The 50 weirdest terms of financial jargon – and what they actually mean

Flummoxed by front-end loading? Bamboozled by bridging? Don’t know if your cap is split or your asset orphaned?

Here is Times Money’s alternative guide, for anyone who blushes at the mention of cum-dividends, or thinks churning is something that only happens to dairy products.

1. AER – Annual Equivalent Rate refers to the actual rate of interest you will receive on savings and current accounts after a year. It is different to the gross rate because the AER takes into account how frequently the interest is applied. Daily is better than monthly, because of the effects of compounding. It is useful to know, because most accounts have a bonus rate for a few months, which is later replaced by more bog-standard rewards.

2. Amortisation – It sounds like something to do with death, and in fact, it is. It is to do with the depreciation of intangible assets, or alternatively, the process by which the decrease in value of an asset is calculated, ie. The intangible bit is important. Tangible assets, like Volvos, depreciate. Intangible assets, like a patent or brand, amortise.

3. Annuity – Not something that young people need to worry about, but anyone approaching or already in retirement definitely needs to care about these, because they will have to buy one. Annuities are Government-enforced income plans that you must buy with your pension to provide you with an income. They are enforced because people over a certain age cannot be trusted not to squander their retirement pots in one go, on things like round the world cruises or expensive drumkits. The Government doesn’t want this to happen because it would then be forced to pay out more state pension money.

4. APR – like AER, only it means the amount of interest you will pay on mortgages, loans and credit cards. You want a nice a low one. Mortgage lenders will quote a headline interest rate which lasts for a set time period, then a (usually much higher) APR, which is what you would pay if you stayed on that mortgage for the full term. If you thought that only dullards did not know what an APR was, note that 71 per cent of 16-18 year olds recently questioned thought that a high APR was a good attribute on a credit card. This does not necessarily disprove the point.

5. Bear – Not the grizzly kind. A way of describing the stock market or an attitude towards the economic outlook. Describing someone as bearish does not mean they are large and hairy, it means that they have a cautious and conservative outlook, and are more inclined to be pessimistic. A bear market is characterised by falling share prices and poor returns. Bear times are bad times.

6. Beta - Inexplicably, beta, in the finance world, measures the volatility of a share relative to other markets and is nothing to do with them being second rate, as Greek etymologists might assume. Something that has a beta of more than 1 is more volatile than other shares in the index, while something with a beta less than 1 is considered relatively stable. Risk-takers like betas. Buying a beta is the stock-market equivalent of magic mushrooms - you never know whether you will end up higher or lower.

7. Bonds Bonds is a restaurant in the heart of the City of London where top bankers meet, as well as a famous Australian underwear manufacturer. The term also refers to something altogether less exciting, a type of investment where the investor lends money to a company for a period of more than one year that is then repaid at a specified time, with interest. If it helps: Bonds are good, ie James Bond, but bills are bad, ie. Bill Clinton, an economics teacher once said. Bonds are not always good, however. They are safer than buying shares, but they do not have the potential to make you higher returns. They are for people who do not like surprises.

8. Bridging – A bridge is a structure spanning and providing passage over a gap or barrier, such as a river or roadway. It is also the upper bony ridge of the human nose. In finance however, bridging is a type of loan that provides short-term funding before long-term funding is secure. This could be particularly relevant if you are building your own house or setting up a business because this is what lenders are likely to offer if they don’t trust you completely, but think you might be on to something.

9. Bull - The opposite of bear. A bull market is strong, aggressive and opportunistic. Being bullish in the City is a good thing. It basically means optimistic about the outlook.

10. CAT – Short for catastrophe bond. These are issued by insurance companies to raise finance in the event of a catastrophe. Dead cats can also be bounced, according to stock market investors (see below).

11. Churning – Anchor butter does it to milk, but in finance, this refers to a fairly mercenary practice by stockbrokers and IFAs, whereby they buy and sell stocks for clients in large volumes frequently to make more money in commission. In business, a churn rate also refers to the attrition of customers. A high churn rate therefore means lots of new business coming in and going out, while a low one means customers stay put.

12. Compound Interest – There is no better illustration of the benefits of compound interest, which basically means earning interest on interest already paid, than here

13. Cum dividend – The word is latin for “with”, hence cum-dividend, benignly, relates to a share sale made close to the time that the dividend is due to be paid out that will still be eligible for the dividend. Nice if you can get it.

14. Dead cat bounce – Don't call the RSPCA, the bounce refers to a stock market phenomenon, where a temporary recovery in the market follows a long and pronounced period of decline. What this has to do with dead cats is unclear.

15. Endowment – If your mortgage broker says you are well-endowed, don’t slap him across the face straight away – he could be commenting on the performance of your mortgage investment vehicle. Endowments are investments that were originally sold alongside mortgages that are designed to grow in value by enough over the period to pay off the loan. They also provide some life insurance cover to the holder. However, endowments have a black mark against them, after a big misselling scandal left many homeowners without enough to pay off their mortgage.

16. Equity – another way of saying value, for instance, of a home or share. With homes, it relates to only that part which represents debt-free value. It also means impartial and fair, although these attributes do not necessarily apply.

17. Ex-dividend – Not a perk of divorce, a share sold ex-dividend means that the buyer is not entitled to any recent dividend payments on the share and has to wait until next time around. Thus, shares sold ex-dividend are often a bit cheaper than their cum-dividend cousins.

18. Front-end loading – In a lad’s mag, this could mean all sorts of things that have no place in a financial glossary. What it actually refers to, however, is the fee that advisers lump onto a mutual fund or insurance policy at the time they sell it to you, meaning you end up with a smaller investment at the beginning. Advisers argue it is the cost of their expertise, but the jury is very much out about whether loading is a good thing.

19. Future – Buying a future means entering into a contract to buy an asset at a certain time at its future selling price. It’s a bit of a gamble, since no one knows what that future price will be. Future traders would find one of these useful.

20. Gearing – It sounds like something Jeremy Clarkson might talk about, but it is actually just another word to describe borrowing. However with gearing, the borrowing is done expressly for the purpose of investing more. Investment trusts gear, for example.

21. Gilt – Gold-edging is not just an interior design feature. A gilt is also another word for a Government bond, also known as a risk-free bond, because when you are the Government and you owe people cash when their bonds mature, you can just print more.

22. Gross – Can describe slugs, eels and ugly people kissing. It also means amount received before tax is paid. For instance, your gross income will always be startlingly higher than your net income – by around 30 per cent in the UK according to one study. Much better to live in Dubai, where net income is only 5 per cent lower than gross, on average. Same applies to gross interest.

23. Hedging – Nothing to do with green leafy boundaries and everything to do with funds and betting. Hedging means taking two positions that will offset each other if prices change and so limiting financial risk. In Roulette, the ultimate hedge bet is putting your money on both red and black, however this is pointless and bound to lose half your money. Hedge fund managers are far more clever than that.

24. Illiquid – On the liquidity scale, think of cash as water and things like houses as rocks. Liquid assets are those which can be accessed easily to buy other things, Illiquid assets are harder to turn into ready money than things like cash and cheques.

25. Intestacy – A mistake Paul McCartney would definitely not have made. This means dying without a will, and is a big no-no for anyone with rich with a big family who do not get on. If you die intestate, then everything automatically goes to the next of kin, which can obviously cause major family rifts if the next of kin is a loathed step-mother or sibling.

26. Junk bond – These offer high interest but are high risk. The lyrics to this song should help you remember.

27. Leverage – A word that will provoke a wince from investment bankers right now, leveraging is the main reason that banks across the world are in so much trouble. It means borrowing to complete a transaction. Private equity houses do a lot of it when they buy out a company. The problem now is that since the credit crunch, no one trusts anyone to pay back the money they borrow. The general view is that too much leveraging has been going on and that banks are now at risk.

28. Liabilities – People running around with scissors, Britney Spears, and also debts. A liability is anything you owe to someone else. If you are in debt, the phrase “I have a few liabilities” sounds less controversial, if a bit silly.

29. LTV – If mortgage lenders owned their own Sky channel, this is what they would call it. It means loan-to-value, and is the maximum proportion of a property’s value that a lender is willing to lend on. High LTVs are for people who have not saved up much, and come with higher interest rates. Low LTVs come with much lower rates, but require big deposits of 30 per cent of the property’s value. A real headache for first-time buyers. It looks like mortgage TV is only one step away.

30. Margin – This is the difference between costs and revenue and basically means the amount of profit. Obviously, you want a nice big one, like him.

31. Mutual – Is a lovely word that conjures up all sorts of feelings of warmth and reciprocity, which is arguably why building societies, which are mutual, are apparently so well liked. A mutual company does not have shareholders. Instead, it shares out profits between its customers, or “members”. If you couldn't care less about mutual values, what you want is a demutualisation. This gives you a taste of what it must feel like to win the lottery, because you could get a nice big cash windfall.

32. NAV – Nothing to do with Satellite Navigation systems or these boys, a NAV is the Net Asset Value of a mutual fund share. This is calculated by subtracting a mutual fund’s liabilities from its assets.

33. Negative equity – Lots of people who took out mortgages for 100 per cent or more of the value of their properties are in danger of this, which translates as losing money on your house. During times when house prices are falling, more homeowners are at risk of this. So expect to hear lots about negative equity in coming months then, if this forecast comes true.

34. Net – simply means amount of money left after tax is paid. Usually looks pitiful when compared with your gross salary.

35. Nominal – means a value not adjusted to take account of inflation. Inflation is pretty high at the moment, and looks set to carry on rising, so nominal values should basically be ignored, as they might lead you to think that something is worth more than it actually is.

36. OEIC - pronounced OIK, like the word that tweedy men use to describe teenagers who play music on their iPods loudly in public. OEIC stands for an Open-ended investment company, which invests in other companies. It is open-ended because it can increase or decrease the amount of shares in issue at will.

37. Option – Unimaginatively titled, an option is a contract that gives a share buyer the right to buy or sell a stock at a given price until a specific date. Yet another way of making the stock market more interesting and lucrative. Do you ever get the feeling that city boys just make stuff up as they go along?

38. Orphan - The rather tragically-named orphan assets are so-called because they are the unclaimed pots of cash built up by with-profits funds, to which no-one is really entitled. What to do with these assets has become the subject of controversy. Can companies hold on to them to boost balance sheets or should they divide the spoils between policyholders and shareholders?

39. PEP – This stands for Personal Equity Plan. They are the O-levels of the tax efficient investment world - you can’t get them anymore – they were replaced by Isas in 1999, but some people still have them. Like Isas, they were designed as a tax-efficient way of investing in the stock market.

