haircut

Definition

A reduction in the stated value of an asset for the purpose of calculating capital requirements or collateral, because lenders assume you're overstating value (and they're usually right). Not to be confused with what you get at a barbershop, though both can be painful.

Example Usage

The bank applied a 20% haircut to the collateral value, meaning your million-dollar portfolio only gets you an $800,000 loan.

Origin

Wall Street slang from at least the 1960s, possibly from the visual of cutting something down to size

Fun Fact

During the 2008 financial crisis, haircuts on mortgage-backed securities went from 5% to 50% overnight, which is like going to the barber for a trim and walking out bald.

Source: Banking and securities lending terminology

Related Terms

Beginner

ticking and tying

The tedious audit procedure of tracing numbers from one document to another and reconciling totals, involving literal tick marks on paper. It's as exciting as it sounds and explains why auditors develop that distinctive glazed expression.

💰 Finance / Accounting

Intermediate

indebtedness

The state of owing money to someone else, quantified in dollars and anxiety, often measured both as a total amount and as a perpetual source of stress. In finance and accounting, it's a cold, hard number on a balance sheet; in real life, it's the reason you check your bank account with one eye closed. Whether it's student loans, mortgages, or credit cards, it's the gift that keeps on taking.

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Beginner

financials

The numbers-heavy documents that reveal whether a company is actually making money or just really good at spending investor cash. It's the collective term for financial statements like balance sheets, income statements, and cash flow reports that accountants love and everyone else pretends to understand. Essentially, it's where the truth about a business's health lives, buried under Generally Accepted Accounting Principles.

💰 Finance / Accounting

Intermediate

non-recurring charge

An expense that supposedly happens only once but mysteriously appears in financial statements every single quarter. It's management's favorite way to exclude bad news from 'adjusted' earnings while claiming it's temporary.

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Advanced

backflush costing

A simplified cost accounting system that records costs only when production is complete, skipping the tedious tracking of work-in-process. It's for manufacturers who prefer speed over precision and assume everything flows smoothly.

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Intermediate

diligence

In business and legal contexts, the thorough investigation and analysis conducted before making a decision or completing a transaction. Due diligence is the corporate equivalent of looking before you leap, except you're also hiring consultants to examine the depth, temperature, and legal ownership of the water below. Skip this step and you might acquire a company that's actually three lawsuits in a trench coat.

💰 Finance / Accounting

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