This post was written by DailyFinance contributor Peter Cohan.

Wall Street has a short memory when it comes to pay. That's what came to mind when I saw a report saying that many big leveraged buyouts (LBOs) are in trouble -- four of the 10 biggest companies bought in leveraged buyouts have stopped paying back the money they borrowed. Nevertheless, Wall Street will pay itself record bonuses in 2009.

Unless my memory is failing me, it was only 14 months ago that Wall Street nearly went bankrupt. Without trillions of dollars in taxpayer money, it's highly unlikely that it would be in a position to pay itself $140 billion in bonuses this year.

For the past year, silver linings have been in short supply. Even as financial markets claw their way back up, the wealth lost has been neither forgotten nor completely recovered. In the private equity sector, the good news is that, frankly, the situation could have been worse. Though returns plunged, the asset class still outperformed the public equity markets.

A new analysis from alternative investment research firm Preqin puts the private equity industry's return at -30% for the 12 months ending March 31, 2009, a period that encompasses the bulk of the lows without the benefit of the upswing that followed. For the same year-long period, the S&P 500's return was -38.1%, with the MSCI Europe's at -49.9%, and the MSCI Emerging Markets' return at -47.1%.

The next time you take a bite of a Carvel ice-cream cake, you'd better make sure you earned it. The company that owns it, Roark Capital Group, is an Atlanta-based private equity fund named for the virtuously selfish architect concocted by writer and philosopher -- and master of neither writing nor philosophy -- Ayn Rand, the founder of Objectivism.

A tribute to the author in more than just name, Roark has spent most of the financial crisis on the sidelines. Now it has $750 million to put into the private equity market -- nearly half of the $1.55 billion it has under management.

A big cover story in Monday's New York Times looks at how Simmons Bedding Company, a 133-year-old firm, was driven into bankruptcy by private equity firms. The story is alarming in a number of ways, not least for implication that private equity can be a powerfully destructive force in the "real," productive economy.

Could these same firms use similar techniques to push troubled banks over the edge? Now that the FDIC has voted to allow private equity firms to buy troubled banks, we could be looking at another tsunami of bank failures several years in the future.

For the private equity industry, 2009 is looking a lot like 2003. After yet another tough quarter, the amount of new funds raised plummeted, reaching levels not seen in six years, according to documents provided by London-based private equity research firm Preqin.

Fewer funds are closing, and many of those that are closing are doing so short of their initial targets. There are indicators, however, that the situation could turn around by the end of 2009 or early in 2010.

Private equity funds raised only $38 billion in the third quarter of 2009. This is the lowest worldwide total since the fourth quarter of 2003. From the second quarter of 2008's level of $84 billion, this is a decline of 45%, and it is a mere 18% of the record $208 billion that global private equity funds raised in the second quarter of 2007.

As the FDIC fund dwindles to its lowest point since 1992, foreign banks may step up to save the day. Fewer U.S. banks have the reserves to buy failed banks, so the FDIC is looking at changing the rules to allow private investment groups to buy banks. It's also turning to foreign banks, especially those that already have a presence in the United States.

The FDIC bank rescue fund had a balance of $13 billion on March 31. Since that time three major bank failures -- BankUnited Financial Corp. in May and Colonial BancGroup and Guaranty Financial Group in August -- cost the fund $10.7 billion. Another 53 banks also failed in the meantime, with an estimated total cost for all bank failures since March 31 of $16 billion. Even at $13.2 billion, the fund was at its lowest point since 1992, when it was $178.4 million. Since March, banks have paid fees so the fund isn't insolvent, but it may be close.

Will the U.S. retreat from new rules that would make it harder for private-equity firms and hedge funds to buy failed banks? From Kohlberg Kravis & Roberts and Blackstone to Wilbur Ross and John Paulson, private investors have been pushing back against the changes, saying they're too onerous. If they become the law of the land, it'll become harder to find buyers for banks gone bust, they say.

