GNAIE Endorses G30 Fair Value Accounting Ideas

An influential Washington think tank's global financial reform report with recommendations for an examination of fair value accounting has drawn support from the Group of North American Insurance Enterprises.

In reacting to the study released last week by the Group of Thirty steering committee headed by former Federal Reserve Chairman Paul A. Volcker, an economic advisor to President Obama, GNAIE said it has also advanced its own principles-based solution to issues created by fair value accounting.

Part of the report stirred controversy by calling for installation of a national regulator for insurance and banking in nations like the United States where no such regulator exists.

The wide-ranging report, Group of Thirty said, “is intended to be useful to policymakers in all the countries whose financial systems have been disrupted in this [financial] crisis.”

Part of the report called for the re-evaluation of fair value accounting principles and standards “with a view to developing more realistic guidelines for dealing with less liquid instruments and distressed markets.”

The report stated, “The tension between the business purpose served by regulated financial institutions that intermediate credit and liquidity risk and the interests of investors and creditors should be resolved by development of principles-based standards that better reflect the business model of these institutions, apply appropriate rigor to valuation and evaluation of intent, and require improved disclosure and transparency.”

The GNAIE said it believes that while fair value measurements did not cause the current global credit crisis, “unreliable and non-transparent fair value measurements served as a powerful accelerant.”

The GNAIE further said the application of fair value accounting measurements to an inactive, illiquid and disorderly market for structured credit products had helped fuel the worldwide credit crisis.

Jerry de St. Paer, executive chairman of GNAIE, said the G30 fair value accounting recommendations were “a meaningful step in adding clarity to the ongoing examination of the proper way to account for assets in disorderly markets.”

The GNAIE said it has proposed its own set of recommendations to the FASB and the SEC. The GNAIE called its proposal “a practical, easily implementable and principles-based solution to the issues created by fair value accounting using existing mechanisms within U.S. GAAP.”

In situations where markets are not active, liquid or orderly, the GNAIE said its solution is to temporarily migrate from fair value accounting to an amortized cost/incurred loss methodology.