Say you take out a mortgage, then rent the house to a series of meth dealers to extract the rent while devaluing the property, and then default: you're still personally on the hook for any post-foreclosure deficiency judgment. One issue with LBOs is that, after extracting cash and fees, PE funds have various ways to extinguish liabilities that individuals don't, both by shielding the PE fund from debts and the use of bankruptcy and restructuring of the acquired company to discharge liabilities, including those from litigation.

There are various proposals to deal with this, but the most effective are probably imposing joint and several liability on certain kinds of litigation (breaking the "investor veil" and allowing rights of action against PE funds for the actions of their portcos) and limiting business judgment rule protection for directors and senior managers who approve LBO sales that are reasonably foreseeable to end in bankruptcy, which creates personal liability for fiduciaries. In other words, align the financial and personal interests of the individuals and companies involved with those of the acquired entity.

I mean, if I'm allowed to just make up silly hypotheticals, I can easily justify anything.

Say I raise money for a friend to buy a house and they proceed to rent it out to meth dealers. The friend is the one on the hook for the loans, of course; but would I not be on the hook for at least a reputation hit such that I can't do that again? Or do we think folks can get away with that sort of poor judgement forever?