TimButler

AIG and the Lunacy of GAAP Reporting

This is a superbly written, insightful commentary about AIG.

FASB mark-to-market accounting rules do their level best to give an accurate picture of a balance sheet at a point in time, namely today. However, the equity value of a company is a function of all of it's future cash flows, discounted to today's present value. The distinction between the two numbers can be, and usually is, large.

Notwithstanding Robert Merton's argument suggesting that capital market stock prices accurately reflect all the information available about the value of a stock today, I concur with the author of this Seeking Alpha article, in suggesting that Wall Street today is paying too much attention to today's mark-to-market book equity, along with the risk of 1 to 2 year sustained EPS losses, rather than focusing on longer run cash flow generation from AIG.

Of course it's a matter of opinion, I just happen to think that Hank Greenberg, Warren Buffet and Robert Willumstad might well agree.

Disclosure -- As of Friday, August 25th, I'm long AIG too. I'm trying to make up for buying AIG Jan 60 '08 Calls at $10 in September '07!

Timing is everything, and differing views is what makes a market. I've placed my bet, and I like to think of it as an investment, though I'll be the first to admit that it certainly does have a speculative component.