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Article Excerpt
Byline: David Williams Russell
At this writing, the United States is in the midst of an unprecedented liquidity panic substantially resulting from long-standing intrinsic difficulties in the accurate valuation of enterprises and securities. Unregulated new securities instruments increasingly unmoored from underlying assessable values have exponentially compounded these difficulties.
Once the discounted stream of earnings method of valuing an enterprise replaced the discounted cash flow method of enterprise valuation, the valuation process veered into abstraction. Earnings, while existing for tax purposes, essentially are abstract non-cash algorithms, subject to manipulation through the application of increasingly complex concepts of taxation and accrual accounting.
After the market crash of 1929 and the great financial depression that followed, a great number of banking and regulatory laws were passed. The federal securities acts were enacted in 1933 and 1934 principally to provide some transparency to the financial markets. Registration of "public" shares with the Securities and Exchange Commission ("SEC") required full public financial disclosures, for example.
To compensate for the inherent abstraction and manipulability of the "earnings" and other financial information provided by SEC-registered enterprises in such periodic financial filings, the securities acts required that registered companies hire outside "Certified Public Accountants" to certify as to the soundness of their accounting. This solution to valuation difficulties has proven suboptimal at best.
Emergence of financial managers
During rapid economic expansion after World War II, mathematical concepts and algorithms, such as "earnings," came to be considered constructs to be manipulated by an emerging class of financial managers. Record profits from post-war industry poured into vast pension and...
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