Private equity giant KKR & Co. (NYSE: KFN) posted a $1.2 billion loss last year -- compared to pretax net income of $815 million the year before. This is KKR's first loss in at least five years.

Bloomberg pins the blame on a drop-off in leveraged buyout transactions. A $1.4 trillion market in 2006 and 2007, only $212 billion was spent on takeovers last year, which was bound to put a dent in KKR's top and bottom lines.

Goldman Sachs (NYSE:GS) has raised $10 billion to invest in existing LBO loans. According to the FT, the investment house plans to make money by "taking advantage of a gap in the financing markets created by the credit crisis." In other words, Goldman believes that the problems in the lending market have driven leveraged buy-out loans below their logical values. Panic has created opportunity.

While the news may be good for banks that hold some of these loans and do not want to write them off if they fail, Goldman is making a bet beyond the fact that LBO loans may be selling at a discount now. Goldman is essentially betting the economy will get better in the fairly near-term.

For many of these loans to perform well, the economy has to avoid a deep recession. Even loans with reasonable credit ratings, debt in companies with strong prospects and earnings, could fail if the general business conditions deteriorate into a prolonged period of negative growth. Under such circumstances, Goldman could pick relatively safe debt and still get burned.

Someone at Goldman sees light at the end of the economic tunnel.

Douglas A. McIntyre is an editor at 247wallst.com.

It may all be doom and gloom in the U.S., but the heads of two of Europe's largest banks believe that the economy is over the worst of it.

The head of France's biggest listed bank, BNP Paribas, told Italy's La Repplica newspaper, "The worst should be over and I think that from the second half onwards the crisis should normalize: that is, the phase of exceptional turbulence on the markets should end."

Over the the UK, the news was nearly as good. The head of Barclays (NYSE: BCS), the biggest bank in the UK said that the 4.5 billion pounds the bank had raised was adequate to get it though the crisis, according to The Telegraph.

Both men may be bank CEOs, but they may be wrong. A growing number of analysts see bank and brokerage earnings getting worse in the second quarter and even into the second half of the year. The primary reasons behind growing financial company balance sheet problems, especially the mortgage crisis and LBO loans, may be becoming more troubled and not less.

If the economy tips into a deep recession, banks will find themselves further damaged by loans from every sector going into default. That means more write-offs, which means more raising of capital and further shareholder dilution.

CEOs at big banks were singing the same tune in May. It turned out not to be true.

Douglas A. McIntyre is an editor at 247walls.com.

Of course, the subprime crisis is a key element of the credit crunch. But there has also been another force: the huge build up of leveraged loans for mega buyouts.

Well, with the help of sovereign wealth funds -- and even some private equity firms, like TPG -- the subprime problem appears to be improving. And, interestingly enough, it looks like banks are also effectively dealing with the leverage loan overhang. This according to a piece in FinancialNews.com.

Basically, the backlog is now at $91 billion (which is a drop of nearly 60% so far this year). But we are already seeing signs that banks are opening up to new loans, such as with Basell's buyout of Lyondell Chemical Company. The major banks need the deal flow from private equity firms because of the juicy fees. So it's no surprise that we've seen a lot of action in getting things moving again.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates MergerBook.com.

Pay the break-up fee. Don't make that next LBO loan. That is what many legal advisers are telling the largest banks. Better to pay out the fee than take on loans which could lose a significant portion of their value and could lead to more big write-offs.

A partner at a large private equity firm told the FT, "The banks have so many issues with their balance sheets that they are considering a new policy."

The idea may sound good, but it isn't.. If banks walk, they could face shareholder suits from owners of the companies which have been stiffed in the LBO process. But, more importantly, the action would drive a wedge between banks and their large corporate clients that could last for years. Corporate banking profits go well beyond providing buyout loans.

Acting in bad faith with one of the biggest customer bases at big banks may save money now, but is the alienation of corporate customers worth it?

Douglas A. McIntyre is an editor a 247wallst.com.

It has looked like LBO loans were going to be hard for banks to syndicate to institutional investors. They tend to be fairly risky because the companies taken private often have to do very well to cover the debt service. Concerns about that happening in a recession are growing.

All of this means that big money center banks are being stuck with the loans. Since they are almost certainly worth less than their face value, that could lead to another round of write-downs at banks.

