To be fair to banks this is what they do with almost all debt their underwrite.
They hold it to help stabilize the market for it while its being sold and then offload it once the market has been established.
Nothing out of hte ordinary here, but to be fair the original article isnt' a financial site so they would have no real idea about how this work behind the scenes.
This doesn't seem like a story at all given how robust this debt is trading.
Is there a way that you can track this yourself? I've had three different mortgages [1] in my lifetime and as far as I know it was all completely opaque who/what was ultimately holding the underlying debt.
[1]: First was a decade ago with RMG (a Canadian monoline lender) and the other two with Scotia, the first of which was a fixed mortgage at purchase, and the second was a refinancing.
I don't mean this flippantly, but it's usually whoever you're writing the check to. My first home had the mortgage sold within a week, and someone else started taking the money out of my account.
Some originators will hold on to servicing of your debt wherever it goes (within certain boundaries, e.x. if you go into a delinquency or reconciled delinquency state).
Those originators use it as a selling point, because many people have gotten bit by servicer flips one way or another.
Oh okay, in that case mine were never sold. As in the sibling reply, my assumption is that the "retail" side of the mortgage (who you make your payments to) is fully detached from who ends up owning the mortgage backed securities that your debt is being financed by.
When your mortgage is sold, you should get a "goodbye letter" from whoever sold it, and a "hello letter" from whoever bought it. This is so you don't keep sending checks to the old place, and have the new people decide that you aren't paying your mortgage.
in principle you should be able to reject the mortgage sale, too. purely hypothetical but: suppose some bank was responsible for killing a family member, you shouldn't be forced to owe that bank money.
This means that any mortgage transfer would come with a 'sweetener deal'. If you don't object to the transfer you get a small reduction in your monthlies, e.g.
Understood, but they've got all the leverage, unfortunately. In countries like Australia, it's essentially impossible to get a fixed rate mortgage (for the life of the mortgage), when it would probably has been a great deal a few years ago; banks have all the leverage to dictate the terms.
With variable-rate mortgages, banks can insulate themselves from inflation risks, which they themselves create.
Bad customer service, autopay details changing, etc. Have you ever managed a loan sale? Have you ever managed a loan sale of an elderly person with dementia? It's a royal pain in the ass. If you get it wrong, you risk losing credit score.
Use a mortgage originator that keeps the servicing themselves. One of the reasons I usually use PenFed in the US, after a nightmare of fly by night servicers.
- I still have a mortgage on a property but don't live there so the mortgage bill gets sent to a different address (b/c rental property)
- Company A originated the mortgage and sells it to Company B
- Company B completely ignores the mailing address and starts sending bills to the original property address
- only through blind luck did I realize that the mortgage bill was being unpaid
This seems like basic, basic bookkeeping but I guess it's also a reminder that "reality has more detail than people realize" and that there are plenty of opportunities for improving systems.
One of those myths too many programmers believe: All street addresses can accept US mail. Not necessarily the issue in this comment, but when somebody gives you both a shipping address and a mailing address and you send mail to the shipping address, the fault is yours if it doesn't arrive.
Another: A particular street address only maps to one person, entity, or family. Counterexample: Giant skyscraper with a zillion tenants, each in a different suite. Or a giant apartment building. Etc.
Still another: One particular suite address only maps to one person, entity, or family. Counterexample: Any of thousands of commercial mailbox-rental / package-shipping stores in US strip malls, which tend to have suite numbers (within the mall) and possibly hundreds of tenants, all at one suite.
One of those facts that mortgage owners refuse to internalize: the party responsible for the payments is not necessarily living on the property. There is absolutely no reason in this century to assume that the mailing address for real estate mortgage related correspondence is the address of the property. Related: the assumption that if there are two names on a mortgage with given names that are commonly understood to be gendered, the parties are legally married.
I own the duplex I live in. The actual property address is the rental unit. Every time the mortgage gets sold my tenant gets mail about it until I can change the mailing address back to my actual address (next door). It’s absolutely infuriating because the carelessness of my mortgage servicer who I don’t even choose makes me look bad.
You should be able to go to the USPS and do a change of address for yourself. That way every time mail for you is sent to your tenant, it will go to you.