40. Preference – We all have them, but in finance, a preference is naturally more complicated than, say, favouring tea over coffee. A preference share is one which pays a fixed rate of interest. So, like insurance, it is only actually preferential in the bad times. They are lower risk than normal shares because if a company goes bust, then preference shareholders will be at the front of the queue for payouts. Good news, if you have preferential shares in Northern Rock, perhaps. But this rarely happens. On the downside, if a company does well, preference shareholders will not benefit as much as normal ones, who will receive bigger returns.

41. Price-earnings ratio – a company’s current share price compared to its earnings per share. That obviously still means nothing. So just remember that a high one means investors are expecting higher earnings growth in the future, whereas a low one is more pessimistic. Only compare the PE ratios of companies in the same industry.

42. Redemption – Hedonists and erring Christians seek it, and so do investors who want the money they put in bonds or shares back, thank you very much.

43. Scrip – It sounds cooler than it is. A way of paying something via a means other than money. Scrips are things like gift tokens, points and tickets that act as a subsititute for cash.

44. Sipp – SIPP stands for Self-Invested Personal Pension. In the pensions world, these are sexy. They are the Agent Provocateur lingerie of pensions, compared with other more Spanx-like products, such as stakeholders. This is because they are more flexible, as well as more expensive. They look prettier, because you can put things like your art collection in them. Pension advisers get very excited about these because they can make lots of money from selling them to you, but this doesn’t mean you should. Only those who think Agent Provacateur lingerie is a bargain need apply.

45. Split-cap – Can lead to pregnancy in another context, but investors are more likely to assume you are talking about a type of investment trust that splits capital growth from income. A full definition would take a while, but there is one here. A horrible misselling scandal in 2004 meant that they became as unpopular for a while, but there are reports that they are beginning to regain popularity.

46. Stagging – Where two male deer lock antlers? No. It describes the act of buying a share at its initial public offering price and selling it on immediately for a profit. It is also called flipping. Honestly, who invents these words?

47. Stagflation – The English language just keeps on giving. Stagflation describes an economic period of high inflation, low growth, rising unemployment and recession. The word comes from the marriage of stagnation and inflation, apparently. Expect to hear this word more often from taxi drivers and economists when debating whether the Bank of England should cut interest rates.

48. Serps – Not a sexually transmitted disease, SERPs was the State Earnings Related Pension Scheme set up provide a second pension income, on top of the basic state pension, for people who did not have occupational schemes. The system has now been replaced by the State Second Pension, or S2P, which is the Government’s way of making pension savings sound cool. Unfortunately however, it sounds too much like Y2K – the millennium computer bug that sparked fears of Armageddon, to ever go down well.

49. Underwriter – A company that stumps up the money behind insurance policies. These people have extraordinary power in society, because they can work out things like when you are likely to die.

50. Wind-up – It means something else to humourists, and Jeremy Beadle. In the world of money, it means when a company ceases activity with a view to shutting down altogether. It can also refer to a way of ending a pension scheme, or a relationship, if you want to dump someone: "I'd like to wind things up with you", should do the trick, or alternatively, do what this guy did. It's time to do that here too.

The top 10 financial freebies

We all like something for nothing, especially in a recession.

So here are ten financial freebies currently available, from flights and financial advice to cold hard cash.

The deals vary and some are only available to certain groups, such as existing customers.

The information has been supplied by price comparison sites moneysupermarket.com and moneyfacts.co.uk, along with Defaqto, the financial information group.

1. Switching current accounts

Like clearing out of the attic or sitting through an entire episode of Heartbeat, we all dread the prospect of switching current accounts. We fear our direct debits will be lost, our standing orders will left unpaid and we will never receive a payment again. Ever. This is, of course, unlikely, and if you are willing to take the risk, some banks will pay you £100 for your bravery.

At the moment First Direct, owned by HSBC is offering £100 to current account switchers. The bank offers a switching service which should reduce the hassle of moving all those direct debits and regular payments. And First Direct has won plaudits for its customer service, so it might not be as painful as you think.

2. Tesco Clubcard credit card

Tesco Clubcard credit card customers receive points for using their card which can be converted into vouchers for use in Tesco stores, converted into Airmiles or exchanged for Clubcard deal vouchers, which double the value of your points – these can be redeemed on restaurant trips, weekend breaks at hotels in the UK and other leisure activities. Spend £4 at Tesco and it will give you five Clubcard Points. Spend £4 anywhere else and it will give you 1 Clubcard Point.

3. Free credit report

Risk-adverse banks and building societies are going through the credit files of prospective borrowers with a fine tooth comb to uncover evidence of defaults, financial mismanagement or irregularities. This means the quality of your credit report has never been more important and it pays to check it regularly. Experian, the biggest credit reference agency, offers a free 30 day trial of its CreditExpert service, which allows you to scan your report and stay updated with any changes that occur on your account for a month. Just remember to cancel your contract before you are charged for another 30 days.

4. MBNA bmi American Express credit card

This is a quick and easy way to bag youself a free flight to any European destination, providing you have a decent credit record and therefore will be accepted by MBNA. Cardholders with the MBNA bmi American Express credit card receive 20,000 destination miles when you spend £250 on the credit card in the first 90 days. Under the bmi scheme, 12,000 points are required for a return flight to any destination in Europe. Just remember to clear the balance on your card each month and cut it up once you have earned your miles to ensure the flight remains "free". The card has an interest rate of 15.9 per cent.

5. Halifax Reward current account

Halifax is keen to advertise its shiny new "Reward" current account, which pays you £5 a month just for being a customer. Sadly, as we are now only too aware, there is no such thing as a free lunch in finance, and there is indeed a catch with the new Halifax account. The cost of going overdrawn is £1 a day, rising to £2 over a certain limit.

6. Free advice from an IFA

It has been said that free advice is not worth the price, but the alternative, paying for it, can be punishingly high, particularly for those with less to invest. Thankfully, most financial advisers offer introductory "taster sessions" where you can ask an expert questions without having to pay for it. Alterntively, a number of high street banks are running schemes offering customers and non-customers financial planning advice, although these services are unlikely to be impartial, as the Times Money team exposed last month. To find a financial adviser in your area visit unbiased.co.uk

7. O per cent purchase credit cards

This is not technically a freebie but it does save you money if you're in the market for a personal loan. Marks & Spencer offers 0 per cent on purchases for 10 months, while Halifax charges 0 per cent on purchases for the first nine months. Customers who need to borrow cash to make an essential purchase should use the cards as an interest-free personal loan, provided that you can clear the balance in time. The interest rate on both cards after the initial introductory period is 15.9 per cent.

8. The American Express Nectar credit card

The Clubcard scheme is not the only loyalty scheme and if you live nearer to a Sainsbury's than a Tesco, you should opt for Nectar instead. Regular shoppers at Sainsbury's can quickly build a bumper pot of Nectar points if shopping is bought with the American Express Nectar card. Cardholders can earn 2 points for every pound spent with the credit card and another 2 points for shopping at Sainsbury's. The points are worth 0.5p each. The interest rate on the card is 18.9 per cent.

9. Childrens accounts

It is beneficial to get children into the habit of saving sooner rather than later. The Abbey Flexible Saver account includes a free wallchart to help your child keep track of his or her deposits. The Lloyds TSB Young Savers account comes with a free moneybox.

When parents sign up to KidStart.co.uk, they earn up to 20 per cent back on purchases made on their debit or credit cards at hundreds of online or high-street retailers. This cash is deposited in either a Child Trust Fund or a nominated children's savings account. It is free to join, and is also open to grandparents or friends.

10. Weekly Money Bulletin

Last but by no means least, Times Money offers a free weekly e-mail bulletin sent directly to your inbox every Wednesday. The bulletin contains money savings tips and advice.

Ten mind-boggling statistics from the credit crunch

It's been a year of mindboggling statistics and silly money, of soaring debts, collapsing stock prices and astounding events.

When Northern Rock collapsed last year, did you think, "We're going to have to nationalise the rest of them too". No, me neither.

I also bet you didn't work out that the part-nationalisation of our banking sector would cost you at least £8,000 in taxes. And this is just the beginning.

Here are some other surprising, dispiriting and utterly disturbing statistics from the financial credit crunch which has ravaged our financial sector, broken the back of our economy and produced a recession that could be the worst for many generations.

1. £500,000,000,000

...or around £8,000 each. £500 billion is a conservative estimate of what taxpayers, you and me included, are paying for Gordon Brown's plan to bail out the UK banking system. The three-part package includes committing up to £50 billion of taxpayer funds for a part-nationalisation of Lloyds TSB, HBOS and Royal Bank of Scotland (RBS), which is now 57 per cent owned by you and me.

The Bank of England will pump at least £200 billion into the money markets to encourage banks to lend to each other again, which should help lower the costs of new mortgages. And the Government is also making a further £250 billion available for banks over the next three years to guarantee medium-term debt which is of dubious quality. This should also help restore confidence and get banks lending to each other again.

£500 billion is a staggering amount of money, equivalent to 4,000 brand new hospitals (at £125 million each), 16 new high speed rail links between London, the north of England and Scotland or 37,000 Jamie Oliver-approved free school meals for each and every pupil in the UK. Instead, they'll be eating turkey twizzlers.

2. £20,000,000,000

This is the amount of taxpayer cash that has gone into the coffers of the Royal Bank of Scotland, a bank which was the pride of Scotland until the prefix "troubled" was permanently attached to its name. This is the equivilent of £333 each. You have Sir Fred Goodwin, the former chief executive of the much-maligned firm, to thank for this. Royal Bank of Scotland made £7.5 billion in net profits in 2007, the year before the banking bubble popped. Last month Tom McKillop, chairman of RBS, apologised for the right royal mess the firm was in.

3. £1,800,000,000,000

£1.8 trillion is the cost to the global economy of the credit crunch. Such a vast number is difficult to grasp, but in the same report, the Bank of England valued the UK economy, the fifth biggest in the world, at £7 trillion. So it has so far cost about a quarter of the value of our entire economy.

4. 0.4 per cent

The drop in retail sales last month compared to a year ago, according to the British Retail Consortium. This doesn't sound like much, but a predicted fall next year of just 4 per cent will produce the worst conditions on the high street since 1965, according to research by Verdict, a retail consultancy. Major retailers are collapsing into administration, including Woolworths, Pier and MFI, and more are expected to follow in the next 12 months, as consumers shut their wallets, bury their purses and consider making half their Christmas presents.

