I’m currently working on an IPO preparing project and some investment bankers say, “You cannot be on the board of a public company.” They imply that I am on some sort of black list. This is because I previously worked for Livedoor, and moreover I was a board member of it.
Livedoor shock happened in early 2006. People are getting to forget this incident. But still, like myself, some people involved in Livedoor suffer its aftereffect and and their business activities are limited.
At Livedoor shock, some were arrested and some died. But not only those people who paid the price.
The end of Present Value… Nikkei, a major economic newspaper in Japan, ran a column corresponding to the current financial meltdown. It argues that this financial crisis was caused by excessive reliance on the idea of Present Value. Investment bankers put illusory values on anything around the world. Even though an asset has no value on balance sheet, they can create substantial value by calculating present value of probable future returns brought by the asset.
But I don’t think Nikkei’s argument is appropriate. Nikkei missed an important point of present value theory, namely risks. Modern financial engineering put great emphasis on estimating and dealing with risks. According to the present value theory, risk is the most important factor that determines a discount rate.
It can be said that banks which bought subprime loans simply took risks to maximizing their profits. Who is to blame is not the present value theory, but the carelessness and negligence of the investors who underestimated risks and didn’t prepare for downside scenarios.
I believe in Present Value and other received financial theories, such as real option. If you deny Present Value, then what do you rely on? Only book-value? No kidding! What to do is not negating financial theories, but better understanding the theories.
