There’s growing concern that the next shoe is about to drop in the financial crisis and that private equity could land squarely in the line of fire.

When the traders talk about private equity they’re talking about firms such as Blackstone

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[FIG  Loading...      ()   ] or any group of investors that form a financial partnership, really. Although their dealings are fairly complex, it’s fair to say typically they invest in non-public companies, fix up those companies and then sell them at a higher price.

Strategic investor Doug Kass is among the most vocal investors expressing concerns about private equity. On TheStreet.com he writes that “returns are going up in smoke” and that “deals done over the last two and a half years are now worthless.”

And he goes on to say that “unrealized losses have not yet been reflected in the marks of private equity investors.”

His thesis is so intriguing that we invited him to join us on Fast Money where he explained that private equity firms accumulated huge amounts of debt to purchase companies. They borrowed not only from banks but also from hedge funds. And remember that money comes from institutions like colleges, municipalities and pension funds.

Kass thinks the deals they made were essentially “a promise of turning waste into gold” based on unattractive corporate takeovers. He sees the deals as a new generation of "dirty bombs" as if to suggest they will explode, kind of like the subprime slime.

As it plays out he expects creditors will end up with the company, the equity in the private equity firms will get wiped out and that the investors in the private equity firms will take the loss.

What’s the bottom line? "I hate to tell you but the casualty count in the world of finance is about to expand. And no one is paying attention,” Kass concludes.

To hear a full explanation from Doug Kass himself please watch the video.

Read More:

> Kass: Private Equity Is The Next Shoe To Drop

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Trader disclosure: On Oct.30, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (AGU), (BTU), (C), (GS), (INTC), (MSFT), (NUE); Pete Najarian Owns (MS) Calls; Pete Najarian Owns (MSFT) And Is Short (MSFT) Calls; Pete Najarian Owns (PBR); Pete Najarian Owns (TSO) Call Spread; Pete Najarian Owns (YHOO) And Is Short (YHOO) Calls; Pete Najarian Owns (BNI) Put Spread; Finerman's Firm Owns (RIG), (MSFT), (SUN), (TSO), (VLO); Finerman's Firm Is Short (IYR); Finerman's Firm Owns (OIH) Puts; Finerman's Firm Is Short (IJR), (MDY), (SPY), (IWM), (USO), (COF), (BBT); Seymour Owns (AAPL), (BAC), (BX), (F), (MER), (TSO), (CHL); Seygem Asset Management Owns (PBR), (EEM)

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