This won't just create less choice on the high street. The retail sector employed 3.2 million people last year, so problems on the high street spell huge problems for the economy at large.

5. £50,000

This is the amount which will have been wiped off the value of your house by the end of next year, according to the Centre for Economics and Business Research (CEBR), an optimistically-minded think tank. It predicts that average prices will fall by 25 per cent and not return to their peak until 2013. The average home in the UK, which hit £200,000 in August 2007, will fall to £149,000 by 2009. Capital Economics, the consultancy, has said that prices could fall by 35 per cent, peak to trough, although it also forecast a tentative recovery in 2010.

6. £50,000,000

Executive pay at the five biggest banks exceeded £50 million in the last five years, according to a report by the Labour Research Department. Sir Fred Goodwin, the head of RBS, was paid a basic salary of £3.5 million last year. Between 2003 and 2007, Goodwin got £15.5million in basic pay and cash bonuses. Eric Daniels, of Lloyds TSB, pocketed £10.2million and HBOS chief executive Andy Hornby earned £6.9million, according to annual reports.

Another number to remember is 59.9p: the lowest share price this year of Halifax Bank of Scotland, 92 per cent less than the highest point in the year. Stocks in the embattled mortgage giant, which is set to be taken over by rival Lloyds TSB have plummeted since trading at almost £11.60 last year.

7. £2.5million

The cost of celebrating Christmas at Britain's nationalised banks. Lloyds TSB, which is accepting about £5.5 billion from taxpayers to shore up its broken balance sheet, is to spend around £2.5 million on Christmas parties for its 100,000 UK employees, or around £25 a head. Meanwhile, HBOS is hosting a "luxury dinner and dance" at the Birmingham NEC for 1,500 mortgage workers, with free hotel rooms thrown in. Meanwhile, Royal Bank of Scotland (RBS) is spending £1 million on parties for its 100,000 staff. RBS also spent more than £300,000 entertaining 40 senior employees and 30 partners recently.

Alex Neil MSP, an SNP member representing central Scotland, reflected the mood north of the border when he said the bank was "playing with fire". He added: "I don't want to be a party pooper, but spending £1m on Christmas parties when so many pensioners have lost their savings as a result of the RBS share collapse is obscene."

8. £1,500,000,000,000

This is the amount of debt which Britons have to pay back. £1.5 trillion is the amount we owe in the form of mortgages, credit cards, personal loans and store cards. This equates to roughly £4.5 billion washing machines or 7.5 million three-bedroom houses.

The average household in the UK with personal, unsecured debt, such as personal loans or credit cards, owe £22,190. If you include mortgages, the average household debt is £59,715.

However evidence suggests that we can't afford to pay it back. About 120 properties were repossessed every single day in the UK last month and the situation is expected to get worse as growing numbers of households struggle to meet their mortgage commitments. The Council of Mortgage Lenders says 200,000 homeowners will have missed at least three mortgage repayments by the end of the year.

Auction houses are reporting a huge jump in the number of repossessed homes on their books. Allsops, one of the largest, recently held an auction with 996 lots, compared to 227 in the same month last year.

The bad news continues. The number of homeowners trapped in negative equity is expected to soar to 2 million by 2010.

9. $2,900,000,000

Last year's pay cheque for George Soros, the second-highest-paid hedge fund manager in the world. Mr Soros is the chairman of Soros Fund Management and was estimated to be worth about $8.8 billion by Forbes magazine last year. This could clear the credit card debt of almost 300,000 struggling Americans.

The average American household owed $2,966 on their credit card in 1990 compared to $9,840 in 2007. The average American male earned $32,000 last year, according to figures from the US Census, and last month more than 533,000 Americans lost their jobs, the largest amount in 34 years.

10. $52,000...

...every minute. This is how much cash GM, or General Motors, is losing as a result of the economic meltdown in the US. Note that this eclipses the average annual American salary. This collapse in profitability has forced the world's biggest carmaker to go cap-in-hand to the US government and it has been joined by Ford and Chrysler, which are facing similar loses. The US carmarkers are asking for £23 billion in taxpayers cash.

Do budget airlines still offer the cheapest fares?

As Ryanair prepares to introduce its new check-in charge, we investigate whether low-cost carriers offer good value

Laura Whateley

A pound to spend a penny; £30 to carry home a giant Toblerone that won’t fit in your bag; and now rumours that Ryanair is planning to introduce a fat tax for overweight passengers. It is little wonder that Times Money has received almost 600 comments and complaints about the budget airline on our Money Central blog.

From next week Ryanair will charge £5 to check in online and impose a £40 fine per person, each way, if you fail to bring your boarding card to the airport.

The aim, says Steve McNamara, a spokesman for the airline, is to phase out airport check-ins by October. He says that the charge will “benefit some as it will not be applied to promotional fares”. But he admits that for the majority of those who do not manage to bag the best deals “flights will cost a little bit more”.

Ryanair is by no means the only budget airline to catch out passengers with fees. Flying with bmibaby will cost you £10.99 per bag on each flight if you book online, but £15 if you forget and book in your luggage when you get to the airport. Flybe charges £13 and Aer Lingus £15 a bag, each way, if booked at the airport.

EasyJet demands a 2.5 per cent transaction fee when paying for flights with a credit card. This comes on top of a £2.95 booking fee — and you have to be careful to uncheck additional travel insurance when buying a flight on its website, otherwise as much as £17 per passenger will be added to the cost of your ticket.

With all these charges, can these airlines still claim to be budget carriers? Times Money decided to investigate. Looking at the two market leaders — easyJet and Ryanair — and British Airways, the scheduled airline, we have compared the total costs of taking a flight from London this summer for a family holiday, a weekend break and a business trip.

Two-week family holiday to Málaga, Spain

Two adults and two children travelling on Saturday morning, August 1, returning on Saturday evening, August 15, with three bags in the hold and one set of golfclubs.

British Airways (from Gatwick)

Cost with debit card: £1,166

Cost with credit card: £1,171

EasyJet (from Gatwick)

Cost with debit card: £1,073

Cost with credit card: £1,098

Ryanair (from Stansted)

Cost with debit card: £1,265

Cost with credit card: £1,265

The cheapest fare on a credit card for a family of four to Málaga is with easyJet, at £1,098. But this is only £73 less than flying with British Airways, which will offer you seats booked together, a more generous baggage allowance and free food and drink during the flight.

The easyJet ticket is £166 cheaper than the Ryanair equivalent, which is the most expensive option because of its additional charges. If you book everything on the Ryanair website, you still pay £94 more than you would for the same journey with British Airways. All the flights are about the same length at a little less than three hours.

If you book the flight after next week’s fee changes and forget to check in before you arrive at Stansted, you will have to stump up £40 per person, per flight — that’s a hefty £320 for a family of four simply to check in at the airport.

If you do not use the website and book your baggage into the hold via the Ryanair call centre or when you get to the airport, the airline will charge an extra £10 per bag, per flight, and an extra £10 per flight for each item of sports equipment.

It is worth noting that phoning Ryanair will cost you too — £1 a minute. A Ryanair flight to Málaga without prebooked luggage and check-in would cost £419 more than the same journey with British Airways.

Italian weekend break for two

Two adults travelling to Rome on Friday evening, September 4, returning Monday evening, September 7, with one bag in the hold.

British Airways (Gatwick to Rome Fiumicino)

Cost with debit card: £251

Cost with credit card: £256

EasyJet (Gatwick to Rome Fiumicino)

Cost with debit card: £240

Cost with credit card: £244

Ryanair (Stansted to Rome Ciampino)

Cost with debit card: £244

Cost with credit card: £244

British Airways is the most expensive flight, but only £12 more than Ryanair. But that difference disappears if you book priority boarding with Ryanair, at a cost of £3 each way per person.

It will cost only £7 more to fly with British Airways if you pay for your flight with a debit card. That is about as much as the cost of a couple of bottles of water and a packet of peanuts on one of the budget airlines.

Also bear in mind that Ryanair only flies from Stansted and into Ciampino, a small military airport with relatively few facilities for tourists, rather than Rome’s main international airport, Fiumicino.

Last-minute, midweek business trip to Scotland for one night

One adult travelling to Glasgow early on Tuesday, June 2, returning early the following day, June 3, with no bags in the hold.

British Airways (Gatwick to Glasgow International)

Cost with debit card: £79

Cost with credit card: £83

EasyJet (Gatwick to Glasgow International)

Cost with debit card: £56

Cost with credit card: £59

Ryanair (Stansted to Glasgow Prestwick)

Cost with debit card: £55

Cost with credit card: £55

A midweek flight, carrying no hold baggage, offers the best-value travel on the budget airlines. Mr McNamara points out: “The cheapest fares during the busiest periods — school holidays or over Bank Holiday weekends — are snapped up quickly, so it is worth booking off-peak.”

In this instance, a flight to Scotland with easyJet and Ryanair is more than £25 cheaper than a British Airways flight. The Ryanair outbound single fare actually costs nothing and the easyJet return flight £19.99. But with third-party fees and booking charges, the headline rates rise quickly.

What’s more, the Ryanair flight will take you to Glasgow Prestwick airport, which is 32 miles from the centre of the city — so your £25 saving will disappear on a taxi fare — all without a morning croissant and newspaper on the flight. And if you work in Central London, you will spend the additional £25 getting to the airport — the Stansted Express will set you back at least that much.

The moral of the story, according to Barry Smith, co-founder of the comparison website skyskanner.net, is “to stay flexible, add up the fees before you click ‘buy’ and never, ever fly on a low-cost airline with children — you will get hammered for baggage”. He adds: “Remember that aircraft are big pieces of kit and the cost of running them has to come from somewhere. If flights are 1p, the airline will rely on customer naivety to make its money.”

How to avoid those extra charges

If you can, fly midweek, avoid peak times and book several months ahead to take advantage of promotions. Ryanair allocates 50 seats per flight as “very low fare”, but they disappear in a flash.

Make sure that you weigh your luggage before you get to the airport. Ryanair has a stingy 15kg limit and will charge £15 for each additional kilogram each way if you overpack.

Check where your flight will land; the airport could be miles from your desired destination. Frankfurt Hahn airport, for example, is about two hours’ drive from the centre of Frankfurt.

Ryanair and easyJet do not charge booking fees if you pay for your ticket with a Visa electron card.

Use flight comparison websites. On skyscanner.net, for example, you can view a whole month of flights to the same destination, allowing you to pick the cheapest day to travel or find the airline with the lowest-priced ticket.

• Consider booking your outbound and return journeys with different airlines to cut costs.

