Buffett's Balancing Act

The era of the trust-me CEO took another bullet last week, when American International Group (AIG) fessed up to improper bookkeeping in a deal with a unit of Warren Buffett's Berkshire Hathaway. AIG severed ties with its iconic former CEO Maurice (Hank) Greenberg. But it is Greenberg's link to the even more lionized Buffett that's causing the biggest stir.

Buffett has long been the most trusted CEO in the world. So what did he know? And when did he know it? In late 2000, Berkshire's General Re, which insures insurers, entered into agreements with global underwriter AIG that AIG concedes it did not account for properly, thus exaggerating its financial strength. Buffett knew about the deals, which totaled about $500 million and were legal. But if AIG intentionally created a false picture of its books and Buffett knew it, he could have legal problems.

Investigators are going out of their way to emphasize that Buffett is not a target in their expanding probe of the insurance industry. They characterize him as a "valuable asset" and a "productive and cooperative witness." In a statement, Berkshire stressed that Buffett "was not briefed on how the transactions were to be structured or on any improper use or purpose."

Still, this stain may not wipe away easily. As reported first in TIME, Buffett has been summoned to speak with regulators. He is scheduled to meet in New York on April 11 with representatives from the Securities and Exchange Commission (SEC), the Justice Department and the New York attorney general's office. Greenberg is set to be deposed the next day. "The stakes are high for anyone even superficially attached to the AIG transactions," says Christopher Bebel, a Houston securities lawyer and former federal prosecutor. "This is how things are today. It's hardball." After all, prosecutors aggressively hunted down the banks that devised the complex partnerships that helped Enron hide its financial deterioration just before it collapsed.

Buffett rightly is getting the benefit of any doubt. But "it raises questions any time your name appears next to indiscreet participants," says Thomas Russo, a money manager who owns Berkshire shares for himself and clients at Gardner Russo & Gardner in Lancaster, Pa.

Buffett's being drawn into the insurance muck throws a spotlight on the industry and has rekindled the debate over whether insurance companies need federal oversight. Regulation of the industry rests mainly with the states, which are short on resources--a condition that may have allowed abuses to incubate. Insurer Marsh & McLennan, formerly run by Greenberg's son Jeffrey, agreed to pay $850 million to settle civil fraud charges earlier this year. Others being probed include Chubb, Swiss Reinsurance and ACE.

The SEC, which has only limited jurisdiction--and only over insurers that raise capital in the public markets--has begun jockeying for a larger role. Republican Senator John Sununu of New Hampshire has explored proposals that would give power to the Treasury Department to oversee critical aspects of the industry, including accounting. A federal authority "could pick up patterns of behavior more effectively than 51 separate regulators," says Craig Berrington, general counsel at the American Insurance Association.