Leveraged buy-outs started off well enough. The original idea was something more like this: Old-timer spent years building a business, now it's worth about 2 mi

Leveraged buy-outs started off well enough. The original idea was something more like this: Old-timer spent years building a business, now it's worth about 2 million bucks and he wants to cash out. His young, motivated #2 in command wants to take over, and after years of saving has $200k. Old timer goes to the bank, takes out a $1.8 million dollar loan against all the business's assets, with the debt being the businesse's obligation. Older timer has the business pay him a one-time, $1.8 million dividend, and then sells the business to #2 for $200k. If business stays steady, the company's profits pay off the loan and everyone lives happily ever after. As a way for old-timers to retire and pass on control of small private companies, LBOs are really useful. The problems started in the 80s when private equity firms realized they could sell enough junk bonds to do LBOs on giant publicly-traded companies.