Goodwin under fresh scrutiny for failings at the Royal Bank

Sir Fred Goodwin and his erstwhile boardoom colleagues faced fresh scrutiny after they were criticised by one of Scotland's senior businessmen and as regulators were reported to have launched a fresh investigation into the conduct of former Royal Bank of Scotland directors.

David Watt, head of the Institute of Directors in Scotland, said the disastrous losses that left the bank requiring a massive bailout by the tax- payer were caused by "a failure of leadership and governance".

He warned that financial services players ran the risk of repeating the kind of mistakes that devastated Royal Bank unless there was a big change in the culture prevailing in the country's boardrooms.
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While Goodwin recently told MPs it was unfair to blame him for the bank's problems, Watt said the former chief executive of the bank had to shoulder responsibility.

Goodwin was the architect of a strategy of acquisition-led growth that culminated in the bank pressing on with the purchase of ABN Amro bank in 2007 despite clear signs that the credit crunch would cause a serious slowdown.

Watt criticised Goodwin for failing to listen to those who questioned the wisdom of the strategy. "Somebody understood that the challenges that Royal Bank was getting involved in were becoming too risky and that buying ABN Amro was not very wise," said Watt. Goodwin is said to have run the bank in a domineering fashion, which meant subordinates were not allowed to express dissenting views "His leadership culture left a lot to be desired to put it mildly," said Watt.

However, he said the problems resulting from Goodwin's misjudgments could have been avoided if his fellow directors had done their jobs properly.

Non-executive directors are employed to act as a check on executives and to ensure that the strategies they pursue are sound. "They should have been asking fundamental strategic questions like, Which countries are we investing in?', and that would have revealed that the bank was investing heavily in countries where there could be serious difficulties if things did not go to plan," said Watt.

His comments show that the debate about what went wrong at Royal Bank is still very much alive despite the efforts of the new management team to draw a line under the past.

Chairman Philip Hampton called for an end to "public flogging" of the bank at last month's general meeting.

On Friday, Chancellor Alistair Darling joined the attack on the management of banks that ended up requiring life support from the Treasury.

"There is a feeling that in a number of boardrooms that a number of people, non-executives in particular, did not ask the questions that they should have asked," he told industry leaders in Edinburgh.

Yesterday it was reported that the Financial Services Authority (FSA) had appointed the giant accountancy firm Pricewater- houseCoopers to investigate the conduct of former board directors of Royal Bank.

The investigation will cover risk management processes and the information provided to investors about Royal Bank's financial position. The FSA and Royal Bank both declined to comment on the report.

Watt said failings of leadership and corporate governance appeared to have affected other banks, including HBOS, which owned Bank of Scotland.

This became the subject of a government-brokered takeover by Lloyds TSB Bank after it hit the buffers because of overly-aggressive lending in the property and housing markets.

Sir Victor Blank will retire in the next year as chairman of the enlarged Lloyds Banking Group.

Some investors were unhappy that the hasty takeover left Lloyds saddled with massive debts.

Governments around the world are developing proposals to try to ensure there if no repeat of the crisis in the financial sector that has dragged the world into recession.

Watt warned that a response focused on regulation would fail. He said fundamental changes in boardroom practices and cultures were required.

Non-executive directors should receive training to ensure that they are able to exercise their supervisory functions adequately. They needed to ensure that companies pursued sustainable long-term growth rather than short-term targets.

Remuneration policies should not reward employees for actions that brought short-term gain at the risk of losses in future.

Directors should be recruited from a much broader range of back-grounds to ensure that boards reflected the interests of their companies customers.

"What got us here won't get us out," said Watt.

"We can't believe that continuing to do what we've done for the last 20 years will get us improvement; it won't."

All You Need Is To Dream

Have you ever dreamed of earning a SIX FIGURE INCOME ? Bet some of you do. But only a handful of us would actually commit ourselves into making our dream comes true. Instead of committing to pursue our dream we often just sit back and do nothing about it.

"The future belongs to those who believe in the beauty of their dreams." Eleanor Roosevelt "

Well, for some people, earning a SIX FIGURE INCOME seems to be an impossible dream to attain. It appears that such belief is absolutely pessimistic. To earn a SIX FIGURE INCOME is possible and within our reach if we possess the fundamental understanding of how wealth is created and accumulated.

By the same token, the depth of our financial knowledge and planning will determine our financial future whether we will retire broke, debt-ridden or leave a huge amount of wealth for our dependence. The choice is ours because we are the navigator of our own destiny.

As Burke Hedges the author of the book The Parable of the Pipeline eloquently writes , " becoming a millionaire is a matter of choice, not chance."

How To Achieve A Six Figure Income And Be Financially Free

Most of you must have heard of people saying; you either be a professional or run your own business to earn a SIX FIGURE INCOME. It is true to a certain extent however, a profession per se does not guarantee one a brighter financial future. Why? Because no matter how much we earn as an engineer, a manager, an accountant, an architect, etc. you will still depend on a paycheck or a fee for a living. So the moment when we stop working, our income will stop flowing in.

Thus, being a professional with a big income is never going to make us financially free. He/she will never make his or her family safe and secure. Burke Hedges calls this group of people a "bucket carrier". He writes," as long as you carry buckets, you have to show up and do the work in order to get paid".

Sound familiar isn’t it. This is how the rat-race world works. Instead of working for the money as Robert T. Kiyosaki the author of the best selling book Rich Dad and Poor Dad has pointed out, we should make the money work for us. A brilliant saying!

So how do we get out of this rat-race world? The answer is we need to start thinking on how to make the money work for us. Have you heard of the concept of leverage? It is a concept that is widely applied in all fields of work including the financial world. So what is it all about?

What is leveraging?

Leverage is a phenomenal concept that has been known to people throughout the ages. The root of the word leverage, lever is originated from an old French word that means, "to make lighter." Say, if we want to move an object, which is many times heavier than us, what do we do? That’s right. We place a rigid bar on a pivot to lever it and the object becomes so light that even a child can lift it easily.

" Give me a lever long enough and a fulcrum on which to place it, and I shall move the world." - Archimedes

This is the power of leverage. In today’s financial world, we apply the same principle of leverage to time and money, and the outcomes are exponential. Leverage allows people to work smarter, not harder, and it is the reason behind the creation of so many millionaires in the last century.

Leverage: The Source of Residual Income

Residual income, which is also known as passive or recurring income, is an income that will continuously generates inflow of money to us after the initial effort that we have put to work or money we have invested in an investment fund. Alternatively, if you are an inventor, your residual incomes will basically derived from the rights and patents of something you have invented and used by others. The same goes to an artist or a musician.

Two Types of Leveraging

Leveraging Money

Have you heard of Warren Buffet? Yes, the second richest man in the world and a legendary figure in the stock market that earn six figure income by leveraging other people’s money and as result he made himself and his investors rich in the course.

Check this out. One share of Buffet’s Berkshire Hathaway stock was worth around $19 in the mid 60s and by the end of 1998, the value of that single share has shot up to $70,000. Say, if you have invested $ 10,000 back in 1965, your investment at the end of 1998 would have been worth a whopping $ 51 million. WOW ! That’s unbelievable. The money was left to compound [1] by itself as time went by. That’s how money-leverager makes their millions.

Nevertheless, most of these ‘money-leveragers’ would only get to see their wealth touches the million-dollar mark after they have reached their 50s or 60s. Though it’s a long wait before they could see the result, it is worth the wait anyhow. Wouldn’t it be great to be a money-leverager?

Ok, let’s be honest to ourselves. Not everyone of us has the patience to wait, not to mention, some of us even find it hard to come up with the initial capital to invest. So, if we don’t have the money, what do we have to leverage then? The answer is TIME !

Leveraging Time

A day has 24 hours and all of us regardless whether we are rich or poor, have that same amount of time in a day. Time helps us to level the playing field. We can no longer give ourselves excuses not to get rich. We have been given an equal opportunity in this age where every one of us can have easy access to information and knowledge on wealth building.

All we need to do is to leverage an iota of our leisure time and spend it wisely to build our pipeline [2] that will continuously pay us day and night. Always remember - pipelines are no longer an affair of the rich. Pipeline belongs to people who believe that they CAN do it.

Why Leveraging Time Not Money?

"Life is a waste of time; time is a waste of life; so why waste your time when you could be having the time of your life?." - Unknown

Why leveraging time not money? Well, if you were a money leverager, you wouldn’t be here reading this article in the first place. You would probably surfing the net now scouting for stocks to invest or busy looking for real estate properties to add to your investment portfolio. Right? So I believe you are here because you do not have enough financial means to leverage money to build pipelines of ongoing residual income.

Up to this point, I hope that you understand the difference between leveraging time and money. Let us put aside the latter and pay more attention on the concept of leveraging time as I have mentioned earlier that building pipelines through leveraging time is within everyone reach.

In the next few hundred years from now, believe it or not, many millionaires will be created through either one of these two systems; E-Marketing or Network Marketing. Keep your mind open to ideas and let not prejudge it just because that you think it is not your cup of tea.

Perhaps, some of you will comprehend what is written here and proceed to set your own financial goal. Others may just call it a quit before even trying it. Whichever path you decide, always bear in mind this saying by Napolean Hill, "winners never quit, and quitters never win." End

FOOTNOTE:

1. Do you know that ALBERT Einstein once said, "Com?pounding is the eighth wonder of the world." Although he was referring to atomic energy, we know that the law of compounding applies just as astonishingly to the financial world as it does to science.

2. "Pipelines are designed to take the worry out of people’s lives by putting profits into their pockets. But most of all, pipelines are designed to give people personal and financial freedom and lifelong security." - Burke Hedges, The Parable of the Pipeline

Bubble burst - Understanding whats happening

Very interesting reading and found the reason why the recent US crisis occurred

Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was 2 dollars as there were only two pieces of 1 dollar coins circulating around.

1) There were 3 citizens living on this island country. A owned the land. B and C each owned 1 dollar.

2) B decided to purchase the land from A for 1 dollar. So, now A and C own 1 dollar each while B owned a piece of land that is worth 1 dollar.

* The net asset of the country now = 3 dollars.

3) Now C thought that since there is only one piece of land in the country, and land is non producible asset, its value must definitely go up. So, he borrowed 1 dollar from A, and together with his own 1 dollar, he bought the land from B for 2 dollars.

*A has a loan to C of 1 dollar, so his net asset is 1 dollar.
* B sold his land and got 2 dollars, so his net asset is 2 dollars.
* C owned the piece of land worth 2 dollars but with his 1 dollar debt to A,
his net residual asset is 1 dollar.
* Thus, the net asset of the country = 4 dollars.

