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So far, Washington legislators and regulators have done little besides watch the buyout binge. But pressures are building to curtail the deals. Colorado Democrat Timothy Wirth, chairman of the House Subcommittee on Telecommunications, Consumer Protection and Finance, has announced that he will study the effects of buyouts on the availability of credit as —part of an investigation of takeover tactics. Federal Reserve Board Chairman Paul Volcker, in a letter made public by Wirth, warned that the buyouts may expose companies to financial difficulties. The Federal Reserve, however, has so far declined to restrict lending for buyouts. Volcker says that measures like credit controls "would be very difficult to implement."
In recent years, no firms that underwent leveraged buyouts have failed. But Wilbur Ross, managing director of Wall Street's Rothschild Inc., warns: "The real test will come the next time you have a combination of high interest rates and a bad economic environment. When that happens, we'll see just how prudent some of these deals really were." As every sensible investor should know, a formula designed to create huge profits in good times can eventually lead to enormous losses in bad times .