Typically, banks like Citigroup would commit to fund loans and then sell them off later to investors. But today, investors aren't particularly interested in such loans. The result: Banks are sitting on a few hundred billion dollars of debt committed to buyouts. And as credit conditions worsen, those loans lose their value. In other words, the overreaching of private equity firms like KKR, the Blackstone Group, and the Carlyle Group has reduced the value of bank loans.
And guess who wants to buy them? Private equity firms.
It sounds very complicated and convoluted. Private equity firms are raising money from investors, which they will use to buy the loans made by banks to private equity firms, who are using money raised from earlier investors to buy companies.
The story is not "private equity has an obligation to fix its own mess", but rather "banks shouldn't have guaranteed that they would fund private equity deals with so few strings attached".
Capitalism doesn't function well because someone who messed up your balance sheet owes you a favour next time, but rather because there's a strong incentive to learn from your mistakes.