SeekerBlog

…is what really matters. From Jan 2003 remarks the AEI by Peter R. Fisher, then-current Under Secretary Treasury:

…In recent years, I have often heard it said that “There’s too much leverage in the system.” My question is: how would anyone know?



The balance sheet was a wonderful Italian invention that helped move us out of the dark ages and into the Renaissance. But 500 years later, and after the last 50 years of innovation, we have learned a little bit more about finance. We now know that the value of a firm is its future unencumbered cash flow. The balance sheet and last quarter’s earning statement are of little help in divining that value.

Investors need to know the real economic leverage being employed, whether through on- or off-balance sheet devices. We need a measure of all the contractually-obligated liabilities, whether contingent or fixed, future or current. We need a parallel measure of all the firm’s contractually obligated revenues.

Tying them together will give the firm’s contractually-obligated net present value – a true indicator of the firm’s leverage. This is not an untested or novel idea. The concept of NPV appears everywhere in modern finance except in financial reporting. This kind of disclosure is critical to the performance of our capital markets.