NW YORK (Bloomberg) ? Maurice (Hank) Greenberg stormed Omaha Beach in the D-Day invasion of the Second World War II and earned a Bronze Star fighting in Korea.

Over four decades, Greenberg built American International Group Inc. into the world?s largest insurer, often scrapping publicly with state officials, investigators and prosecutors.

Last week, the most powerful US insurance executive learned that conflict isn?t a survival strategy against New York Attorney General Eliot Spitzer and federal regulators as they investigate whether AIG manipulated earnings and rigged insurance bids.

?He was playing chicken with the regulators,? says Robert Haines, an insurance analyst at New York-based CreditSights Inc., a debt-research firm. ?He should have taken a more conciliatory tone.?

Greenberg, 79, stepped down as AIG?s chief executive officer last night, and the board replaced him with co-chief operating officer Martin Sullivan, 50. Greenberg will remain as non-executive chairman.

?He?s agreed to provide me with any assistance that I require,? Sullivan said today on a conference call. ?His guidance to me will continue to be invaluable going forward.?

Since taking over New York-based AIG in 1967, Greenberg boosted its assets more than 1,000-fold and transformed the insurance business while building AIG through $50 billion of acquisitions in 130 countries.

Now, Greenberg was scheduled to testify on Thursday to the US Securities and Exchange Commission and Spitzer in their investigation of a four-year-old transaction between AIG and Berkshire Hathaway Inc.?s General Reinsurance unit, people familiar with the matter said.

Spitzer and the SEC have received information showing Greenberg may have initiated the transaction to boost reserve levels and smooth his own company?s earnings, the people said.

AIG?s board last night also replaced Chief Financial Officer Howard Smith with Steven Bensinger, 50, the company?s treasurer since 2002. Smith had worked at AIG since 1984 and served as chief financial officer since 1996. Sullivan said Smith and the board agreed that Smith should leave the company.

AIG said it would delay filing its annual report to regulators to review accounting for transactions under investigation. Bensinger said he intends to file within two weeks.

Greenberg and AIG did not recognise the growing power of Spitzer, 45, and federal regulators fast enough, says Albert Yu, who helps manage $2.5 billion at Rochester, New York-based Clover Capital Management, including shares of AIG.

?The regulatory environment is a lot tougher, and perhaps AIG was a little slow to react to those changes,? says Yu. ?They certainly could have reacted differently.?

In the past four years, Spitzer ? working with the SEC and regulators from other states ? has wrested $4.4 billion in penalties from Wall Street banks for tainted research and from mutual fund companies for trading irregularities that cheated small investors.

Last October 14, Spitzer turned his attention to the insurance industry, announcing a lawsuit against Marsh & McLennan Cos., the world?s largest insurance broker. It accused Marsh of rigging bids to increase fees.

A week later, responding to questions about Spitzer?s legal complaint, Greenberg warned that the action risked damaging the entire insurance market. ?If you have a boil on your arm, you don?t cut your arm off, you lance the boil,? Greenberg said.

Since then, four AIG employees have pleaded guilty to rigging bids with Marsh, agreeing to testify in future cases. AIG hasn?t been sued by regulators.

During a February 9 conference call, Greenberg accused overzealous regulators of ?turning foot-faults into murder charges?.

Those retorts were a mistake by Greenberg and AIG, says Damon Silvers, associate general counsel of the Washington-based AFL-CIO labour federation, whose member unions control funds with assets of about $400 billion.

?Where have these guys been the last four years?? says Silvers. ?Don?t mess with Eliot; that?s certainly true. The most important thing about Eliot is that he?s afraid of no one.?

Greenberg?s departure will lead CEOs to be more ?cooperative? with regulators, says Clover Capital?s Yu.

?There?s a lot more pressure on boards,? he says. ?So many of them are being sued for their actions, or their lack of actions, over the past couple of years that they have to deal more aggressively with problems or the perception of problems.?

Spitzer declined to comment yesterday on news reports that Greenberg would resign as CEO, said spokesman Darren Dopp. John Nester, an SEC spokesman in Washington, also declined to comment.

AIG said on February 14 it received subpoenas from Spitzer and the SEC as investigators broadened a probe into alleged collusion between insurers and brokers to include an investigation of insurance policies that may have been sold to help companies hide losses.

General Re?s lawyers last month told regulators about the transaction with AIG and said Greenberg was involved in setting it up, said a person familiar with the matter, who spoke on condition of anonymity. The SEC is investigating whether AIG and Greenberg pursued any similar transactions, the person said.

The SEC has not concluded whether Greenberg?s role in the transaction was improper, and the agency is continuing to investigate, the person familiar with the matter said.

