Attempt to blame fair-value accounting for AIG’s woes was misleading, FASB chairman says

Former American International Group Inc. Chairman Martin Sullivan misled Congress last year when he told lawmakers AIG’s financial problems were caused by fair-value accounting standards, the chairman of the Financial Accounting Standards Board said today.
Mr. Sullivan “spent a fair amount of time here in Washington and on Capitol Hill trying to convince lawmakers there that there were no problems with the credit default swaps that they had entered into, that it was all just bogus fair-value accounting,” said Robert Herz, chairman of the FASB of Norwalk, Conn., which sets accounting standards that companies must use.
“Now the taxpayers are $150 billion-plus into AIG,” he said at a National Press Club luncheon in Washington. Politicizing accounting standards undermines public confidence in the markets, he said.
But Mr. Herz, who outlined his views on financial regulatory reform, acknowledged that situations where markets are inactive make it difficult to establish values. Some members of Congress have called on the FASB to change its fair-value accounting rules.
Regulatory standards for bank capital requirements should be separated from accounting standards, he said. Banking and accounting regulators should work together to ensure that “transparency and sound reporting to investors and the capital markets are not subordinated to the objectives of prudential regulators, and that the regulators are not inappropriately handcuffed by requirements that they conform their treatments to [generally accepted accounting principles],” Mr. Herz said.
“I would be supportive of a greater decoupling between the determination of bank regulatory capital and our standards,” he said.
Bank regulators need to set capital requirements to ensure the soundness of banks, while accounting standards must be designed to give investors the information they need, Mr. Herz said.
Reforms must ensure that the “too big to fail” phenomenon is avoided or reduced, he said. While the taxpayer-funded bailouts of major financial institutions were necessary to avert more harm to the economy, they are perceived by many as “downright unfair,” Mr. Herz said.
Similar issues are associated with executive compensation that is not tied to performance, Mr. Herz said. “Perverse incentives seemed to motivate the leaders of certain major financial institutions to adopt what we now see were high-risk strategies in an apparent quest for a big corporate, and perhaps big personal, payday,” he said.
He said he did not favor the government setting pay levels in the private sector. “But the investing public does need to see that the private sector is effectively addressing this issue either through continued improvements in transparency and corporate governance. Success should be rewarded. Failure should not.”

Related Topics: American International Group (AIG)