There's a very succinct description of how private equity works in Matt Taibbi's Greed and Debt: The True Story of Mitt Romney and Bain Capital:

In a typical private-equity fragging, Bain put up a mere $18 million to acquire KB Toys and got big banks to finance the remaining $302 million it needed. Less than a year and a half after the purchase, Bain decided to give itself a gift known as a "divident recapitalization." The firm induced KB Toys to redeem $121 million in stock and take out more than $66 million in bank loans -- $83 million of which went directly into the pockets of Bain's owners and investors, including Romney. "The dividend recap is like borrowing someone else's credit card to take out a cash advance, and then leaving them to pay it off," says Heather Slavkin Corzo, who monitors private equity takeovers as the senior legal policy adviser for the AFL-CIO.

Under the debt load, with new management planted by Bain who knew nothing about the toy business but knew enough to rubber stamp Bain's dividend, KB went bankrupt. That may have been disappointing to Bain -- the longer KB survived, the more its owners could bleed it -- but Bain's investors and owners had already made a handsome return on the deal. And deals are what private equity is all about, one deal after another, each one a windfall. Back during the S&L crisis someone pointed out that the best way to rob a bank was to own one. Turns out that's true for any business.

But it used to happen less frequently. Several reasons come to mind, the most obvious being that business owners have fewer scruples now than they used to. The most corrosive idea behind this shift is the notion that the sole responsibility of business owners is to maximize profits, especially given that we can only truly measure profits in the short-term. This has always been a latent idea among business owners and (especially) financiers, but for most of our history has been limited both by law and by custom.

For instance, family-owned companies have good reason to take a longer-term view of a business that will be handed down through the generations. Even the case of a broadly held corporation is likely to have a mix of short- and long-term-oriented investors, and need to balance those interests off. On the other hand, when a company is taken over through a LBO, the ownership is narrowed drastically, and the debt overhang all but forces the owners to focus on the short-term.

Other trends add in. When owners live in the same locale as the plant, they are less likely to harm the community. Replace them with outside owners and those scruples go away. When owners are expert in their industry, they are more likely to strike a balance between short- and long-term needs, because they see their whole careers developing within a single industry which has few options should they blow up. Replace them with finance people and those considerations vanish: to a financier, all companies look the same, and there are always more companies around the corner. (Financiers, after all, don't build companies; they buy them -- and usually with other people's money.)

A unionized work force also limits the management's options, so the loss of union protection has made it easier for companies to be looted and plundered. Then there is the law: most of us still believe that business owners are still subject to law, that they are prohibited from criminal activity (significantly including fraud), but the overall trend had been toward less regulation, toward less effective enforcement, and toward less exposure to torts: the result is that business owners need have fewer scruples about their compliance with the law. (Possibly the best example of this was the Citibank-Travelers merger, at the time blatantly illegal, but rather than prosecuting the Clinton administration arranged to change the law, making the merger retrospectively legal.)

The result of all these trends is that we are now plagued by a new breed of businessman: one that's only in it for the money, and willing to take the money from anywhere it's available, using any methods he can get away with. The particular scheme that Romney practiced at Bain is especially odious because even in cases where the extra debt and looting don't kill the business, everyone related to the business (workers, customers, neighbors) except for the owners is much poorer as a result, while only a handful of already rich investors get richer. But they're just the worst of the worst. The whole financial sector has more than doubled in the last thirty years as the business of business has shifted from making products and providing services to making deals with huge payouts to the dealmakers, those profits to be squeezed out of everyone else.