With so much cash being borrowed to purchase corporations with a huge amount of leverage, and the stock market surging on the news on almost a daily basis, what is the real life, long-term effect of such deals? The linked article highlights the strain the leveraged buy outs place on the underlying firms as a huge percentage of free cash must go to service the underlying debt. So, while bankers, deal makers, and equity holders smile now, employees, debt holders and others who get caught up in the buying spree will likely be crying later.

Adding another thick layer of debt to an already debt-burdened society in order to cash out deal makers in the present does not appear to be the best move for the long term health of the economy. Unfortunately, in this day-and-age, immediate gratification is essentially all that counts.

A telling quote from within the article, relating to the breakdown in the real estate credit market: “Most of the corporate debt market is going from prime to subprime in short order.”

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Filed under: Social Mood, Economics