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Private equity firms J. C. Flowers & Company and Friedman Fleischer & Lowe were going to buy Sallie Mae, the student loan organization, for $25 billion. When credit problems started to hit big buy-out deals, the market got nervous. As The New York Times noted  "Shares of SLM closed yesterday at $48.55, because investors expect a price cut."

The planned deal may now fall apart because the buyers plan to go back to Sallie Mae and ask for a better price. They would pay the company a $900 break-up fee, which would be cheap if they think that an over-leveraged purchase would fall apart under the weight to too much debt.

What began as a reset deal for a buy-out of the supply unit of Home Depot (HD) is now beginning to spread. Morgan Stanley (MS) reported weak earnings yesterday after it marked down a number of loans it had made for big buy-outs. Investment banks are left holding the debt because institutional buyers don’t want to touch something that seems to have become so risky.

The losers in the current busted deal are Sallie Mae shareholders. They watched their shares move from $41 o $56 when the deal was announced. They may now get to see those shares drop below $40.

Douglas A. McIntyre