On the face of it, the Canadian financier Robert Campeau's 1989 hostile takeover of Federated Department Stores appeared to be just as Fortune described it: one of the “looniest deals” of the 1980s. When Campeau first set his sights on Federated it was a lumbering retail giant, a bloated corporation suffering from a gross excess of capacity and ripe for efficiency improvements. Campeau financed a takeover of Federated for $7.67 billion, nearly double its market value – with 97 percent leverage. Within months, the company was in distress, its cash flows insufficient to meet its debt payments. In 1990, the company filed for bankruptcy. Overpriced and badly structured, the Federated buyout came to symbolize the folly of leverage in an overheated market for corporate assets. Perhaps so; but behind Campeau's failure lurked another, brighter story.

While Federated was struggling to meet its debt payments, the financial economist Steven Kaplan was tracking the company's fortunes from his office at the University of Chicago. Examining the data, Kaplan spotted something remarkable: when it went into bankruptcy, Federated appeared to be a better company than it had been before its acquisition by Campeau.

Good organizations have strong memories. In the spring of 1994, George Roberts engaged the authors as consultants to help his firm, Kohlberg Kravis Roberts & Co., document the histories of its investments in systematic fashion. After some eighteen years in business, KKR was no longer just a small association of investors with a shared body of experience. It was important for the firm's senior partners to transmit both the details and the patterns of nearly two decades of experience to its younger generation of professionals and its widening circle of investors. For us – an economist (George Baker) and an historian (George Smith) – it was an exciting prospect. Though the project was strictly proprietary and intended for internal use, it gave us privileged access to the records and people of one of the modern era's most innovative and influential financial firms. We stood to learn a great deal about the private equity markets, and in particular the leveraged management buyout, a phenomenon that remained largely a mystery outside the rarefied precincts of high finance.

The project involved not just documenting the financial and structural parameters of each transaction KKR had done, but recording the post-transaction operating decisions, management and strategy changes, and operating performances of each of the forty-odd companies KKR acquired between 1976 and 1992. We combined extensive archival research (offering memoranda, SEC filings, internal budgets and memos, annual reports, and the like) with interviews of KKR principals and company executives.

As the buyout movement gained momentum, the public response was anything but friendly. “The perception,” said Robert Kidder, the CEO of Duracell, “is that buyout specialists are robber barons, that they come into a company, cut it to the bone, and then strip it of its vitality just to make money in the short term.” How else could it be? Leverage a company up to the hilt, and one had little choice but to sell off assets, cut jobs, and then run the remains into the ground. This kind of criticism reached a crescendo in the press and the halls of Congress toward the end of the 1980s, and KKR found itself right in the middle of the controversy. Stung by charges that they were plundering assets, KKR partners wondered how their intentions and track record could be so misconstrued.

To Michael Tokarz, the criticism defied common sense. Imagine, he said employing an analogy favored by KKR partners,

“He that goes a borrowing goes a sorrowing,” warned Benjamin Franklin's Poor Richard. Generations of schoolchildren have been taught to heed this advice. Yet even in Franklin's day, time and season said otherwise. To be able to borrow in the eighteenth century was vital to any farmer who had to pay for seed, tools, and labor before the harvest, to any merchant who wished to conduct distant commerce, to any tradesman who wanted to set up his own shop. Still, debt remained in Revolutionary America what it had been throughout the history of Western civilization: a moral problem. For many, to take on debt may have been necessary; but it was not a good thing to be in debt.

Preindustrial America was still very much a traditional society; and in traditional societies, to be in debt was to be in thrall, often to lenders who might set exorbitant terms for the use of their funds. Neither individuals nor communities ought to be in debt, according to Thomas Jefferson, the icon of American republicanism. The national debt, if not extinguished, would lead inevitably to “corruption and rottenness,” Jefferson said, worrying about the power it gave to banks and governments alike. He made it his policy as president to retire the modest federal government obligations that his political arch-enemy Alexander Hamilton had incurred in the name of stimulating national credit, taxes, and fiscal policy.

InThe Man in the White Suit, Alec Guinness plays a mild mannered industrial scientist who discovers a seemingly indestructible fiber. Who could doubt what a boon that would be to society? His employer, a venerable, run-down British textile company, wants to suppress his invention. His coworkers are terrified by it. His friends turn against him. His personal safety becomes endangered, and comic chases ensue. All is well in the end – when the fiber turns out not to work.

Entrepreneurs seek profits by introducing new goods, services, organizations, and techniques. In doing so, they advance the economic welfare of society. At the same time, their activities are profoundly disturbing. Entrepreneurs are, after all, the agents of “creative destruction,” as Joseph Schumpeter so aptly labeled the processes of change they set in motion; their successes invariably upset existing social arrangements, transferring wealth and power from old to new sectors of the economy. It is for that reason, throughout most of history, that expansive empires and local tribal cultures alike have tried to curb entrepreneurial behavior with political restraints and social taboos, lest it upset the status quo. Modern capitalist societies depend utterly on entrepreneurship for their progress; but they too remain ambivalent about its effects. In the United States, where the individualistic pursuit of happiness flourishes as in no other country, commercial invention and innovation have become the norm, encouraged by public policy and reinforced by cultural values that support progress, change, and social mobility.