The New Kings Have No Clothes; Since 2003 companies acquire in LBOs borrowed $70 billion to pay dividends to their LBO owners. Can this business model succeed? I don't think so.

Byline: Barton Biggs (Biggs, the famed Wall Street strategist, is now a hedge-fund manager at Traxis Partners)

A new path to fame and fortune is attracting the best M.B.A.s--to a new bubble. No, it's not hedge funds, which are stumbling on mediocre performance. The new destination of choice is private-equity or leveraged-buyout (LBO) firms, which not only promise magical returns. They also claim, in pitches from New York to Berlin and Beijing, to perform a capitalist public service by reforming weak companies.

To be polite, that's not quite how it works. An LBO firm raises capital from institutions and very wealthy individuals and charges them a fee of 2 percent of assets, plus 20 percent of the gains. Then the LBO finds a company that it thinks is poorly managed and undervalued, and it buys control by offering a 20 to 30 percent premium over the current stock price. If the purchase price is $6 billion, typically the LBO firm puts up a billion and borrows the rest (hence the "leverage").

Then the smart, young LBO guys dissect the company. They cut costs, redesign products and lay off people. If all goes according to plan, the company will prosper and they can resell their shares back to the public at a higher price, or to some other company or a rookie LBO fund at a much higher price. In the 1980s, the LBO game was high risk/high reward, and took years to play out.

The problem is that LBO firms and their investors are impatient. So, being ingenious guys, they have figured out how to get their money back faster. They can charge the acquired company hefty fees for their invaluable management guidance. Or they can have the acquired company sell a junk-bond issue--for the sole purpose of paying the LBO firm a special dividend.

One example of this formula is the purchase in 2002 of Burger King by an LBO consortium for $448 million. Within two and a half years, the consortium had earned all that back by charging Burger King unspecified "professional fees" and quarterly management fees, and taking a big special dividend, for which the company had to borrow to pay. This May, the consortium sold a portion of Burger King back to the public at $17 a share, which valued its remaining investment at $1.8 ...