An asset bubble is an opportunity. By late 2024, financiers were already constructing collateralised GPU obligations, lending against video cards.
CoreWeave borrows against its Nvidia GPUs — which have a useful life of maybe two years. CoreWeave then uses the loan to buy more Nvidia GPUs. This is fine.
Investment banks have been hard at work creating “novel types of debt structures” since then. What a great phrase that is.
Now banks and private lenders find themselves stuck with a large pile of horrifyingly rickety loans for data centres.
Why did they make these loans? Did they not realise everyone involved is a dissolute clown? Sure, but it’s where the numbers are! You get to write down loans on your books as assets with a big number on them! The lenders dived into AI lending head first.
And they’re realising this debt is the sort that isn’t good. The AI company borrowers would have to pull off several financial miracles to make all this pay off. And they’re really not going to.
So what do the banks do? They wrap up the radioactive poop bomb in a lovely package with a bow on top! From the FT: [FT, archive]
Groups including JPMorgan Chase, Morgan Stanley and SMBC are trying to find ways to distribute portions of data centre-related deals to a broader range of investors.
A collateralised debt obligation is when you take a pile of debts, you slice the pile into “tranches” based on how risky you can claim the debts are, and you sell the tranches as investments to fresh suckers.
If some of the debts fail, the least-risky tranches get paid out first! But they get the lowest interest. The riskiest ones get paid out last, but they get the highest interest. If everything goes well.
What happens if the wind changes and the whole sector goes bad, like housing did in 2007? The least-risky tranches get some payout. The rest go to zero. This causes problems that have names like “great financial crisis”.
As with collateralised mortgage obligations in 2008, the lenders know very well these data centre loans are shaky, and they want to spread the risk — and there’s quite a lot of risk, because these deals are stupidly big:
The efforts showcase the unprecedented scale of borrowing that underpins the AI sector and the pressure it is putting on lenders. Oracle and CoreWeave, two data centre operators, have borrowed hundreds of billions to build sites across the US for AI labs.
These deals cannot work out. The customers don’t exist. The entire population of the earth is not going to pay a couple of thousand dollars each a year for lying chatbots. These are bad debts and, at some point, the banks will have to admit that.
What happens when the AI bros go broke? A lot of lenders will mark massive losses. Banks and private credit will be hit hard.
In 2008, you had chain reactions where one company going down took down other companies and the US government eventually had to step in and bail them out to save the economy.
I’m not sure this particular part of the AI bubble crash will be at that level of disaster. There’ll be lots of other bad things happening. But I do predict fire sales of all the lenders’ other assets. As all these book assets out to be fairy gold — but they’re still liable for it.












