According to The Wall Street Journal, "with the prices of existing loans tumbling, investors have little incentive to buy new loans unless they are sold at steep discounts, something banks are reluctant to do." JPMorgan (NYSE: JPM) held $26.4 billion in LBO loans at the end of last year. Other large banks probably have similar amounts on their balance sheet. Many of these will be sold for 90 cents on the dollar, if they get sold at all.

Banks may have another series of financial problems just around the corner.

Douglas A. McIntyre is an editor at 247wallst.com.

Shareholders at United Rentals (NYSE: URI) have a right to be mad. Hedge fund Cerberus Capital Management offered to buy the company. Shares rose from about $27 to over $34.

Then Cerberus walked. United Rental stock fell to $20.76 and has not recovered much. The entire matter headed to court. The legal battle was to begin today in Delaware Chancery Court. That has been delayed while the two sides talk.

Cerberus said that it was within its right to break off the contract. According to The Wall Street Journal, "the delay could help United's flagging stock price, as well as clear up some of the negative public perception of Cerberus, a Wall Street buyout shop that provided little detail for why it walked away from its agreement."

In other words, it may have been in the financial interests of Cerberus to walk out, but its may be a shaky legal ground.

Private equity firms have broken a number of these buyouts now, and, in some cases, contracts allowed them to do so. The court system is likely to catch up to them at some point soon. If settlement talks with United do not work out, it may be in this case.

Just one announcement that an LBO shop has had to pay hundreds of millions in damages would send a real shudder through the industry.

Douglas A. McIntyre is an editor at 247wallst.com.

You think subprime is a mess? We may have another big-time problem -- the leveraged buyout (LBO) binge. This week's Barron's [a paid publication] has a good piece on the matter.

Private equity firms tend to focus on mature companies, which produce lots of cash flows. There is usually a good amount of cost-cutting as well. But for the private equity firms to make real money, they need to pile on the debt. This is fine -- so long as there is enough cash flow.

Unfortunately, it looks like the U.S. economy is slowing down. As a result, some LBO deals may fall apart because they can't meet debt payments.

Wall Street is already getting nervous. For example, Barron's points out the sluggish bond prices for companies like Realogy, Swift Transportation, Linens 'n Things, Claire's Stores and Dollar General. Some buyout deals are even trading at about 50 cents on the dollar.

All in all, we may see wipe-outs of the equity stakes for private equity firms. It's a good bet that the returns -- for 2008 to 2009 -- will pale in comparison to the boom times.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

BusinessWeek reports that the value of private equity deals tumbled 68% from the second quarter to the third as a liquidity crisis slashed the availibility of credit that makes such deals possible. While the absence of deals from the business headlines has been obvious, the extent of the damage is now clear.

The statistics are startling. Worldwide, there were just three buyouts of $1 billion or more during September, 10% of the 30 such deals reported in May. The trend was global, although it was most severe in the U.S. Global M&A in the third quarter slowed to $992.1 billion, down 43%, from $1.7 trillion a year earlier. The third quarter this year was still 24% higher than the volume of $799.5 billion during the third quarter of 2006. U.S. deal volume in fell nearly 50% during the third quarter, to $308 billion, down from $606 billion in the second quarter. But U.S. deal volume for the quarter was up 13%, from $274.1 billion a year earlier.

What's next? If the credit markets can find a way to reprice risk that's acceptable to private equity firms, acquisition targets, and investors in private equity loans then the deal business could revive. The recent closing of KKR's acquisition of First Data suggests that this is possible. Most likely, only the most conservatively structured deals will make it through this tighter credit sieve.

That means deal volume will not return to where it was and that investment banks -- which have invested so heavily in serving private equity firms -- will need to find new ways to make money.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

You know the feeling. You've done a lot of shopping -- and used your credit card heavily. It's so easy, right? Of course, until the heavy interest payments pile up.

Simply put, that has been the story for big-time financiers, such as Goldman Sachs (NYSE: GS), Lehman Brothers (NYSE: LEH), Merrill Lynch (NYSE: MER), Citigroup (NYSE: C), JP Morgan (NYSE: JPM) and so on. They kept committing their balance sheets to provide loans to buy up companies. And, of course, private equity funds -- like KKR, TPG, Apollo Management, and Blackstone (NYSE: BX) -- were ready, willing, and able to take the largesse.

But now the bill is coming due.