4) A saw that the land he once owned has risen in value. He regretted having sold it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollars from B and acquired the land back from C for 3 dollars. The payment is by 2 dollars cash (which he borrowed) and cancellation of the 1 dollar loan to C.
As a result, A now owned a piece of land that is worth 3 dollars. But since he owed B 2 dollars, his net asset is 1 dollar.

* B loaned 2 dollars to A. So his net asset is 2 dollars.
* C now has the 2 coins. His net asset is also 2 dollars.
* The net asset of the country = 5 dollars. A bubble is building up.

(5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 dollars. The payment is by borrowing 2 dollars from C, and cancellation of his 2 dollars loan to A.

* As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 dollars.
* B owned a piece of land that is worth 4 dollars, but since he has a debt of 2 dollars with C, his net Asset is 2 dollars.
* C loaned 2 dollars to B, so his net asset is 2 dollars.

* The net asset of the country = 6 dollars; even though, the country has only one piece of land and 2 Dollars in circulation.

(6) Everybody has made money and everybody felt happy and prosperous.

(7) One day an evil wind blew, and an evil thought came to C's mind.
"Hey, what if the land price stop going up, how could B repay my loan. There is only 2 dollars in circulation, and, I think after all the land that B owns is worth at most only 1 dollar, and no more."

(8) A also thought the same way.

(9) Nobody wanted to buy land anymore.

* So, in the end, A owns the 2 dollar coins, his net asset is 2 dollars.
* B owed C 2 dollars and the land he owned which he thought worth 4 dollars
is now 1 dollar. So his net asset is only 1 dollar.
* C has a loan of 2 dollars to B. But it is a bad debt. Although his net
asset is still 2 dollars, his Heart is palpitating.
* The net asset of the country = 3 dollars again.

(10) So, who has stolen the 3 dollars from the country ? Of course, before the bubble burst B thought his land was worth 4 dollars. Actually, right before the collapse, the net asset of the country was 6 dollars on paper. B's net asset is still 2 dollars, his heart is palpitating.

(11) B had no choice but to declare bankruptcy. C as to relinquish his 2 dollars bad debt to B, but in return he acquired the land which is worth 1 dollar now.

* A owns the 2 coins, his net asset is 2 dollars.
* B is bankrupt, his net asset is 0 dollar. ( he lost everything )
* C got no choice but end up with a land worth only 1 dollar

* The net asset of the country = 3 dollars.

------ End of the story; BUT….

There is however a redistribution of wealth.
A is the winner, B is the loser, C is lucky that he is spared.
A few points worth noting -

(1) When a bubble is building up, the debt of individuals to one another in a country is also building up.
(2) This story of the island is a closed system whereby there is no other country and hence no foreign debt. The worth of the asset can only be calculated using the island's own currency. Hence, there is no net loss.
(3) An over-damped system is assumed when the bubble burst, meaning the land's value did not go down to below 1 dollar.
(4) When the bubble burst, the fellow with cash is the winner. The fellows having the land or extending loan to others are the losers. The asset could shrink or in worst case, they go bankrupt.
(5) If there is another citizen D either holding a dollar or another piece of land but refrains from taking part in the game, he will neither win nor lose. But he will see the value of his money or land go up and down like a see saw.
(6) When the bubble was in the growing phase, everybody made money.
(7) If you are smart and know that you are living in a growing bubble, it is worthwhile to borrow money (like A ) and take part in the game. But you must know when you should change everything back to cash.
(8) As in the case of land, the above phenomenon applies to stocks as well.
(9) The actual worth of land or stocks depend largely on psychology.

Donald MacKenzie on Hedge Funds

We have heard a lot about hedge fund and they were the main culprit of the economic problem or at least that is what some people are saying. Below is some of the explanation of what are these hedge fund companies.
Hope it will give you some understanding of what hedge fund really is...

An Address in Mayfair

You could walk around Mayfair all day and not notice them. Hedge funds don't – can't – advertise. The most you'll see is a discreet nameplate or two. An address in Mayfair counts in the world of hedge funds. It shows you're serious, and have the money and confidence to pay the world's most expensive commercial rents. A nondescript office no larger than a small flat can cost £150,000 a year. Something bigger and in the style that hedge funds like (glass walls, contemporary furniture) can set you back a lot more. It's fortunate therefore that hedge funds don't need a lot of space. Two rooms may be enough: one for meetings, for example with potential investors; one for trading and doing the associated bookkeeping. Some funds consist of only four or five people. Even a fairly large fund can operate with twenty or fewer.

These small organisations control substantial amounts of capital. If a hedge fund manages less than $100 million it isn't seen as a big player; $1 billion is quite commonplace. The capital managed by the world's ten thousand or so funds amounts to around $2000 billion. (Hedge funds don't have to divulge the details of their finances and operations, so no one knows the exact numbers.) About a fifth of this money is managed by funds based in London, and two fifths by those based in the US, mostly in New York and its upmarket suburbs, especially Greenwich, Connecticut.

Hedge funds' physical and legal locations are often separate. The funds themselves are normally registered offshore for tax reasons, many of them in the Cayman Islands. In the offices in Mayfair or Greenwich are the funds' managers, the legally distinct firms or partnerships that control them. Hedge funds are often described as unregulated, but that's not quite right. Fund managers based in the UK have to register with the Financial Services Authority, and are bound by its codes of market conduct. It is just as illegal for an employee of or a partner in a hedge fund based in London or New York to spread false rumours or indulge in insider trading as it is for someone working for a more conventional investment firm. Nevertheless, hedge funds enjoy lighter regulation and considerably greater freedom of action than the investment companies that advertise in the financial pages.

The 'hedge fund' was the inadvertent creation of the wave of financial market regulation that followed the 1929 crash and the Great Depression. To avoid a repeat of the excesses of the 1920s, legislators in the US enacted a series of measures – the 1933 Securities Act, the 1934 Securities Exchange Act and the 1940 Investment Company Act – which, among other things, laid down what investment companies taking money from the general public had to do and couldn't do. Two practices in particular were limited or prohibited: leverage (buying securities using borrowed money) and short selling (selling securities that the investment company doesn't own). Expecting prices to fall, a short seller might, for example, borrow securities from their owner (in exchange for a fee), sell them, then later buy them back (at a lower price, if things have gone according to plan) and return them.

If you wanted to employ leverage or to short sell – characteristic features of what hedge funds do – you therefore had to make sure that, legally, you weren't classed as an investment company open to the public at large. That's the reason hedge funds can't advertise, and why they can generally take money only from individuals who are 'accredited investors'. The US Securities and Exchange Commission's regulations define these as people with net assets of at least $1 million and an annual income of $200,000 or more. In practice, most hedge funds would have little interest in investors who only just reach those fairly modest thresholds (they haven't been raised since 1982). A new fund might accept a minimum investment of as little as $250,000, but established funds will usually demand much more – perhaps $1 million, sometimes even $10 million.

Over time, the restrictions on what regulated investment companies can do have gradually loosened, but hedge funds remain distinct from them. The most noteworthy difference is the fee structure. In addition to a management fee typically set at 2 per cent – which is a bit higher than the fees of most conventional investment firms – hedge funds also charge a performance fee, usually 20 per cent of profits, which has no real analogue in the mainstream investment world. (The performance fee is generally subject to a 'high-water mark': if the fund has lost money in previous years, it must recoup those losses before it can impose the fee.) A handful of especially favoured funds are able to charge even more: Renaissance Technologies, founded by a mathematician, James Simons, and based in East Setauket on Long Island's affluent north shore, is reported to charge investors in its Medallion Fund a 5 per cent management fee and a 44 per cent performance fee, though I haven't been able to confirm those figures.

To stop the performance fee from being an incentive to take wild punts, hedge fund investors generally want to be sure that the people who manage the fund have hefty investments in it – half a manager's net worth is the traditional requirement, though that seems to have eased recently – so that they suffer from losses as well as benefiting from gains. The combination of high fees and substantial personal investment means that the most successful managers can make huge sums. Each year, the investment magazine Alpha publishes estimates of top individual earnings. The 2007 list was headed by John Paulson of Paulson & Co., who earned $3.7 billion by betting that the value of securities backed by US sub-prime mortgages would collapse. He was followed by George Soros ($2.9 billion) and James Simons ($2.8 billion). These are figures far beyond even the most generous remuneration packages offered by banks or other public companies.

How do you get to run a hedge fund? Nearly all the managers I've met made their names in the big investment banks. Some simply want to make more money, but often their motives are more complex. A couple of years ago, one professional investor told me:

A lot of the people who are setting up the best hedge funds are . . . doing this for perhaps slightly ego-driven and political reasons as much as anything else. They're not doing it for the money: they've got their Bentley Continentals and their yachts . . . so they're going into it because they want to run something because they're never, ever going to be the guy that sits right at the top [of an investment bank] because they can't be bothered with the politics.

Anyone trying to set up a hedge fund will find their previous career invaluable. Their initial stake will come from the accumulated bonuses they have received, and they will have built networks of contacts. Financial markets aren't the atomistic, anonymous places portrayed in conventional economic models. Asked how he set up his fund, one manager told me: 'You call your friends and, you know, just talk through your ideas.' If they're persuaded by the ideas, those contacts might decide to invest in the fund themselves and they also pass you on to other potential investors: 'Eventually you kind of pitch to people who allocate capital and if they like the idea they put money in; if they don't then they send you on your way.' These investors will want to assess the personal characteristics of those pitching to them. Asked how he knew what proportion of managers' personal wealth was invested in their funds, one investor told me: 'It's a look-in-the- eye part of it.' Professional allocators of capital will often phone people they trust who have worked with the prospective founders of hedge funds. You'll get phoned up, said a well-established manager, and asked: '"Do you know so-and-so?" And if you say, "Oh actually he's a smart guy," that's good; if you say: "I'd rather not comment" . . . That's one of the ways it works, and because it's people coming from those five or six big companies' – the leading investment banks – 'the funds of funds have a fairly easy job of checking up.'

As the name implies, 'funds of funds' aggregate investors' capital and select which hedge funds it will be allocated to. Investors who use them pay a further layer of fees – typically a 1 per cent management fee and a 10 per cent performance fee – but avoid the onerous process of deciding which funds to invest in and having time-consuming face-to-face meetings with managers. Direct investment by the rich and their family offices has been falling as a proportion of hedge funds' capital. It formed more than half of it in the 1990s; now it's a little less than a third, according to research by International Financial Services London. (In case anyone reading this doesn't have a family office, I should explain that they help keep the rich rich, by managing investments and minimising tax, as well as dealing with matters such as the hiring and firing of staff.) Funds of funds now provide a third of hedge funds' capital, with the remainder coming from pension funds, endowments, foundations and so on.

