On the streets of New York, it's not unusual for residents to discard their unwanted bookshelves and television stands on the sidewalk. Often within just a few hours, another crafty New Yorker will have scooped them up, slapped a fresh coat of paint on them, and sold them on eBay.

On Wall Street, something very similar is happening. But instead of dining tables, it's bad loans that are no longer wanted. And one of the biggest junk shoppers for this type of item isn't anywhere near New York.  

Dallas-based Lone Star Funds is hungry for distressed debt, and there's no better time than a credit crisis to satiate it. Last month, the private equity firm took $31 billion worth of mortgage loans off of Merrill Lynch's hands for the low, low price of $6.2 billion, financed mostly by Merrill Lynch. It bought the mortgage businesses from CIT Group and Bear Stearns, and it paid $300 million for troubled Accredited Home Lenders. And last week, it made headlines again when it bought IKB, a German bank that was crippled by its exposure to U.S. subprime debt.

For all the attention Lone Star is garnering these days, the firm and its founder maintain a remarkably low profile. John Grayken founded Lone Star in 1995 after cutting his teeth in the distressed investing world as a protégé of Robert Bass. Bass, for those who didn't experience the last credit crisis, was a Texas billionaire who reaped huge returns by sweeping in at the tail end of the savings and loan debacle in the 1980s and turning over loans that others deemed worthless.

These days, Grayken eschews publicity. The 52-year old Harvard Business School alum grew up in Massachusetts but now lives in London with an Irish passport. According to a profile in Bloomberg Markets magazine three years ago, Grayken relinquished his U.S. citizenship in 1999. Like in most profiles of him and his firm, Grayken declined to comment for the Bloomberg story.

There's no shortage of opportunities for a distressed investor today, which is part of the reason why just about everyone seems to want to enter the fray. In the past, Lone Star's toughest competition was often the very banks like Merrill that now find themselves in negotiations with it. Today, Lone Star is up against rival funds from the likes of KKR and Apollo.

But Lone Star has a history that few can match. During the past thirteen years, the $23 billion fund has turned around troubled investments all over the world, with a particular interest in Germany. It buys all types of distressed assets, including the restaurant chain Shoney's and the supermarket chain Bi-Lo.

It targets, and reportedly often achieves, a 25 percent annual return for its investors.

This kind of work doesn't come without controversy. Lone Star recently fought an ugly courtroom battle with prosecutors in South Korea who accused the firm of manipulating the stock prices of an investment it made. A Lone Star executive was found guilty earlier this year and, while an appeals court overturned the conviction, prosecutors are now taking it to Korea's Supreme Court.

But many of Lone Star's deals, such as the Merrill one, look great on paper. Buying loans worth $31 billion for just $6.2 billion—and getting it 75 percent financed by the seller—means that even if all the loans fail, which isn't likely, Lone Star isn't on the hook for much.

But winning an auction for distressed debt isn't even half of the challenge. Unwinding those assets for a profit is in many ways the greater task. And that's where Grayken's other Dallas-based company steps in.

Hudson Advisors puts its 800 employees to work to do everything possible to squeeze blood from the turnips bought by Lone Star. That means unwinding loans one by one, striking deals with new borrowers or negotiating terms with existing ones. In a worst-case scenario, it will foreclose on properties when the loans can't otherwise unload.

It's a tedious process, but Lone Star's objective is to turn over its investments in relatively short order. How Grayken plans to find buyers for Merrill's toxic collateralized debt obligations in this ongoing credit crisis remains a mystery.

But then again, that seems to be the way he likes it.