When the junk bond/leveraged buyout strategy started, it was a reaction to the fact that corporate managers who had lived through the great depression were too

When the junk bond/leveraged buyout strategy started, it was a reaction to the fact that corporate managers who had lived through the great depression were too risk averse when it came to balance sheet debt, along with the fact that there is a tax asymmetry between providing returns to suppliers of capital in debt form as opposed to equity form. In the early days, these factors, along with low stock prices, permitted the financiers to buy companies and either restructure or dismember them to produce a profit at fairly low risk. Early profits on these deals attracted competition, eventually resulting in extremely high prices and debt levels. By the time of RJR/Nabisco, the debt levels were too high to be safe in an economic downturn. I expect that there was a similar life cycle for collateralized debt instruments. The people that made out well were the early adopters who understood what they were doing, and the people who got burned were the ones who simply had to be in the business because they saw that other people were making so much money.