Former chairman sues AIG claiming losses cut his personal fortune by $2bn

The former AIG chairman, Hank Greenberg, is suing the crisis-stricken insurance company, claiming he lost $2bn (£1.4bn) of his personal fortune because the firm failed to inform shareholders of vast losses run up by its controversial London finance office.

Greenberg, who was the architect of AIG's growth between 1968 and his forced retirement in 2005, said AIG kept investors in the dark about its perilous financial condition well after it became aware of liabilities at its Mayfair-based financial products division, which insured banks against default on debts and derivatives.

The 83-year-old accuses AIG of "material misrepresentations and omissions" which prompted him to buy shares in AIG as part of a retirement plan, at an "artificially inflated price" in early 2008. He told CNBC television yesterday that the company's near collapse had cost him $2bn.

"It was such a strong company," said Greenberg. "It was the biggest insurance company in the world. I never dreamed that even incompetence could destroy the company."

Greenberg cited an investor conference in December 2007 at which, he said, the company assured investors it would not lose money on its dealings in ill-fated credit default swaps. "They went to great lengths to explain it, to try to calm the markets," he said.

Ben Bernanke, chairman of the US Federal Reserve, yesterday accused AIG of operating like a hedge fund. In testimony to Congress, he said AIG "made huge numbers of irresponsible bets".

AIG this week recorded the worst corporate loss in US history with a deficit of $62bn for the final quarter of 2008. The US government, fearful that a collapse of AIG would cause a domino effect throughout the financial system, has made four attempts to prop up the business at a cost of more than $150bn in emergency aid.

Defendants named in the legal action include Greenberg's successor as chief executive, Martin Sullivan, and the head of the company's financial products division, Joseph Cassano. An AIG spokeswoman dismissed the action, saying: "We believe the suit is without merit and we will defend ourselves vigorously."

Greenberg's legacy at AIG is the subject of vigorous debate. He said a "freewheeling" culture developed only after he left, and said that the company's management failed to keep proper checks and balances on its complex financial manoeuvring. However, AIG's present chief executive, Ed Liddy, who was appointed at the behest of the US treasury, suggested Greenberg was partly responsible for AIG's demise, pointing out: "The formation of the [financial products] unit, which has literally brought us to our knees - that happened on his watch."

Greenberg was ousted four years ago in an accounting scandal concerning allegations about off-balance sheet transactions. Christopher Whalen, co-founder of Institutional Risk Analytics, said: "The bottom line is that Hank Greenberg wandered out of the very safe, well-capitalised world of insurance into the surreal world of credit default swaps."