Political Desperation in the Face of Financial Crisis May Leave Regulatory Harmonization in Tatters

OLDWICK, N.J., Oct 06, 2008 (A. M. Best via COMTEX) -- AIG | Quote | Chart | News | PowerRating -- First it was American International Group that was brought low by the credit crunch. Then, as if the gods wanted to make sure Europeans weren't exempt, Fortis took a tumble, and like AIG had to be rescued by government largesse.

Troubling as the near-death experiences of both AIG and Fortis are, it is even more disconcerting that the government rescue plans give the U.S. Federal Reserve an effective stake of up to 80% in AIG, while the governments of Belgium, Netherlands and Luxembourg each get a 49% stake in Fortis' banking operations in their respective countries.

These moves effectively leave shareholders out in the cold, prompting shareholders in other major insurance and banking institutions to wonder if their own holdings are in jeopardy. On Oct. 1, we witnessed what that kind of fear can lead to when Harry Reid, the majority leader of the U.S. Senate, commented in public that one big U.S. insurer "with an name that everyone knows" was on the verge of bankruptcy. The comment came as part of an effort to convince fellow Congress members to back a $700 billion bailout bill for financial institutions.

Reid claimed to be quoting an unnamed Democrat caucus member on this, but the comment immediately sent panic through the U.S. insurance industry, prompting insurance giants MetLife and Hartford Financial to issue statements saying, effectively, "it's not us." It didn't help much ? Hartford's stock fell 40% in the two days following Reid's comment, while MetLife stock fell 30%.

Even more troubling is the implications for regulatory structures governing insurers worldwide.

Regulation Muddle

Debate is now raging about the utility of the U.S. Financial Accounting Standards Board's Statement 157 on fair-value accounting measurements.

Suggestions that mark-to-market accounting should be suspended in light of the current crisis drew a sharp warning from the FASB. In a letter to Rep. Barney Frank, chairman of the U.S. House of Representatives Committee on Financial Services, the Financial Accounting Foundation (which oversees the FASB) warned about the dangers of political meddling in standard-setting procedures for accounting.

"We believe that once Congress starts setting accounting standards through its political process, the integrity of the U.S. accounting standard setting and the credibility of U.S. financial reporting will be dangerously compromised," the letter said.

Europeans will wonder how all of this will affect the International Financial Reporting Standard, rules set out by the International Accounting Standards Board governing companies based in the European Union. The IASB and FASB had been working on harmonizing the international standard with U.S. GAAP to produce a truly uniform standard for multinational companies. A worthy goal, but now in jeopardy.

All along, European experts had been expressing fears that such harmonization would be vulnerable to U.S. political meddling. It appears they now have their proof.

Also at issue for Europe is the effort to implement Solvency II, the EU's proposed capital adequacy standard for insurers. The U.K. Financial Services Authority recently warned that U.K. insurers are not up to speed in their efforts to comply with Solvency II by its 2012 implementation target date.

One has to wonder whether the current financial crisis will delay Solvency II as well, as the focus needed to bring such a complex project together may be diverted to more immediate concerns.

(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)

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