I just moved. Moving a business address was hard. For an individual, the only requirement ai saw was that I pay a small fee with a credit card registered to one of the addresses.
This is a great idea. I'll try it but I'm not sure it will work. I believe there is a time limit on the forwarding and it looks like not all mail is forwarded, including financial documents.
Ar some point I had all the bills on my calendar and a event to check if the company confirmed the payment. It saved me at least a handful of times.
I confess that I am not that diligent anymore, but I also have scheduled things in a more reliable way that always notifies me on payment. But the other day the bank skipped one of the payments because some information on the destiny account have changed but nothing was shown.
It is always annoying to stop what you are doing to do this
My mortgage got sold before the first payment. It was in retrospect quite funny because I still get periodic spam emails from the originator as if I'd already be back on the market for another mortgage.
This is standard. Origination and servicing are typically handled by different companies (or parts of the same company). Usually the Origination side only handles short term loans and doesn’t want stuff hanging around longer than is necessary.
> This doesn't seem like a story at all given how robust this debt is trading.
That directly contradicts specific points made in the story, about specific Tier 1 banks and specific amounts of debt not finding buyers. And the amount cited isn't all that great, given the overall equity in play.
> Nothing out of hte[sic] ordinary here
Matthew Moniot, Man Group: "the deal sizes involved are 'out of scale to anything we've thought about, ever.'"
Hard to compare your model with his, since he doesn't have one. When quotes from named credit risk guys from named finance organizations sound like angsty Gen Z, it's not ordinary.
In any case, the story is covering something significant. There is an important test occurring, and we're all going to learn the results, sooner or later. It could all turn out fine, but I don't know. I don't believe you really know either.
Well I'd agree the size of these deals are far larger than any debt deals I can remember in the past 10 years.
But that has nothing to do with the scare tactic headline that says banks are trying tot offload debt. As I said this is exactly how banks work and how they treat all debt they underwrite.
I believe the implication is that if AI is really The Second Coming (or First Coming, if you prefer), then banks would want to keep the debt and the potential gains of said debt. Or rather, there should be an overwhelming demand for said debt.
Where it's going to pinch is any incompletely funded AI datacenter build-outs.
If the market is already crammed with sector-concentrated debt (because of the amount already issued), finding buyers for more is going to get increasingly hard.
At some point everyone big already has enough exposure and isn't interested in the risk of more.
The only thing that keeps the party going is being able to drain that debt off bank sheets, but it's hard to see a ton of interest in fixed rate, capped upside exposure to a high risk industry in an environment of rising central bank rates.
If the of fate of the AI boom is so fragile that a digital newsletter site's headlines are a meaningful concern to you, perhaps you have some things to ponder. The story itself names names, quotes verifiable statements and makes reasonable inferences.
And this is supposedly high grade debt we're talking about: JPMC is spending months on end shopping around a few $10's of billions, and having to discount it. Never mind the far greater sums on the books of vastly less credible outfits, complete with meme names that always age poorly when things go pear shaped.
How a bunch of highly speculative moonshot big tech stuff has managed to be financed by Tier 1 financial institutions and high grade debt, as opposed commonplace equities, is a question for the ages, and we may all yet find ourselves suffering the answers.
You give a blatant misrepresentation of the very non-ordinary circumstances here.
The debt isn't trading robustly at all, exactly the opposite.
> JPMorgan and MUFG are part of the group that has spent more than six months trying to distribute $38 billion in construction debt tied to a Texas and Wisconsin data center project leased to Oracle.
> JPMorgan, Morgan Stanley, SMBC and MUFG are quietly shopping pieces of the AI debt pile they helped build, a sign the lenders closest to the money have started hedging their own bet.
> One case shows how stuck this has gotten. A group of banks including JPMorgan and MUFG has spent more than six months trying to distribute $38 billion in construction debt tied to a Texas and Wisconsin data center project leased to Oracle, Bloomberg has reported. Some lenders are now willing to sell pieces of it to non-bank buyers at a discount, just to move it. Six months is a long time to sit on debt nobody underwrote to hold forever.
