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.

It's a story repeated over and over. Investors make money. Banks ramp up to lend to those investors. The borrowing drives up asset prices. Investors overpay and their returns drop. Banks get nervous about getting their money back. Banks tighten credit terms. Bad deals fail or fall apart. Banks don't get repaid. Banks write off bad loans and lose money.

We're in the eighth inning of this cycle in the current round of the LBO market. That's my interpretation of this story from Reuters which estimates that Lehman Brothers Holdings, Inc. (NYSE: LEH) and The Bear Stearns Companies (NYSE: BSC) could be on the hook for as much as $22 billion and $7.9 billion of LBO debt, respectively. Up until a few months ago, those banks could have sold the debt to others so they wouldn't have to assume the risk that those loans might not get paid back.

Meanwhile many banks depend on LBOs for big chunks of their revenues -- Bear Stearns gets 5.1% of total revenue coming from LBO firms. Lehman Brothers gets 4%, The Goldman Sachs Group Inc (NYSE: GS) and Morgan Stanley (NYSE: MS) take in 3.7% each.

Maybe this helps explain why their stock prices have fallen since the Dow peaked on July 19. Lehman: - 14%, Bear Stearns: -17%, Goldman Sachs: - 11%, Morgan Stanley: - 9%. If those LBO loans go bad and the related revenues decline, it could get uglier out there.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.