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 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. Greenberg has fallen from his perch and is now an unemployed executive scrambling to transfer more than $2 billion (£1.05 billion) in assets to his wife to shield them from prosecutors and private litigants.

In rapid order, Greenberg was labelled a chief executive “who did not tell the public the truth” and charged with “fraud” on a television broadcast by New York attorney-general Eliot Spitzer, defrocked by his board, and 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.

At the heart of the matter is 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 chief executive and replace him with a long-time Spitzer friend and former associate.

The Spitzerisation 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 chief executive; and, in the end, a cash settlement in lieu of a trial that would determine the truth of his charges. I defend the Sarbanes-Oxley Act and corporate reform but worry whether even the happiest of ends justifies Spitzer’s means.

Spitzer has set a pattern that others will follow, especially if his self-described role as a latter-day Theodore “Teddy” 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 chief executives will refuse to learn some new tricks.

The first is that reputation counts — witness the treatment received by Greenberg and how different it was from that received by Warren Buffett, boss of Berkshire Hathaway and its insurance subsidiary, General Re. Both men were involved in the transaction that moved Spitzer to act, but Greenberg is being investigated while Buffett was called merely as a “witness”.

One reason is that Buffett has a reputation for being willing to co-operate with regulators, while Greenberg has a policy of challenging them when he thinks he is in the right. Buffett long ago helped a leading investment bank to survive a scandal by co-operating fully with regulators. This time, he directed all his executives to turn over every scrap of information 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 much.

Greenberg, on the other hand, last year riled regulators by refusing to co-operate fully with another investigation. Worse still, before resigning, he infuriated Spitzer by directing his lawyers to remove 80 boxes of documents from the Bermuda offices of a company that controls the pay of AIG executives.

So lesson No1 for any chief executive is to build a reputation for co-operating with regulators. Lesson No2 is to realise that 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 huge layoffs at Marsh & McLennan, he does not want to enter the governor’s race as the man who destroyed another big New York company. So he will settle for a fine, and rely on disgruntled shareholders to pursue AIG for reimbursement.

Washington and Wall Street gossip has it that Robert 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.

But the scandal is having repercussions beyond AIG, because it will affect the fate of Martin Feldstein. This Harvard professor 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 pay scheme was in use.

This 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 that 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 have been caused because the attorney- general of one state questioned one complicated transaction made by one insurance company.

Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute

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