Let's take an example. Blackstone Group (NYSE: BX), the largest private equity firm, acquired Hilton Hotels (NASDAQ: HLNQ) by putting down 20% and borrowing $20 billion dollars. The problem was that it wasn't Blackstone that did the borrowing, it was Hilton. Now Hilton is in trouble and cannot repay its huge debt. To avoid embarrassment, Blackstone agreed to reduce Hilton's debt by $5 billion.

In another deal, Blackstone bought Travelport. Blackstone laid off 10% of the workforce and 20% retired voluntarily. What did Blackstone do? Why it simply piled on more debt, effectively paying back the $1.1 billion it had invested.

According to Josh Kosman, author of the forthcoming book The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis, "If the companies eliminate half of their workforces, the impact would be 87% greater than the jobs lost under NAFTA and about 2/3 of the 2.6 million jobs lost in 2008."

Kosman argues that between 2010 and 2015, half of the private equity firms employing 3.75 million people will collapse.

What If Blackstone and the other private equity firms go to the mat? If you think it can't happen, just look at Long Term Capital, Lehman Bros., Bear Stearns, and Merrill Lynch. The Fed pledged $11.2 trillion dollars to bail out the bankers. Would it do the same thing again?

Before you invest, it is wise to look at the debt-to-equity ratio. Some of the best plays are companies that have little or no debt. They can survive a downturn better than those with high debt. When times are tough, sales and net profit decline. That leaves little money to service a company's debt. Recently, CIT lacked to money to service its debt and had to file bankruptcy.