Ultimately, of course, investors in hedge funds judge them and those who run them by their returns: 'Eventually just the numbers matter. The relationships matter for a little while,' was how one hedge fund manager put it. Investors want returns that are high and that ideally don't fluctuate too much, and many of them – especially such institutional investors as pension funds – are also looking for returns that aren't highly correlated with stock markets, because they're already heavily invested there. It makes for an excellent pitch if you can plausibly promise that your hedge fund's strategy will still be profitable when markets fall.

How do hedge funds make their money? What is generally regarded as the first of them was A.W. Jones & Co., set up in 1949. Jones had a PhD in sociology from Columbia but then became a financial journalist. His investment idea was what has become known as 'equity long/short'. By adding modest borrowing to, let's say, $100,000 of investors' money, Jones might buy $110,000 worth of the shares in companies he liked, while simultaneously short selling $40,000 of shares he thought might do badly. He was thus partially insulated ('hedged') against overall market movements. If the overall market fell, the shares he had bought (his 'long positions', in market terminology) would lose money, but his short positions would gain because buying back borrowed shares would now be cheaper.

Equity long/short is probably the single most common hedge fund strategy, at least among newcomers to the industry: it's a straightforward extension of the 'stock picking' practised by many conventional investment managers. Instead of simply avoiding shares that seem to have poor prospects, you bet against them by short selling them. Another relatively straightforward strategy is the 'carry trade'. This involves borrowing in a currency with low interest rates, such as the yen, and investing the proceeds in countries where interest rates are higher (Iceland, Hungary and New Zealand have been especially popular in recent years). It sounds like a free lunch, but of course it isn't: a rise in the value of the yen or a fall in the Icelandic króna or Hungarian forint can wipe out your profit or turn it into a loss. Carry traders have to be ready to liquidate their positions very quickly indeed when exchange rates start to move adversely, and their doing so can greatly amplify those movements. This autumn's financial crisis has been marked by large increases in the value of the yen, almost certainly caused in part by the liquidation of carry trades.

Other strategies are more specialised, and the alumni of the top investment banks are more likely to be found pursuing them than sticking to carry trades. One example is 'fixed-income arbitrage'. 'Fixed-income' refers to bonds, which usually pay set amounts to their holders, and to financial instruments similar to bonds; 'arbitrage' means the exploitation of price discrepancies. This was the field of operation of Long-Term Capital Management (LTCM), the hedge fund at the heart of a serious, albeit short-lived, global crisis in 1998. While equity long/short requires only limited borrowing, fixed-income arbitrage needs higher levels of leverage. The discrepancies being exploited are small (typically corresponding to a difference in rates of return of a fraction of a percentage point), so the rates of profit are attractive only if they can be boosted by financing, primarily by borrowing.

LTCM aside, specialist strategies such as fixed-income arbitrage generally attract little public attention. 'Activist' hedge funds such as Nathaniel Rothschild's Atticus are more likely to get into the newspapers, especially in Germany, where what they do is often controversial. They buy a company's shares and then press for changes in the way the company is structured or run. Even more prominent are 'macro' funds like Soros's Quantum Fund. These seek to predict and profit from large-scale economic changes, such as a substantial rise or fall in the US dollar or other currency. The most famous hedge fund trade of them all was the Quantum Fund's huge and enormously profitable September 1992 bet that the pound would fall in value. Soros's $10 billion short position in sterling was a major source of pressure on the currency, and helped precipitate 'Black Wednesday', the pound's forced departure from the Exchange Rate Mechanism.

In their everyday operations, hedge funds rely heavily on two other kinds of organisation. One is hedge fund administrators. Many of these are based in Dublin: Ireland has offered low tax rates in its push to attract this business. Administrators keep track of a fund's trades, handle its accountancy and matters such as the movement of investors' money into and out of the fund, and perform regular valuations of the portfolio. This last is crucial because many hedge funds take positions in financial instruments that aren't traded on organised financial exchanges such as the London Stock Exchange, and for which fully reliable market prices are therefore not always available. Administrators are supposed to serve as an independent check that funds aren't boosting their performance fees by recording inflated valuations, or using price estimates that 'smooth' profits – make them appear less volatile and thus more attractive.

Most hedge funds' trading desks are now continuously linked electronically to their administrators. This helps make it possible to manage huge portfolios with small numbers of staff, which is a major reason the sector has grown so fast: as recently as 1990, there were fewer than a thousand funds worldwide, managing what now seems a trifling $25 billion.

The second organisation on which a hedge fund depends is a prime broker. These are usually big international banks, which typically hold funds' money and act as custodians of their portfolios, transferring money or securities when trading demands. (Again, all this is now automated, so that funds' computer systems are directly linked to those of their prime brokers.) Prime brokers are a major source of leverage: they lend to funds, often using securities in the fund's portfolio as collateral. A prime broker is also usually the first port of call when a fund is selling short and needs to borrow the securities in question. Indeed, a fund's prime broker, or other investment banks, will often in effect do some of its trading for it, by means of what's called a 'total return swap'. For example, hedge funds weren't initially able directly to trade the European carbon dioxide allowances that I discussed in the LRB on 5 April 2007: if they had, they would have risked no longer qualifying for the Investment Management Exemption in UK tax law. (Introduced in 1995, the exemption protects the profits of offshore funds with British-based managers from UK taxation.) So a bank would hold a position in carbon for a fund, passing the gains and losses on to it and charging what was in effect a fee for doing so.

Prime brokerage has been a major source of income for the leading investment banks in recent years; that is one of the reasons their fate is so tightly interwoven with that of hedge funds. This autumn, the focus of attention has been on the troubles of banks, but hedge funds also have their vulnerabilities. The most obvious threat is that investors might withdraw their capital, which can happen after even short periods of poor performance. As one manager told me: 'You've had one or two bad months and you've got a redemption notice in.' It takes time for investors to get their money out – a requirement for 90 days' notice is common, and some funds successfully insist on lengthier 'lock-up' periods in which no redemptions are permitted – but once redemptions begin it can be hard for a manager to stop them. The need to liquidate positions to release the money required to meet redemptions can cause further losses, sparking further redemptions and a spiral of decline. In the interconnected, gossipy world of the financial markets, a hedge fund known to have suffered or to be facing significant redemptions can quickly come to seem very unattractive. Speaking of the leading partner in one hedge fund, a fund-of-funds manager told me: 'He's in a Regus office.' (Regus rents office space in its business centres on a short-term basis.) My informant was emphatic that I wasn't to name the unfortunate man: the fact that his fund could no longer pay rent at Mayfair levels would be seen as too damning.

Hedge funds can be drained of capital in other ways too. If you're doing something more complicated than just buying shares or bonds – and few hedge funds restrict themselves to that – trades often take the form of a contract between two parties, which typically demands that collateral (cash or securities) be transferred between them, often daily, as market prices fluctuate in favour of one party or the other. These collateral transfers are a sensible precaution because they reduce the risk that someone will default on their contract at a point at which they owe a lot of money: if they do, you can at least keep the collateral they've had to deposit with you. The result of the procedure, however, is that if market prices move against a hedge fund's positions it faces increasing demands for collateral. It's far from rare for managers to be forced to abandon their positions and incur the consequent losses, even in cases such as fixed-income arbitrage, in which it's pretty certain that the adverse price movements will be temporary.

Prime brokers, too, can help kill hedge funds by reducing or withdrawing the credit available to them. If you're leveraged, and your source of borrowing dries up, you will usually have no alternative but to liquidate your positions, again often at a loss. Gillian Tett of the Financial Times reports recent quiet conversations in which central bankers have sought to persuade prime brokers not to take away funds' access to credit. The concern is with risks not to individual funds and their investors but to the financial system as a whole. The sector recorded disappointing results in the first half of 2008, and this autumn's crisis has meant sharp losses for many funds. The restrictions on short selling worsened matters by making many of their strategies difficult or impossible to implement, and their investors now seem to have started to feel that cash or government bonds are the only safe havens.

So large-scale redemptions have begun. On 27 October, Alpha suggested that over the previous month hedge funds might in aggregate have received redemption notices totalling $500 billion. It's not the sort of number one can be sure of, but if it's roughly right it means that by the end of January a quarter of the sector's capital base will have drained away. In that context, it may not be over-alarmist for Emmanuel Roman, joint chief executive of hedge fund managers GLG Partners, to have warned an industry meeting that almost a third of hedge funds faced collapse.

That would be serious enough if the resulting fire-sale liquidations of positions were spread evenly across the financial system, but they're unlikely to be. Trading by hedge funds tends to cluster: in part because those following the same general strategy will often light on the same opportunities (the number of attractive fixed-income price discrepancies, for example, is finite); in part because there is lots of chatter in markets about potentially profitable trades. You might think that if you'd discovered such a trade you would want to keep it to yourself, but often that's not so. Prudence dictates that a bank or hedge fund shouldn't devote too much of its capital to a single trade – and, unfashionable as it may be to say so, most banks and funds do try to control the risks they take (which doesn't mean they always manage to). Once you've devoted as much of your capital to a trade as is prudent, there's nothing to be lost by telling others about the opportunity, and often quite a bit to be gained. If you've bought an asset you believe to be undervalued and short sold a similar asset you believe to be overvalued (and much hedge fund trading boils down to that), you want others to do the same. If they do, that will help boost the price of the asset you've bought and decrease the price of the asset you've sold short.

Situations in which many hedge funds have similar or identical positions are called 'consensus trades' or 'crowded trades'. Every so often these cause sudden, huge movements in prices that have little or no basis in economic fundamentals such as the prospects for the firm, sector or country at issue. In the last week of October, for example, Volkswagen briefly became the world's most valuable company by market capitalisation, but not because investors were suddenly struck by how attractive its cars were or by optimism about the prospects of the motor industry. Rather, a consensus trade had gone disastrously wrong. Volkswagen's ordinary shares had started 2008 half as expensive again as its preference shares, and the difference had soared during the year. The holders of preference shares can't take part in shareholder votes, and they receive a fixed rate of interest rather than the fluctuating dividends offered by ordinary shares, but both kinds of share are stakes in the same firm, and it seemed reasonable to conclude that the growing difference between their prices was an anomaly that would correct itself. So a large number of hedge funds – some say as many as a hundred – bought Volkswagen's preference shares and short sold its ordinary shares. These matched long and short positions meant that the funds were insulated from overall fluctuations in the company's fortunes: it 'was meant to be a low-risk trade', as one London fund manager told the Financial Times.

