Sept. 26 (Bloomberg) -- Maurice ``Hank'' Greenberg, the former chief executive officer of American International Group Inc., sold off 40 million shares of the insurer for about $125.9 million after the stock tumbled more than 90 percent this year.

Starr International Co., a firm run by Greenberg, sold 35 million AIG shares at $3.06 each, Starr said yesterday in a filing. Greenberg, 83, sold 5 million shares for about $3.77 apiece. He still controls more than 10 percent of the company.

Greenberg is selling shares ``for liquidity,'' according to another regulatory filing. Greenberg and companies he runs owned about 11 percent of AIG, the largest block, before the sales.

The New York-based insurer averted collapse last week by agreeing to a federal takeover. Greenberg was among investors who met Sept. 22 to discuss raising money to reduce federal involvement in a rescue. AIG said the next day it signed a deal for an $85 billion Federal Reserve credit line, reducing the options left for dissident shareholders.

AIG dropped 29 cents, or 8.8 percent, to $3.02 yesterday in New York Stock Exchange composite trading.

``If I see my biggest advocate, and the guy with the most access out of shareholders, is essentially throwing in the towel, that's not a good sign,'' said Robert Bolton, managing director for trading at Mendon Capital Advisors Corp. ``People are reading the smoke signals, and if he's willing to take three bucks, maybe we should take three bucks'' a share.

Greenberg still supports efforts to reduce the government dilution of AIG stakeholders, said his lawyer, David Boies. The attorney said ``there is no doubt'' the agreement makes ``a private sector solution significantly more difficult.''

AIG Cooperation

``If the company were to say, `We're prepared to cooperate with shareholders and others,' then the government certainly ought to welcome that, it would be good for taxpayers,'' Boies said yesterday in an interview.

If Greenberg cuts his holdings to less than 10 percent, he may avoid some scrutiny from the New York Insurance Department for actions regarding AIG, said David Neustadt, spokesman for the state's insurance regulator Eric Dinallo.

Dinallo hired private-equity firm Centerview Partners to make sure divestitures ``result in the best for the policyholders of the companies being sold, that the companies are bought by solid buyers and that the deals stick,'' Neustadt said.

Greenberg was CEO for almost 40 years until 2005. The value of the stake he controls declined by more than $5 billion this month as the insurer was overwhelmed by losses tied to the U.S. housing market.

Disclosure Awaited

Investors seeking a way to modify or derail the takeover had been waiting for AIG to disclose definitive terms. Shareholders represented by lawyer Mickey Kantor and including Greenberg had said they may try to raise money for AIG to avoid having their stakes diluted. The federal government will get a 79.9 percent stake as part of the deal.

Edward Liddy, who replaced Robert Willumstad as CEO after the U.S. investment, said yesterday in a statement he'll unveil his strategic plans for the insurer on Oct. 3. Liddy has told staff he must ``quickly come to terms'' with which units he'll sell to repay the lifeline from the Federal Reserve.

AIG may get $115 billion by selling all its units, Credit Suisse Group AG analyst Thomas Gallagher said in a Sept. 23 note. The company may need to sell more than half its businesses to repay the debt, he said.

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

Last Updated: September 26, 2008 00:00 EDT