AIG spokesman Chris Winans declined to comment.

Spitzer learned of Greenberg?s involvement in the General Re transaction within the last two weeks, one of the people said.

By last Thursday afternoon, March 10, events were unfolding so rapidly within AIG that the company?s lawyers at Paul Weiss Rifkind Wharton & Garrison LLP had to cancel a meeting scheduled for the following day with SEC investigators, according to a person familiar with the matter.

On March 13, Sunday, AIG contacted the SEC to alert the agency that the board would be meeting the next day to consider Greenberg?s future role at the company, the person said.

The agency didn?t ask the AIG board to oust Greenberg, the person said.

Greenberg has hired lawyer Robert Morvillo, who represented Martha Stewart, the former chief executive officer of Martha Stewart Living Omnimedia Inc., during her criminal trial on charges of lying to investigators about a stock sale.

This week, Fitch Ratings lowered AIG?s long-term debt rating one level, to AA+ from AAA, the top level, citing ?uncertainties and disruptions? created by the management changes. AIG had shared Fitch?s top rating with just six other companies, including Berkshire and New Brunswick, New Jersey-based Johnson & Johnson.

Standard & Poor?s placed AIG?s AAA credit rating on CreditWatch with negative implications, meaning the agency may decide to lower it in the future, and A.M. Best Co. also said it may cut the company?s top financial strength rating.

Moody?s Investors Service said its outlook on AIG?s credit and financial strength ratings were now both negative.

AIG?s stock has fallen 15 percent in a month, cutting about $29 billion from the company?s market value. Yesterday, shares dropped $1.04, to $59.76 in New York Stock Exchange composite trading.

Spitzer?s investigation of the insurance industry has covered AIG and two companies run by his sons Jeffrey and Evan. Jeffrey, 53, was forced out in October as chief executive officer of Marsh & McClennan Cos., the world?s biggest insurance broker, after Spitzer refused to negotiate a settlement.

Evan Greenberg is CEO of Bermuda-based insurer Ace Ltd., which said on November 15 that it received subpoenas from Spitzer and the SEC as part of investigations into its ?loss-mitigation? policies. The company fired two employees and suspended three others on November 4 in connection with Spitzer?s probe of bid rigging.

?Oftentimes the regulators feel that they?ve really got something worthwhile if they?ve got the CEO?s head on a platter,? says Edward Fleischman, 72, a former SEC commissioner who is now senior counsel in New York for Linklaters, the London-based law firm.

?There are times when regulators do that quietly and subtly, by saying ?We need some more evidence that the company is going to change its ways?.?

Spitzer?s probe of the insurance industry, like the earlier investigations of mutual fund companies and Wall Street stock research, is aimed at changing long-established practices that hurt consumers, says Samuel Hayes, an investment- banking professor at Harvard Business School.

Spitzer, a Democrat first elected to New York state?s top law-enforcement position in 1998, is running for governor in 2006 elections.

He used similar approaches in his probes of mutual funds and Wall Street stock research, picking an initial target company, then releasing internal e- mails. The e-mails sparked public outrage.

?Spitzer is in a sense a regulatory entrepreneur who looks for targets of opportunity,? says Hayes. ?There has been a comfortable regulatory environment for these insurance companies, which has not been adversarial.?

Greenberg is the longest-serving CEO to leave in any of the investigations led by Spitzer. Earlier departures included Richard Strong, the founder, CEO and chairman of Strong Capital Management Inc., based in Menomonee Falls, Wisconsin, who resigned in December 2003 during Spitzer?s mutual fund probe. Lawrence Lasser, the CEO of Boston-based Putnam Investments, which is owned by Marsh, was ousted in November, 2003.

Chairman Sanford Weill of New York-based Citigroup Inc. announced in July, 2003 that he was stepping down as CEO. The announcement followed Citigroup?s agreement in April, 2003, along with eight other securities firms, to settle allegations that the company?s analysts published misleading stock research to win investment-banking business.

?The public-relations effect of a Spitzer attack is so dramatic that the companies are forced to settle rather than defend themselves,? says Robert McTamaney, 59, co-chair of the corporate department at the law firm Carter, Ledyard & Milburn LLP in New York.

?That?s why the investment banks settled, and I think that?s why the insurance companies and brokers were so quick to settle.?

When Spitzer went after mutual fund practices later that year, his aim was to force fund companies to lower their fees for customers. SEC Chairman William Donaldson was opposed because it went beyond the traditional role of industry regulation, which had focused on requiring disclosure of fee percentages but not their dollar level.