Explaining TALF (Less A Haircut)

In announcing its plan to fight the ongoing financial crisis, the Federal Reserve released the following statement: "Under the TALF, the Federal Reserve Bank of New York (FRBNY) will lend up to $200 billion on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans.

"The FRBNY will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS."

Translated this means the government is worried that consumers don't have enough access to borrowed money in the form of credit cards, student loans and small-business loans. So it will give money to only the most highly rated, safest parts of the lending economy, which will eventually get money to consumers and small businesses.

A haircut, meanwhile, is bond-speak for a small profit.

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