The private equity firm, one of this country’s most politically connected, also agreed to end the use of placement agents, who work as middlemen between funds and investment managers and have been at the center of multiple corruption charges.

Other fund managers will also feel the heat as the Securities and Exchange Commission deliberates possible bans on contributions to officials overseeing pension funds.

The New York Attorney General office’s investigation into an alleged pension pay-to-play scheme is setting its sights on 20 investment firms and whether they violated securities laws in pay fees for access to the New York state pension fund, reports the Wall Street Journal.

Attorney General Andrew Cuomo announced that his office criminally charged Raymond Harding, the former head of New York’s defunct Liberal Party, for allegedly receiving $800,000 in illegal fees.

Gary Naftalis, Harding’s lawyer, told WSJ, “Ray Harding is innocent of these charges.”

The attorney general also announced that ex-hedge-fund executive Barrett Wissman has pleaded guilty to criminal securities fraud in connection with his rols as an intermediary between the pension fund and investment firms. “From 2004 to 2007, Wissman acted as a finder in connection with certain investments that were presented to the New York State Common Retirement Fund,” said William A. Brewer III, Wissman’s lawyer. He said Wissman is cooperating in the investigation.

Authorities from the attorney general’s office and the Securities and Exchange Commission will be spending more time examining investment firms to assess whether the payments they made to receive pension money were improper. Cuomo told WSJ that he does expect additional charges.

Among the firms named in court documents as having paid fees to get business from the New York fund are the private-equity specialists Carlyle Group and Odyssey Investment Partners, and a hedge fund and a private-equity fund associated with Pequot Capital Management.

Schwarzman, speaking at the annual Merrill Lynch banking conference, said that private-equity firms do particularly well during recessions, according to FinancialWeek,. He referenced the 1990-91 recession, where he said that despite the lack of credit, the average PE firm registered returns of about 30 percent. Similar returns were seen during the most recent recession, from 2001 through 2004.

“And where do we find ourselves today? We find ourselves in another recession, and we find remarkable investment opportunities,” said Schwarzman.

According to data from PE research firm Preqin, the median return for buyout vehicles in 2001 was 28 percent, while top-quartile funds that year took in at least 44 percent. Similarly in 1991, the median buyout return was 25 percent, with the top quartile starting at about 35 percent, according to FW.

Schwarzman believes that the financial system will return to normal lending patterns by 2011.

Schwarzman’s optimism was counteracted by Merrill’s CEO John Thain, who said he believes the  economic environment will continue to be difficult for some time to come, likening the current credit crisis to the Great Depression.

Other PE firms are also rethinking their approach to leverage. Carlyle Group managing director Randal Quarles told FW yesterday that the use of leverage by homeowners and the financial sector was “completely unprecedented, and it is not sustainable.”

When a consortium of private equity firms, including Blackstone, Carlyle, and TPG, took Freecale Semiconductor private in 2006, it was hailed as a landmark deal that opened the doors of the technology industry to private equity. These days, the deal serves as more of a lesson on why tech firms make poor targets for private equity.

In fact, the BusinessWeek article says Freescale is shaping up to be “one of the ugliest buyouts in history.”

When the deal was completed for $17.6 billion, many observers noted that technology firms were no longer off-the-table for private equity firms. And indeed, a number of tech firms were then taken private during the private-equity boom.

For a long time, the technology sector had been thought to be a poor feeding ground for private equity firms. They require massive research and development investments that crimp the cash outflow model of most private equity firms. They can be highly volatile, especially in the boom and bust world of semiconductors.

How the Freescale deal has gone is an indication that these warnings are founded. According to an article in BusinessWeek, sales started to declinejust months after the deal’s close. Freescale’s biggest customer, former parent Motorola,cut orders, and revenues for 2007 slipped 10 percent, to $5.7 billion, even as the industry’s increased 5 percent. In fact, the BusinessWeek articlesays Freecale is shaping up to be “one of the ugliest buyouts in history.” Things are so bad that Freescale’s owners have written down their $7 billion equity stake by 15 percent or $1billion.

Certainly the buyout business is tough all over these days with the credit crunch making it tough to get financing at favorable terms. But technology deals done in the heydays of private equity appear to be the most troubled. Bonds of First Data, purchased by KKR in 2007, now trade at 83 cents on the dollar. David Bailin, president of alternative investment solutions at Bank of America told BusinessWeek: “Tech buyouts are where the land mines are.”

Freescale may be the poster child for how tough technology can be more private equity buyouts, but there are likely to be many more lessons.