Well, in this week's Barron's [a paid publication], there's an excellent story on this topic. In fact, the lenders were so eager to make these mega loans that they were loosey-goosey on the terms. For example, some loans even allowed for deferring debt payments (perhaps the subprime market was not the only crazy place, huh?)

Oh, the lenders also were willing to forgo escape clauses in loan agreements. Hey, wouldn't the gravy train last forever?

So what happens to the hundreds of billions in buyout debt? Barron's thinks that the lenders will sell the stuff at deep discounts. True, this will mean significant losses. But, if things are bad, might as well get everything written down now and then pave the way for a better future, right? Although, I have a feeling banks are going to be a little more circumspect when it comes to new buyout loans.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements.

It's been a lonely place at BloggingBuyouts lately. There's been a few deals – but no mega deals. And, of course, there's lots of buzz about troubled deals, such as Home Depot's (NYSE: HD) attempted sale of its wholesale business.

Unfortunately, according to a recent piece in Reuters, it looks like the loneliness will continue for the rest of the year -- if not through a good part of 2008.

Basically, there is about $330 billion in debt to get placed – which is not easy when the financial system is in the midst of a credit crunch. In fact, on conference calls from firms like Blackstone (NYSE: BX) and Fortress (NYSE: FIG), the message is that dealmaking is in the freezer.

If anything, private equity firms are probably going to do smaller deals – or buy up discounted debt or other securities.

Of course, this is very bad news for the investment banks, which have been addicted to fees generated from LBO deals.

Although, I think these firms will try focus on other things, such as IPOs (which have lucrative fees) and also try to drum up M&A deals among strategic parties. But, there are limits here too.

In other words, I think Wall Street is going to be down-and-out for awhile.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

It seems inevitable that private equity firm, Carlyle Group, is going to file for an IPO. No doubt, there has been a lot a chatter about it.

Well, according to the FT.com [a paid service], Carlyle has a new CFO Peter Nachtwey. Obviously, this is a critical hire for an IPO (especially in light of the extremely complex issues of alternative investment management companies).

Nachtwey certainly has a sterling resume. He has served as a partner at Deloitte & Touche and even was involved in the audit of the Blackstone Group (NYSE: BX) stock offering.

Although, Carlyle is currently in the process of raising a $15 billion fund. So, in the meantime, it's likely that the firm will focus on that before it makes a filing for an IPO.

But, with $71.4 billion in assets under management, Carlyle should have no problem pulling off an IPO. After all, despite the fall in Blackstone's shares, the valuation is still not cheap.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

One of the driving forces of the buyout boom is the easy credit. In fact, not only have interest rates been low – but the contractual terms on buyout debt has been loose as well.

However, with volatility in the financial markets and the meltdown in the subprime marketplace, buyout lenders are getting a little concerned.

This is a according to a recent piece in LBO Wire [a paid service].

The article points to the cases of Graham Packaging and Ply Gem Industries, Inc. Both refinanced their debts. However, the lenders added some convent protections.

There was also resistance on the financing for the $1.95 billion deal for Realogy Corporation (NYSE: H). The buyers tried to get 225 basis points over the Treasury rate – but instead got 300 basis.

No doubt, this is fairly anecdotal. The fact remains that financing is still very loose – and more and more deals will continue to get done. But, at least in some cases, lenders are pushing back.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

Goldman Sachs Group Inc. (NYSE:GS) is planning to raise $19 billion to $20 billion for the largest corporate buyout fund ever.

This isn't a total shock. As Reuters points out, rival bankers have argued that Goldman was excluded from the Blackstone Group IPO because it's viewed as too much of a competitor. Goldman Chief Executive Lloyd Blankfein disputes this characterization.

Last month, Goldman joined forces with Kohlberg Kravis Roberts & Co. and Texas Pacific Group for the $45 billion TXU buyout, the largest ever.

Buyout funds are surging in popularity because of the growing demand by large investors for alternatives to stocks and bonds

But this is far from a sure thing.

``They have been leaders in identifying new trends and clearly this is where they feel their profit margins have the most growth opportunity,'' said Financial Advisory Service portfolio manager Douglas Ciocca told Bloomberg News. ``But this is risky if it decreases their liquidity.''

It will be interesting to watch to see how private equity firms and rivals on Wall Street react to Goldman's move.

Meanwhile, I bet hotel rooms are booking up fast near Goldman's headquarters in New York from companies both large and small eager to be acquired.