Unfortunately, Porsche, which already owns 42.6 per cent of Volkswagen's ordinary shares, had quietly been increasing its stake by buying call options (a call option is a contract that gives you the right to buy an asset at a fixed price). If it turns all those options into Volkswagen shares, Porsche will own 74.1 per cent of them; the government of Lower Saxony owns a further 20.2 per cent that it's very unlikely to sell. That would leave only 5.7 per cent of Volkswagen's ordinary shares available to be traded on the market. However, hedge funds and other traders had between them short sold shares equivalent to 12.9 per cent of the total, and in consequence were obliged to buy and return them. They understandably panicked, and the resultant frantic efforts to buy Volkswagen shares caused the price to quadruple.

The forced unwinding of a consensus trade is not a pleasant business. Initial losses increase demand for collateral and can lead to the issuing of redemption notices, and prime brokers and others may restrict lending to the hedge funds involved. Weaker funds have to liquidate their positions, causing further losses and the onset of a downward spiral. Losses incurred in one trade can contaminate others, as funds have to sell assets across the board. The prices of seemingly unrelated assets start to move in lockstep, undermining the apparent safety that diversification provides. This was the process that led to the 1998 crisis. LTCM had only a small stake in the consensus trade that started the downward spiral (investment in rouble-denominated Russian government bonds, on which Russia defaulted on 17 August), but was fatally damaged by the highly correlated adverse price movements that ensued around the globe and across a wide range of assets.

No single hedge fund seems currently to be in as pivotal a situation as LTCM was in 1998, but if the sector continues to shrink as fast as recent reports suggest it will, then the liquidation of trading positions is likely to lead to further violent price movements and market disruption, particularly where there are consensus trades. Paradoxically, though, the dramatic events of this autumn may lead, over the next few years, to an even greater role for the hedge funds that survive. With so many banks having been bailed out by the world's taxpayers, they will be under considerable pressure from governments and regulators to concentrate on their core functions (receiving deposits, making loans to individuals and businesses, processing payments etc) and to reduce proprietary trading – that is the trading of financial instruments in order to make a profit for the bank, not to serve the needs of customers. Even banks that haven't needed to be bailed out are moving in this direction: on 4 November, J.P. Morgan announced it was closing its global proprietary trading unit. As banks retreat from trading risky financial instruments, a potentially very profitable space will open up for those still prepared to do so, and hedge funds will step in to fill it.

Well, get a better understanding now ??? No ??? Don't worry, you are not the only one...

World's Worthless Money

10 million Zimbabwean Dollars = US$4

If you think the American economy is bad, take heart that it’s nowhere near the ultra-super-hyperinflation in Zimbabwe, once one of the richest countries in Africa. The country’s central bank has recently issued a Z$100 billion note (yes, Z$100,000,000,000). So, what would a Z$100 billion note buy you? About two loaves of bread (it won’t even get you lunch - you’d need at least Z$250 billion for lunch).

So far this year, the country ravaged by hyperinflation has been forced to print 100-million, 250-million and 500-million notes in rapid succession. All of them are now almost worthless. has become common now for Zimbabweans to talk of their daily expenses in trillions (one trillion is 12 zeros).

500,000 vietnamese Dongs = US$30

An early-1980s U.S. embargo hobbled exports, leading to price controls and the printing of excess currency.

100,000 Indonesian rupiah = US$11

During the 1997 Asian financial crisis, the rupiah lost 80 percent of its value within months, sparking riots in Jakarta (and soon ending President Suharto's 32-year rule).

50,000 Iranian Rial = US$5

Since the 1979 revolution, Iran's inflation rate has hovered around 15 percent, thanks in part to ever-rising oil prices.

50,000 São Tomé Dobra = US$3.47

This African island nation's economy is tied to the volatile price of its chief export, cocoa, and is measured against its trading partners' robust euro.

10,000 Guinean Francs = US$2.33

In 2002, the mineral-rich African country refused to implement reforms mandated by the International Monetary Fund; foreign cash dried up, and the central bank printed too much money.

Roads To Riches

Why investors are clamoring to take over America's highways, bridges, and airports—and why the public should be nervous

Steve Hogan was in a bind. The executive director of Colorado's Northwest Parkway Public Highway Authority had run up $416 million in debt to build the 10-mile toll road between north Denver and the Boulder Turnpike, and he was starting to worry about the high payments. So he tried to refinance, asking bankers in late 2005 to pitch investors on new, lower-interest-rate bonds. But none of the hundreds of investors canvassed was interested.

Then, one day last spring, Hogan got a letter from Morgan Stanley (MS ) that promised to solve all of his problems. The bank suggested Hogan could lease the road to a private investor and raise enough money to pay off the whole chunk of debt. Now Hogan, after being inundated with proposals, is in hot-and-heavy negotiations with a team of bidders from Portugal and Brazil. "We literally got responses from around the world," he says.

In the past year, banks and private investment firms have fallen in love with public infrastructure. They're smitten by the rich cash flows that roads, bridges, airports, parking garages, and shipping ports generate—and the monopolistic advantages that keep those cash flows as steady as a beating heart. Firms are so enamored, in fact, that they're beginning to consider infrastructure a brand new asset class in itself.

With state and local leaders scrambling for cash to solve short-term fiscal problems, the conditions are ripe for an unprecedented burst of buying and selling. All told, some $100 billion worth of public property could change hands in the next two years, up from less than $7 billion over the past two years; a lease for the Pennsylvania Turnpike could go for more than $30 billion all by itself. "There's a lot of value trapped in these assets," says Mark Florian, head of North American infrastructure banking at Goldman, Sachs & Co (GS ).

There are some advantages to private control of roads, utilities, lotteries, parking garages, water systems, airports, and other properties. To pay for upkeep, private firms can raise rates at the tollbooth without fear of being penalized in the voting booth. Privateers are also freer to experiment with ideas like peak pricing, a market-based approach to relieving traffic jams. And governments are making use of the cash they're pulling in—balancing budgets, retiring debt, investing in social programs, and on and on.

But are investors getting an even better deal? It's a question with major policy implications as governments relinquish control of major public assets for years to come. The aggressive toll hikes embedded in deals all but guarantee pain for lower-income citizens—and enormous profits for the buyers. For example, the investors in the $3.8 billion deal for the Indiana Toll Road, struck in 2006, could break even in year 15 of the 75-year lease, on the way to reaping as much as $21 billion in profits, estimates Merrill Lynch & Co. (MER ) What's more, some public interest groups complain that the revenue from the higher tolls inflicted on all citizens will benefit only a handful of private investors, not the commonweal (see BusinessWeek.com, 4/27/07, "A Golden Gate for Investors").

There's also reason to worry about the quality of service on deals that can span 100 years. The newly private toll roads are being managed well now, but owners could sell them to other parties that might not operate them as capably in the future. Already, the experience outside of toll roads has been mixed: The Atlanta city water system, for example, was so poorly managed by private owners that the government reclaimed it.

Such concerns weigh on the minds of public officials like Hogan. He intends to negotiate aggressively with corporate suitors and has decreed that the buyer must share future toll-hike revenues with the local governments that built the highway. But with the market for infrastructure still in its infancy, every deal is different. The ideal blend of up-front payment, toll hikes, and revenue sharing hasn't been found.

FLOOD OF MONEY
The nascent market in roads and bridges in the U.S. follows the shift toward privatization in Europe and Australia that began with British Prime Minister Margaret Thatcher in the 1980s. It took longer to develop in the U.S. because of the $383 billion municipal bond market, which has been an efficient source of capital for governments over the years.

But with the explosion of money flowing into private investments recently, fund managers have been exploring the fringes of the investing world in search of fresh opportunities. Now a slew of Wall Street firms—Goldman, Morgan Stanley, the Carlyle Group, Citigroup, and many others—is piling into infrastructure, following the lead of pioneers like Australia's Macquarie Group. Rob Collins, head of infrastructure mergers and acquisitions at Morgan Stanley, estimates that 30 funds are being raised around the world that could wield as much as $500 billion in buying power for U.S. assets.

Many investors think of infrastructure investing as a natural extension of the private equity model, which is based on rich cash flows and lots of debt. But there are important differences. Private equity deals typically play out over 5 to 10 years; infrastructure deals run for decades. And the risk levels are vastly different. Infrastructure is ultra-low-risk because competition is limited by a host of forces that make it difficult to build, say, a rival toll road. With captive customers, the cash flows are virtually guaranteed. The only major variables are the initial prices paid, the amount of debt used for financing, and the pace and magnitude of toll hikes—easy things for Wall Street to model. "With each passing week, there are more parties expressing unsolicited interest in some kind of a financial transaction that will involve one of our assets directly or indirectly," says Anthony R. Coscia, chairman of the Port Authority of New York & New Jersey.

Firms are even beginning to market infrastructure to investors as a separate asset class, safe like high-grade bonds but with stock market-like returns—and no correlation with either. The Standard & Poor's 500-stock index has returned about 10% a year, counting dividends, since 1926. Bonds have returned about 5%. Firms say infrastructure will beat both, and without having to sweat out market dips along the way. That's a huge selling point at a time when stock, bond, and commodity markets around the world are becoming increasingly interconnected.

Investors can't get in fast enough. They recently deluged Goldman Sachs with $6.5 billion for its new infrastructure fund, more than twice the $3 billion it was seeking. "We're using [infrastructure] as a fixed-income proxy," says William R. Atwood, executive director of the Illinois State Board of Investment, who plans to invest $600 million to $650 million, or 5% of its portfolio, in infrastructure funds over the next three years. "We're hoping to get 11% to 12% returns and lower risk." Pension funds in particular like the long-term investment horizons, which match their funding needs well. Infrastructure "delivers similar yield expectations to high-yield bonds and real estate, with less risk," says Cynthia F. Steer, chief research strategist at pension consulting firm Rogerscasey.

