It’s long been my responsibility to produce NBR’s holiday programs for the Fourth of July and New Year’s Day, which (respectively) review events of the previous six months and year. One of my big decisions is always to determine which were the “biggest” business developments of the particular period.

This time around, the task was fairly easy, because two trends clearly dominated business news and market activity between January and June. One was the unraveling of the subprime mortgage market. The other was the boom in corporate buyouts—sparked by a flood of money from private equity firms.

These matters might seem to be totally different. But on reflection, I think there is a common thread connecting them. Here’s my reasoning:

When it came to subprime mortgages, people who would never have normally qualified for conventional mortgages were allowed to take out home loans. Why? It was a high-risk gamble by the lenders, of course -- but the idea was that the lenders would make money even if the borrowers defaulted, since the collateral (the homes) could still be foreclosed and sold at a profit.

Similarly, when a private equity firm buys a publicly-held company, the buyer is betting that the company being acquired is worth more than the valuation put on it by the Stock Market. The idea (I suppose) is that the new owners can figure out ways to streamline the business or find economies that can make the acquired company even more profitable.

Both of those assumptions work fine if the economy is doing well. But as issuers of subprime mortgages are finding out the hard way, when the housing boom turns into a bust, selling homes (at any price) suddenly isn’t so easy!

By the same token, if the economy takes a downturn, I wouldn’t be surprised if the lofty prices many private equity companies are paying for corporate buyouts turn out to be no bargains.

The lesson: when the economy is doing well, it’s easy to make money (at least in theory). But good times don’t last forever. Investors -- both large and small -- need to keep in mind that rosy scenarios can easily be replaced by worst-case-scenarios.