, AIG canned two of its top executives — CFO Howard I. Smith and VP Christian M. Milton — after the two invoked their Fifth Amendment right against possible self-incrimination in the ongoing investigation into whether whether AIG manipulated its books in connection with a transaction involving General Re Corp., a unit of Warren Buffett’s Berkshire Hathaway Inc.
Both men were terminated pursuant to an AIG company policy that requires employees to cooperate with government authorities investigating matters pertaining to the company. However, the two employees were clearly placed in an untenable position given recent developments in similar criminal investigations. In connection with this investigation involving Computer Associates, three former executives of that company pleaded guilty to obstruction of justice charges that were not tied to alleged misstatements told to federal investigators, but to alleged misstatements made to the company’s own law firm during the company’s internal investigation. Similarly, in this case involving accounting giant KPMG, the government required threatened criminal action against KPMG in connection with a tax avoidance scheme unless the firm forced one of its partners to cooperate with the government, which of course can use the partner’s statements against him in prosecuting a crime.
Accordingly, rather than attempt to facedown the government over its increasingly common use of its odious power to criminalize merely questionable business transactions, the AIG Board has decided to offer several sacificial lambs to the Lord of Regulation in an effort to avoid a meltdown of the company. One can only ponder how many such lambs this Lord will require?

And while the business and legal worlds focus on the implications of the Ebbers conviction, this NY Times article reports on the uneasiness at Berkshire Hathaway as New York Attorney General Eliot Spitzer carves another notch in his anti-business holster with the resignation of longtime American International Group chairman, Maurice “Hank” Greenberg, who is every bit as prominent in financial circles as Berkshire chairman Warren Buffett is in the investment field.
In striking contrast to Mr. Ebbers’ fate, this week’s “retirement” of AIG CEO Greenberg was the result of AIG’s board trying to soften the wrath of AG (i.e., “Aspiring Governor”) Spitzer. AIG remains one of the world’s largest and most lucrative financial services businesses. Mr. Spitzer was about to take Mr. Greenberg’s deposition in his ongoing investigation of transactions between AIG and Berkshire’s General Re Corp., so the AIG board unceremoniously elected to dump the man who had built the company into a giant in the hope of avoiding further legal scrutiny by the Aspiring Governor.
What is unfortunate about all of this is that, in the current anti-business culture that is fostered by films, the MSM, and prosecutors such as Mr. Spitzer, the AIG Board’s throwing of Mr. Greenberg to the wolves just might have been the most reasonable business decision under the circumstances. In light of recent civil settlements by directors in the Enron and WorldCom cases, the main risk for directors now is failing to get rid of a CEO at the first sign of Mr. Spitzer or some other irregularity. Even if that that means showing the door to a CEO with Mr. Greenberg’s long record of great returns for shareholders, that’s just life in the big city.
Based on what is publicly known about Mr. Spitzer’s investigation into the AIG-General Re transaction, it would not be unreasonable for any CEO to run for cover out of fear that she is the next target of this voracious appetite to criminalize even normal business practices. If you believe Mr. Spitzer, Mr. Greenberg arranged a transaction in 2000 with General Re that made AIG’s reserves look slightly better than they really were. However, the deal did not affect AIG’s net income and was the type of transaction that AIG — and many other companies in the insurance industry — have done for years without any adverse market reaction, much less a criminal investigation.
Nevertheless, as Mr. Spitzer continues pressing his campaign to criminalize business, it does not matter whether a transaction was considered proper in the past. Mr. Spitzer knows that he can get what he wants without the details of due process and a trial by undermining a company’s stock price in the media. Such an approach is contrary to the rule of law, but Mr. Spitzer proceeds with the warm understanding that no one in the MSM will ever call him out on the injustice of his ways.
Perhaps the Aspiring Governor will yet turn up something more damaging at AIG and Berkshire than what has been reported to date. But the AIG morality play is turning out about the same as other Spitzer investigations — a CEO gets canned, the company pays a big fine, and the Aspiring Governor gets good P.R. with perhaps a few crimes sprinkled in to titillate public interest in the matter. Although the dubious policy of criminalizing business generally is bad enough, Spitzer’s manipulation of huge companies by publicly attacking common business practices — without any measure of prosecutorial discretion or due process — is taking governmental regulation of business to an entirely new and more dangerous level.
Update: Don’t miss Professor Ribstein’s observations on the foregoing process, which he insightfully characterizes as the “Imperial Regulator and the Divine CEO.”

The Oregon Public Utility Commission announced Thursday that it had decided not to approve Texas Pacific Group‘s proposed $2.35 billion purchase of Enron subsidiary Portland General Electric because “the potential harms or risks to PGE customers from the deal outweigh the potential benefits.” Here are the earlier posts on this situation.
PGE is Oregon’s largest utility with about 755,000 customers. Texas Pacific is the closely-owned Fort Worth investment firm that has been trying to buy PGE out of Enron’s bankruptcy estate for more than a year despite widespread public resistance in Oregon. Even such major industrial customers of the utility such as Intel Corp. came out against the deal.
State law required the state regulators to decide whether ratepayers would benefit from the takeover and that no public harm would result. Inasmuch as the commission could have approved the deal outright or conditioned approval of a sale on certain additional requirements, the outright denial of the proposed purchase is a crushing defeat for Texas Pacific and Enron creditors.
If Texas Pacific does not win an appeal of the utility commission’s ruling, then Enron’s creditor’s committee will essentially decide what to do with PGE. The two most likely results are just to distribute new stock of the utility among Enron creditors or reopen the bidding for the utiity. Representatives of the City of Portland has publicly stated that it would make a bid for the utility.