Housing/financial haircut

[Baker, John]

        We've talked about "haircut" before.  It derives ultimately from
Securities and Exchange Commission Rule 15c3-1, which requires
securities brokerage firms to meet specified net capital requirements.
In determining whether the firms have sufficient net capital, the rule
provides for discounts, known as "haircuts," from the securities' market
values.  The reason is that the purpose of the rule is to require firms
to have sufficient capital in times of stress, and more volatile
securities provide a less certain cushion in such times.  "Haircut" has
been broadly extended to refer to a variety of different kinds of
valuation discounts.

        I've never heard "shorter" in reference to this kind of haircut
before.  I guess the concept is that a shorter haircut is one that
removes a lot of hair.


John Baker



-----Original Message-----
From: American Dialect Society [mailto:ADS-L at LISTSERV.UGA.EDU] On Behalf
Of Dan Goncharoff
Sent: Friday, August 12, 2011 11:18 AM
To: ADS-L at LISTSERV.UGA.EDU
Subject: Re: Housing/financial haircut

In financial terms, "haircut" usually refers to a discount in
valuation, falling under #2 below. If you give me collateral worth
$100 million dollars at today's market price, I have to consider that
it may be worth less tomorrow (and you may be hard to find and ask for
more collateral) and that the market price might not hold firm if I
tried to sell $100 million worth of the collateral in one go.
Accordingly, I put a haircut on the collateral. The size of the
haircut will reflect the quality of the collateral. I might not
haircut a T-bill at all; a good quality corporate bond may get a 10%
haircut, today a mortgage bond might get a 50% haircut.

More generally, "haircut" is used to mean discount. The "home price
haircut" is not very common, and the "shorter and shorter" comment is
confusing to me, too, and looks like it was invented on the spot by a
writer who should be less creative in his or her imagery. That said,
"haircut" meaning "discount" has a long history.

DanG



On Fri, Aug 12, 2011 at 11:01 AM, Ann Burlingham
<ann at burlinghambooks.com> wrote:
> ---------------------- Information from the mail header
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> Sender:       American Dialect Society <ADS-L at LISTSERV.UGA.EDU>
> Poster:       Ann Burlingham <ann at BURLINGHAMBOOKS.COM>
> Subject:      Housing/financial haircut
>
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>
> While searching for information about cutting hair, I came across a
> usage today I hadn't seen before: "haircut" to refer to cutting the
> asking price of real estate. I'm not yet clear on the definition - a
> little off the top? a lot off the top? The first article I came across
> is a Seattle real estate column discussing "worst haircuts" - the
> biggest price-drops in housing prices:
>
http://seattlebubble.com/blog/2010/10/04/whats-the-worst-home-price-hair
cut-youve-found/
>
> this one http://housingdoom.com/2008/02/17/a-33-haircut/ is headlined
> "A 33% haircut- and we're just getting started"
> and includes
> "Home is currently listed for sale at $190,890.  That would be a 33%
> haircut- if it sold at list, which isn't going to happen."
> It concludes:
> "Look for the haircuts to get shorter and shorter this year- and more
> properties will be wearing them. "
>
> which I find confusing - is a "shorter haircut" a smaller drop, as I
> first thought, or, my second guess, the resulting price is lower,
> therefor  "shorter"?
>
> I find it defined in a couple online glossaries, for instance here
> http://www.investopedia.com/terms/h/haircut.asp#axzz1UpJGq4pU
>
> What Does Haircut Mean?
> 1. The difference between prices at which a market maker can buy and
> sell a security.
>
> 2. The percentage by which an asset's market value is reduced for the
> purpose of calculating capital requirement, margin and collateral
> levels.
>
> Investopedia explains Haircut
> 1. The term haircut comes from the fact that market makers can trade
> at such a thin spread.
>
> 2. When they are used as collateral, securities will generally be
> devalued since a cushion is required by the lending parties in case
> the market value falls.
>
>
> So, a new one to me, clearly in use by insiders but opaque at my first
> glance. It sounds like it's been around in financial circles longest.
> (I apologise if this is woefully off-topic; I guess it's more jargon
> than dialect.)
>
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