A call Mr. Greenberg placed to Mr. Zarb after his ouster as CEO was uncomfortable. "You've built a great company," said Mr. Zarb, according to a person familiar with the conversation. "I understand your anger." But Mr. Zarb added that "you have to face the new reality, my friend," according to this person. "You need to talk to your advisers." Mr. Greenberg said that the board's actions in seeking his ouster would ruin the company.

With that, the men, who had lunched together monthly in AIG's private dining room for years, hung up. They haven't spoken since.

"Hank's very upset with Frank," says Edward Matthews, a longtime AIG executive who has left the company to work with Mr. Greenberg. "After all Hank's done for him, he thought at least Frank would give him the chance to present his side to the board."

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The split underscores how the old boys' network in business can dissolve when the heat turns up in today's tougher regulatory environment. There's less opportunity for friends to take care of friends when allegations are flying and everyone starts worrying about liability.

The multiple investigations of accounting and financial relationships at AIG now include the possibility of criminal charges against individuals. AIG already has acknowledged gimmickry and questionable practices that, when set right, will cut its net worth by $2.7 billion. It has fired several executives and is expected to dismiss more. The company is explicitly blaming its past executive leadership for part of the problem. Mr. Greenberg's representatives have responded that any blame must include current AIG leadership as well.

The Zarb-Greenberg fissure "signals that professional responsibility as a director trumps personal relationships," says Charles Elson, corporate-governance professor at the University of Delaware, who calls this "a positive change. Years ago, directors were rewarded for being loyal to management no matter what. Now their loyalty and potential liability run to the shareholders."

Holding an interim chairmanship expected to last about a year, Mr. Zarb, 70 years old, is making changes that break sharply from the centralized rule of his old friend. Mr. Zarb has created two new board committees so directors have more input in management. He is setting up a kitchen cabinet of big institutional investors for quarterly meetings on governance. In just the past two days, he and other directors have spent about 20 hours with AIG's new chief executive, Martin Sullivan, to help revamp the insurer's organization.

Mr. Zarb has justified his actions to friends as the only choice he had, to fulfill his fiduciary obligation to shareholders in the post-Enron climate. He tells friends he is sad about the downfall of a friend he long admired. Mr. Greenberg has told his own friends that he feels Mr. Zarb had an extreme overreaction that amounted to treachery and ambition.

Messrs. Greenberg and Zarb, both born in New York into families of modest means, became acquainted in the 1970s as each was carving out a role in finance. Mr. Greenberg was working to turn the overseas-focused AIG into an underwriter of big-ticket U.S. insurance as well. Mr. Zarb, who'd begun in Wall Street's lowly trade-processing departments in 1966, became a lieutenant to Sanford Weill and then served in the Nixon and Ford administrations, including as energy czar. He then joined Lazard Freres. Lazard banker Felix Rohatyn introduced him to Mr. Greenberg, and he began handling some international business for the insurer.

In 1988, Mr. Zarb rejoined Mr. Weill's empire (today Citigroup Inc.) to lead its Smith Barney brokerage firm. Smith Barney had a minority interest in Russian American Investment Bank, in which AIG was the dominant investor. Mr. Greenberg, who by then had contacts around the world, invited Mr. Zarb to join him on a trip to Russia and a meeting with Boris Yeltsin in the early 1990s. Their wives went along and toured artists' studios.

Mr. Greenberg knew of Mr. Zarb's dismay in 1993 when, after having turned around Smith Barney, Mr. Zarb was moved upstairs to vice chairman at Mr. Weill's group, then called Travelers. Mr. Weill, also a friend to Mr. Greenberg, handed the top Smith Barney job to a prominent investment banker, Robert Greenhill.

Soon after, Alexander & Alexander, an insurance broker that was in need of cash, asked Mr. Greenberg for an infusion. He provided $200 million from AIG and urged Alexander & Alexander to hire Mr. Zarb as its chief executive, which it did in 1994. (Mr. Zarb may not have known about Mr. Greenberg's initial involvement because a corporate headhunter first contacted him for the job.)

Within a couple of years, Mr. Zarb sold the company to another big insurance broker, Aon Corp. He collected $23 million in severance. AIG, which held preferred stock, made a 50% return on its investment.

The friends worked together to help Mr. Zarb's alma mater, Hofstra University in Hempstead, N.Y. In 1994, it named its business school after Mr. Zarb. He then visited Mr. Greenberg with a request: a donation to Hofstra.

Mr. Greenberg agreed. As the head of the Starr Foundation, a charitable entity set up by AIG's founder, he directed that $3.5 million go to construct a building for the Zarb Business School and that $500,000 endow a faculty chair there. In 2000, Mr. Greenberg and his wife, Corinne, along with Mr. Zarb and his wife, Pat, attended the dedication of the C.V. Starr Building at the university, named for AIG founder Cornelius Vander Starr.