On the other side of the bargaining table from the investment firms sit struggling governments suddenly amenable to the idea of selling control of assets to solve short-term problems. The burden of maintaining roads, bridges, and other facilities, many built during the 1950s, is becoming difficult to bear. Federal, state, and local governments need to spend an estimated $155.5 billion improving highways and bridges in 2007, according to transportation officials, up 50% over the past 10 years. And that's hardly the only obstacle they face. In 2006 alone, states increased their Medicaid spending by an estimated 7.7%, to $132 billion. And state and local governments could be on the hook for up to $1.5 trillion in retiree liabilities, estimates Credit Suisse. At the same time, politicians find it difficult to raise taxes. Chicago's former chief financial officer, Dana R. Levenson, sums up the situation: "There is money to be had, and cities need money." U.S. Representative Chaka Fattah, a Pennsylvania Democrat who is running for mayor of Philadelphia, proposes to privatize the Philadelphia International Airport and use the proceeds to fund poverty programs—a much easier sell than a tax increase.

The combination of eager sellers and hungry buyers is shaking loose public assets across the country. The 99-year lease of the Chicago Skyway that went for $1.8 billion in 2005 was the first major transaction. Last year came the Indiana deal. Now states and cities are exploring the sale of leases for the turnpikes in New Jersey and Pennsylvania, a toll road in Texas, Chicago Midway Airport, and several state lotteries. Suddenly politicians around the country are wondering how much cash they might be sitting on. Based on the going rate of about 40 times toll revenues, the iconic Golden Gate Bridge could probably fetch $3.4 billion were California interested in selling. The Brooklyn Bridge? If permission were granted by New York City to charge the same tolls as the George Washington Bridge, a private owner might shell out as much as $3.5 billion for it.

PAVEMENT PRICING
But there's a downside to the quick cash: planned toll hikes that are usually quite aggressive. Chicago's Skyway could see car tolls rise from $2 in 2005 to $5 by 2017. For some perspective, if a similar scheme were applied to the Pennsylvania Turnpike during its 67 years of existence, the toll for traveling from the Delaware River to the Ohio border would be as much as $553 now instead of $22.75. Macquarie, which teamed up with Spain's Cintra to purchase the Chicago Skyway and the Indiana Toll Road, underscored the governmental trade-off during a presentation at the recent White House Surface Transportation Legislative Leadership Summit: "More Money or Lower Tolls." In an extreme scenario, governments could begin to sell properties that aren't tolled to private owners who will impose fees.

Of course, tolls won't go to the moon if they result in dramatic reductions in traffic. For example, investment firm NW Financial Group estimates that if the Chicago Skyway pricing scheme were applied to New York's Holland Tunnel over its 80 years, it would cost $185 to travel through it instead of the current $6. "No one will pay that much," says Murray E. Bleach, president of Macquarie Holdings (USA) Inc. "It's just not going to happen."

Still, Indiana legislators became so alarmed by promised hikes that they changed the terms before the toll road lease was completed. The state set aside $60 million to pay the difference in tolls for up to two years or until the buyers install electronic tolling equipment. After that, the fee for cars with electronic toll cards will rise to $4.80 over the full 157 miles, while the fee for cars without the cards will soar to $8. After 2010, both rates will rise each year by 2%, the pace of inflation, or the rate of economic growth, whichever is highest.

The certainty of future toll hikes doesn't jibe with the uncertainty of service quality. Assets sold now could change hands many times over the next 50 years, with each new buyer feeling increasing pressure to make the deal work financially. It's hardly a stretch to imagine service suffering in such a scenario; already, the record in the U.S. has been spotty. In 2003 the city of Atlanta ended a lease of its water system after receiving complaints about everything from billing disputes to water-main breaks. The city wrestled with the owner, United Water Inc., over basics like the percentage of water meters it should monitor. Both parties acknowledge that the contract lacked specifics. In the end, "we didn't believe we were getting performance," says Robert Hunter, commissioner for Atlanta's Dept. of Watershed Management. "I don't believe the city will ever look at privatizing essential services again." United Water says the contract wasn't financially feasible because Atlanta's water system was in worse shape than the city had represented.

A CHAMPION'S PERSPECTIVE
States are wrestling with other public policy issues, too. Bankers say New York could reap a combined $70 billion for long-term leases on a bunch of assets, including the state's lottery, the Tappan Zee Bridge, and the New York State Thruway. New York state officials have looked into the option of leasing the lottery, which itself might command $35 billion—a sum that could substantially upgrade, say, New York's higher education system. The downside? The state would probably have to remove constraints on the lottery's marketing designed to discourage people from gambling more than they can afford. If the state insists on keeping the constraints in place, it could reduce the value of selling it.

Chicago's experience shows the possibilities and the pitfalls of privatization. Former CFO Levenson has been one of the movement's biggest champions. He was an architect of the Skyway deal, which kicked off the market. Then he sold control of parking garages to Morgan Stanley for $563 million. Next, he started shopping around a lease for Midway Airport that could fetch as much as $3 billion. And soon the city hopes to auction off rights to operate some recycling plants. Levenson dismisses critics who argue that he has dumped prized assets. "This is not like where a person goes in and buys a loaf of bread from a store and walks out with that loaf of bread," he says. "Some entity, we expect, will make an offer to lease the Midway Airport for 75 to 99 years, and the following day I'm pretty sure it will still be there."

Wearing a crisp suit and stylish eyeglasses, Levenson looks like the Wall Streeter he once was, working for Bank One Corp. and Bank of America Corp. (BAC ) before taking the Chicago city job in 2004. In April he returned to banking: As a managing director at the Royal Bank of Scotland Group (RBS ), he now beats the bushes for infrastructure deals. Levenson doesn't understand how local governments can afford not to put public works up for sale. Thanks to the 99-year lease for the Skyway, Chicago has paid off its debt and handed over $100 million to social programs like Meals on Wheels. Plus, says Levenson, it's earning as much in annual interest on the $500 million it has banked from the transaction as it used to earn from running the Skyway ($25 million).

In some ways, Levenson argues, the city still has control over the highway. The agreement with the new owners spells out guidelines in mind-numbing detail, dictating everything from how quickly potholes must be filled (24 hours) to how rapidly squirrel carcasses must be removed (8 hours). If Macquarie and Cintra violate those conditions, the city can take back the road.

So far, the buyers have strictly adhered to the rules. At 7 a.m. on a Wednesday in March, five workers begin another day at the Chicago Skyway's Snow Command. On their to-do list are potholes to be checked and cracks to be sealed. Juan Rodriguez used to patrol the freeway for Chicago city. Today, he cruises the road for private owners. He discovers some potholes have grown unacceptably large because of salt that was spread the previous night. There's some tire debris that must be removed, and a disabled vehicle holding up traffic.

A SMOOTH RIDE?
In the past, Rodriguez says, he had to write out a ticket for each problem, which would be added to a long list of chores. Addressing problems often took days, Rodriguez recalls. But by 10:25 a.m., all of this morning's issues on the Skyway's 7.8-mile stretch of pavement are resolved. "The new owners are taking the Skyway to a whole new level," he says.

They've certainly spent money on improvements. The message "a clean workplace is a happy workplace" is scrawled on a whiteboard in a freshly painted and ventilated garage where workers meet. There's electronic tolling, which didn't exist before. A bunch of new lanes are under construction. The investments seem to be paying off: Since taking over two years ago, the Skyway's operators estimate traffic has risen 5%.

It's all encouraging, except that Chicago "probably could have gotten more without privatizing," according to Dennis J. Enright, a principal and founder of NW Financial. His firm's analysis shows that Chicago could have done a lot better by handling the whole deal itself. It could have raised tolls and sold tax-exempt municipal bonds backed by the scheduled hikes. That would have given the city the up-front cash it needed while preserving some of the income from the toll hikes. Instead, that money will go to Macquarie and Cintra.

Meanwhile, the higher tolls will take a big bite out of lower-income people's wallets. "You have to ask yourself if you want roads that used to be considered a public service to be rationed by income class," says Princeton University economics professor Uwe E. Reinhardt. Chicago says it hasn't received any formal complaints from citizens, though two different drivers recently went to extremes to avoid tolls, says Skyway maintenance manager Michael S. Lowrey. When the new owners introduced free towing for broken-down vehicles, the drivers called the Skyway for help, claiming to be stranded. After workers hauled the vehicles past the tollbooths, they hopped in their cars and sped away.

For workers, the privatization wave has wrought many changes. Skyway toll takers used to be full-time city employees with rich benefits. Now most are part-time independent contractors without benefits. Brian Rainville, executive director of the Chicago Teamsters Joint Council 25, helps manage the union's pension fund. When he listened to a recent pitch from a pension consultant about infrastructure funds, it sparked a realization: The returns he might generate for his pensioners could be canceled out by the union's shrinking number of contributors. "It's pretty obvious that it's not sound fiscal policy for the [pension] fund to undercut the people it's serving," Rainville says.

Pushback against private investors is now playing out in different ways elsewhere. In Pennsylvania, the state turnpike commission is going head-to-head with private bidders for the right to operate the state's 537-mile toll road. Pennsylvania desperately needs cash to repair its nearly 6,000 structurally deficient bridges. Some pundits expected Pennsylvania Governor Edward G. Rendell to propose hikes in gas taxes and other fees to fund the projects. But in December, Rendell unexpectedly announced plans to privatize the turnpike. Timothy J. Carson, vice-chairman of the commission, scrambled to submit an expression of interest for the turnpike to continue to run itself. His proposal is being judged against many others, including those from big Wall Street firms.

Carson isn't dissuaded by arguments that investors are better qualified to run turnpikes profitably. "There's no magic here," he says. "These [deals] are largely driven by one factor: the permitted toll increases." Carson says the state doesn't need to hand over the turnpike to private owners. Historically, he says, the state wanted the turnpike to collect only enough money to break even. But it could just as easily adopt its own toll-hike schedule. The state could also charge tolls on more roads. In other words, the public could remain in control simply by changing the turnpike's mission. That would ensure that the benefits of the toll hikes were spread throughout the populace, says Carson.

Pennsylvania's isn't the only turnpike authority exploring the possibility of bidding for roads. The North Texas Tollway Authority calculated in March that it would have valued a partially constructed 25-mile stretch of highway near Dallas 26% more than a private investor had bid. Now it's considering making a formal bid. And on Apr. 11, the Texas House of Representatives passed an amendment by a vote of 134 to 5 to impose a two-year moratorium on privatizing state toll roads. "We need to put the brakes on these private toll contracts before we sign away half a century of future revenues," said representative Lois W. Kolkhorst, who proposed the bill. A similar bill was passed in the state senate on Apr. 19.

With so much money at stake and so many options available to states, it's impossible to know how the great infrastructure craze may play out. But this much is certain, says Pennsylvania's Carson: "People are willing to pay more than they are currently being charged. The only question is to what extent you're willing to take advantage of that."