One of the most convincing rationales for the success of private-equity firms is that they do not have to worry about the demands of shareholders. By contrast, the managements of publicly owned companies have to answer to investors whose short-term objectives often conflict with the longer-term best interests of the company.

Stockholders watch quarterly earnings reports like hawks. Four times a year you’ve seen the stock market reward or punish companies on the basis of these updates. This focus can be unhealthy, in that it may deter management from making decisions that might be costly up front but very beneficial down the road. For instance, the CEO may decide against investing in a new marketing campaign that is expensive in the short term, but that could boost sales two years hence. Or, management might defer staffing up a new division because of the cost impact on the next quarter’s results, even though it means delaying the launch of an exciting new product. These are the truly terrible symptoms of what is called short-termism, and it is a serious problem for those running public companies.

Private-equity managers have long touted their ability to close divisions, sell off unprofitable businesses, move facilities and make other adjustments that enhance a company’s value unfettered by such concerns. And in many cases they have done just that.

But, just like hedge funds, private-equity players got too big for their britches. As deals got larger, they forgot how beneficial the markets had been, and began to mistake good fortune for good judgment. Low borrowing costs, low stock-market valuations in the early years of this decade, strong demand growth in most sectors and the huge wave of liquidity washing over the economy helped these companies produce excellent returns. As a result, just like hedge funds, they attracted a massive inflow of money from institutional investors like college endowments and pension funds.

As success followed success, private-equity firms began to think they could play God with ever-larger companies. They began to band together in so-called “club deals” that ultimately made nearly every company in the U.S. and around the globe a potential target. Bankers, meanwhile, were giddy with the opportunities to lend vast amounts of money to the industry. Their fees were matched only by the fees that private equity-firms paid themselves! Yes, astonishingly, when a private-equity firm completes a deal, putting its investors’ money into a transaction, they would pay themselves a very hefty fee. Earning a good return and a management fee from investors is not enough reward for these fellows. Consequently, the urge to do deals, even as stock prices rose and prospective returns shrank, was paramount.

This brings us (as promised) to one of the least-explored aspects of the current collapse of Detroit’s Big Three. Little has been said about the role played by Cerberus, one of the biggest private-equity companies, that bought not only 80% of Chrysler for $7.4 billion in 2007, but also led the consortium a year earlier that paid $14 billion for 51% of GMAC, General Motors’s financing arm. These bold purchases – of a perennially troubled car maker and big-time financing outfit – exposed Cerberus to not only the vagaries of auto demand but also to the ups and downs in credit markets. Historically, financial companies have not been considered good prospects for private-equity buyers, since leveraging a lending organization clearly heightens the business risk. That old dictum apparently was thrown overboard, as Cerberus’s management presumably expected to combine the two auto-financing outfits and benefit by the elimination of overhead.

Chrysler, like GM and Ford, is asking for help. They haven’t particularly highlighted that the government would be providing emergency financing to a private firm that overreached. Wonder why …