Whether their complaints were effective will become clear next week, when the Federal Deposit Insurance Corp. plans to vote on the rules, it said today.

A survey of U.S. private equity executives and professionals conducted by advisory firms RSM Bentley Jennison and RSM McGladrey concluded that slashing jobs was the most common approach to cost-cutting among private equity firms.

Nine out of ten respondents said they have cut jobs at their portfolio companies in an attempt to rein in costs during the economic downturn.

It seems that no print publication is immune from the wrenching changes in the publishing industry. Look at Reader's Digest. The company said it will likely file for a so-called prearranged Chapter 11 bankruptcy.

The main reason: to pare down the heavy debt load.

Despite the credit crunch and recession, private equity powerhouse, the Blackstone Group (NYSE: BX), was still able to post a profit of $180.8 million in Q2. How was this possible? It certainly helped that the equities markets surged. The upshot was that the Blackstone company portfolio had an average mark-up of 3%.

Yet, the fact remains that the buyout business continues to lag. While valuations are attractive, the problem is that banks continue to be stingy with funding. Unfortunately, without leverage, it's pretty tough to generate strong returns.

Private equity returns are down 27.6% year-over-year for the 12-month period ending July 30, 2009, according to a Preqin report. The London-based research house notes, however, that the global private equity industry's dry powder (i.e., uncommitted assets) continues to exceed $1 trillion, suggesting that there is still plenty of capital waiting for a rainy day.

Returns for the past 12 months reflect all the nastiness we've seen and lived -- bailouts, company collapses, equity and credit market mayhem, and unemployment rates dangerously close to double-digits. But, the money is still coming in. Preqin puts the rate by which contributions outpaced distributions at 235% for buyout funds in 2008. This category raised $148 billion while distributing only $63 billion, making last year the most imbalanced for these two measures in history.

During the private equity boom years, one of the most common criticisms of the private equity kingpins went like this: "All they do is buy companies at a discount, leverage up the balance sheet, and use the cash flow to pay off the debt -- extracting millions in fees in the process."

Well now that access to cheap, covenant-lite debt has dried up, buyout shops are turning to the other option for making money: operational improvements. A new white paper released by Grant Thornton and the Association for Corporate Growth -- admittedly a private equity trade group -- found that 42% of private equity firms are devoting between 51% and 75% of their time on the management of companies they already control.

Private equity is about continuous dealmaking. But, with the wrenching credit crunch, activity has been horrible.

So, what to do? Interestingly enough, it looks like some of the top private equity operators are signing up for board duties.

Look at GM, which last week announced five new members to its board. In fact, three of them are from major private equity firms: The Carlyle Group's Daniel Akerson, S. J. Girsky & Co.'s Stephen Girsky, and TPG's David Bonderman.

Deep-pocketed private equity firms hoping the Federal Deposit Insurance Corp. would make it easier for them to buy the assets of failed banks were disappointed last week. The agency signed off on preliminary guidelines that won't fundamentally change the rules -- meaning so-called club deals, like the one put together by four PE firms for BankUnited in May, probably won't be going away any time soon.

However, the complexity of those rules means banks with strong finances and aspirations to expand will remain in the best position to buy the assets and deposits of banks seized by regulators, according to Frederick Cannon, chief equity strategist at investment firm Keefe Bruyette & Woods. And the big bank to watch is US Bancorp (NYSE: USB), he wrote in a note to clients.

Private equity investors are using current financial market constraints on liquidity to negotiate favorable deals, as private equity general partners have watched the values of their portfolios fall profoundly. Efforts to attract additional investment haven't been easy, as potential limited partners are reluctant to make long commitments in an uncertain marketplace. This has given limited partners a stronger position from which to negotiate both fees and terms and conditions.

Limited partners are getting a leg up on the private equity funds in which they invest, signaling a change from the historical trend in which funds could push for aggressive compensation based on the returns they provide. In a poll conducted by Preqin, 43% of investors noted a power shift from fund to limited partner, with only 2% seeing a shift toward the general partner.