As Mr. Greenberg's profile rose in the insurance industry, Mr. Zarb gained a reputation as something of a Mr. Fix-It in government and business. In 1997, the National Association of Securities Dealers, parent of the Nasdaq Stock Market, which was trying to put a civil regulatory case behind it, tapped Mr. Zarb as its chief executive. He gave the market new visibility, but some of his actions later drew criticism, such as heavy spending to expand its global reach and buy the American Stock Exchange. Nasdaq eventually divested itself of the Amex.

When Mr. Zarb left Nasdaq in 2001, Mr. Greenberg asked his friend to join AIG's board, a plum directorship at one of the nation's leading companies. Mr. Greenberg, though in his 70s, wasn't addressing the issue of succession. Mr. Zarb provided some cover in 2002 by accepting a new post of chairman of the executive committee.

Soon, Mr. Greenberg trusted Mr. Zarb with this critical aspect of his legacy: The two began having monthly lunches in Mr. Greenberg's private dining room at AIG's downtown Manhattan headquarters to discuss succession. Surrounded by Oriental carvings and fresh-cut flowers in Chinese bowls, and lunching on fish and tomato juice, they would review contenders.

By 2003, what was called "the arrangement" was born: an understanding that if Mr. Greenberg became incapacitated, Mr. Zarb would temporarily take over. And Mr. Zarb would follow Mr. Greenberg's wishes on his successor, laid out in a secret letter not to be opened until the AIG chief's death.

Last year Mr. Zarb began saying Mr. Greenberg should soon publicly identify the next AIG chief, and eventually step down from the CEO job while remaining as chairman.

Then last fall, Mr. Greenberg's attention became focused on a spate of regulatory investigations. By February, regulators had launched a broad examination of the insurer's accounting.

Board support for Mr. Greenberg soon crumbled. Outside directors of the former WorldCom Inc. had just tentatively agreed to pay $18 million of their own money as part of a settlement with investors. AIG's directors, too, became concerned about their personal liability, say people familiar with the matter.

Then came word that the New York Attorney General's office wanted Mr. Greenberg to give a deposition in March. Outside directors, who by now had their own legal counsel, wanted to know what he would say.

The CEO sought but was denied a postponement. That raised the odds that, on advice of counsel, he would assert his constitutional right not to testify. It was a prospect that left Mr. Zarb and outside directors incredulous, according to these people. The directors called for a meeting of the non-management board members for Sunday, March 13, at which their counsel outlined the issues to them.

Mr. Zarb, as lead director, initially held back from asking pointed questions, say people who were there. The directors began to discuss asking Mr. Greenberg to give up his CEO post. A turning point in the meeting came was when Mr. Zarb -- known by all as Mr. Greenberg's confidant -- offered a view of his own responsibility. "I'm here to represent the shareholders, not Hank," he said. Soon, the directors agreed Mr. Greenberg must retire as CEO, as he did the next day.

In the Greenberg-Zarb phone call late in March, any warmth between the two had disappeared. They no longer agreed on the best course for AIG. Mr. Greenberg said the board's actions would ruin the company's culture and stature.

As the outside directors met on March 28 to seek Mr. Greenberg's ouster as chairman, too, he communicated his intention to retire from that post as well. At that meeting, the board decided Mr. Zarb should assume the role of interim chairman.

Though Mr. Zarb told directors he didn't want the post for long, he quickly swung into action. He led the board to nominate two new outside directors and create two oversight committees: one covering regulatory, compliance and legal issues and one involving public policy and social responsibility.

Mr. Zarb also has worked with Mr. Sullivan, the CEO, and with a new chief financial officer to uncover any accounting or financial improprieties. He has accompanied Mr. Sullivan to meet with regulators and promise them a new era of openness, people at AIG say.

Early this week, Mr. Zarb, in an about-face for AIG, reached out to a big institutional investor -- William Patterson, director of the office of investment for the AFL-CIO -- to put past differences behind them. Mr. Zarb told Mr. Patterson that he wanted to establish a group of institutional AIG investors, including the union pension fund, to meet quarterly on AIG's governance, say people familiar with the situation.

Some at AIG say they believe Mr. Zarb wants to remain chairman for the long haul. But at an AIG board meeting Wednesday, Mr. Zarb said that as soon as AIG files its delayed annual report, AIG should begin the process of picking a new chairman, according to a person who attended.

Some directors noted the new atmosphere in the boardroom, which was far less strict than under Mr. Greenberg, according to some participants. As directors stood up to grab sandwiches during a break, one director said to a colleague: "Isn't it funny how much we're talking? We've been quiet for so long."

Directors hadn't been quite sure if Mr. Greenberg might attend. Even though he's been stripped of his roles as chairman and chief executive, Mr. Greenberg remains an AIG director until shareholders vote at annual meeting, still unscheduled.

Mr. Greenberg briefly considered attending, but decided against it, according to a person familiar with the situation: He never wants to be in the same room with Mr. Zarb again.

Write to Monica Langley at monica.langley@wsj.com³