Accounting rules that contributed to recent problems at American International Group and other giant financial institutions have made financial statements less clear and less transparent for investors, an insurance executive said here.
A few days after taking on rating agencies during a speech at the NCCI meeting in Florida, William Berkley, chair of Greenwich, Conn.-based W.R. Berkley Corp., had accounting standards setters in his sights when asked about the impact of the credit crisis on insurers.
During a media briefing in New York, he noted that problems created by accounting rules requiring certain investments to be marked to market values are shared by many financial firms, including insurers. He said the assumptions of the accountants who developed the rules–including an assumption that the investments always have marketability–are not valid.
One consequence of the rules is that "you can mark to market down, but you never get to mark to market back up again," resulting in permanently impaired values, he said.
"The accounting rules didn't help anybody. They made life more complex and confusing," he said, noting the impact on AIG, which has an "incredibly complex portfolio with all kinds of derivatives" that now require markdowns.
Does AIG really need to raise $12.5 billion? "I would think probably not, but they got stuck in all these accounting rules that they probably didn't comprehend the consequences of beforehand," he said.
The rules, he said, are also making it impossible for investors to discern where real problems exist.
"You will have people who have real losses." In other cases, "these charges are just absolutely silly and abstract."
Could AIG have spent more time understanding the rules? "I don't think anybody needs to throw any more stones at AIG. They're suffering," he said.
As new rules were being developed, he said, many people didn't fully grasp all the consequences and there wasn't "a high enough level of concern." Those who were talking to the Financial Accounting Standards Board "ran into a wall."
"FASB wasn't particularly flexible," he said, later remarking that the board "thinks about the rules almost like they're separate from running a business."
"Accounting rules are never meant to be logical from the point of view of running a business. They're meant to be rules that are derived from the fear of yesterday, not the fear of today or tomorrow," he said.
Mr. Berkley suggested that giant financial firms, including AIG and Citigroup, are also suffering the consequences of not evaluating the possibility that risks throughout their complex organization may be intertwined.
Such giants try "to leverage every angle of their business to get…peripheral benefits" without ever asking themselves "if the aggregation of all those things earned them enough money to take the risk of some…things happening together."
"In their efforts to use all their power and all their positions, and [to] optimize what they thought were their chances to make money, they probably weren't as focused on the risks they created when they did some of these things," he said, referring to AIG's finance business and derivatives book as examples.
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