> Matthew Moniot, co-head of credit risk sharing at Man Group, told the Financial Times the deal sizes involved are "out of scale to anything we've thought about, ever."
> This doesn't seem like a story at all given how robust this debt is trading.
FTA: That is exactly why CoreWeave-leased paper prices at 7.00% to 9.875%, against the 5.70% to 7.875% that hyperscaler-leased bonds command, per bond market data compiled by CCIR.
Just so were clear: Core weave paid Micron and NVIDA 80 percent margins to buy equipment at a 9 percent lending rate so it can sell it to providers who are subsidizing tokens at 20x their own API prices (that are likely also subsidized).
Could it all work out? It could. But it does not look like there is the financing to keep building - thats going to impact prices and the moment that happens this debt looks even more risky.
What you've written is the demand for debt. What's the supply like? You can't conclude demand exceeds supply without knowing both sides, and the US has printed more money than any other time in history.
The debt (bonds basically) is sitting on the books of investment banks. The article here is 5 days old - that "9 percent" figure is already out of date.
Here is today: Shares of AI cloud provider CoreWeave (CRWV) dropped over 15% Wednesday, a day after venture capitalist Chamath Palihapitiya posted on X a chart that showed the yield Nvidia-backed firm's 2032 bonds hit 15% yesterday as a sell-off brought prices into distressed territory. SOURCE: https://finance.yahoo.com/markets/stocks/articles/nvidia-bac...
I can conclude that supply is far exceeding demand because of the rates attached.
Bonds are a weird product. As long as the issuer honors them (remains in business) they are a guaranteed return.
In this case CoreWeave has sold ~4billion in 5 year bonds at a 9% rate. If you buy one for 1000 bucks you will get 2x45$ payments a year for 5 years. Then at the end a 1000 cash payment.
For the sake of argument let's say you bought this earlier this year. You now have an asset worth 1000 dollars. If it is a good bond (A US treasury or Municipal Bond) you can borrow against it from lots of place - you have something worth 1000 dollars on your "books" (accounting). For the earliest sales (you) core weave has already made a 45 dollar payment.
You now have a 1000 dollar asset and 45 bucks in cash. IF you hold to maturity and keep all the money you get 1000 bucks back and 450 bucks in interest.
What happens if you want to sell it? Maybe rates went down a lot, so that 9 percent is huge, and the AI boom is going gang busters so that 9percent looks like a good deal. I offer you 1100 for the bond. You now have 1145 dollars in cash.
What happens if you need money, and rates are the same and CoreWeave looks the same? I will offer you 980 for it... You now have 1025 bucks in cash... and I get the rest of the payments (45$x9) and 1000 bucks back at the end. (This has tax implications).
What happens if you want to sell cause you need money AND, you think CoreWeave is gonna burn, or this "ai thing" is a bust. Well it's likely that I think that too. the bond is only ever going to pay 45X9 more payments but I want a higher rate. I say to you "I'll give you 800 for it" (a 15% rate), cause CoreWeave is fucked. You need the cash so you sell it for that much and have 845 bucks. Thats a loss of $155.
Let's say you bought a billion of those bonds, and expected to walk away 1.45 billion in 5 years - but you sold them all off today and LOST 155 million.
Someone owned a LOT of 9% Core Weave bonds and either found a BETTER investment -OR- they wanted out of CoreWeave and no one had the money or desire to own them. The bond buying market is announcing that "We don't want any more CoreWeave Debt".
There are a lot of problems with CoreWeave: those 5 year bonds it sold, well the contracts to support them (15 billion a year in revenue on 60 billion of debt) only run for 3 years. At current rental rates for long term commitment NVIDA hardware had a 3 year pay off term... But thats not power, the building, staff, the business was (is) marginal.
Who was selling the debt? Well my guess would be a chunk of it was JP Morgan (who set up the bonds to start with). Dumping it right after you announce your numbers (they were a minor miss) and lower your target for CoreWeave's stock would be an ideal time. But that is PURE speculation.
So 9% is the yield and people demanding 15% for new bonds instead of the previous 9% means they lack confidence you'll be around to pay back the original principle?
Are you saying there are existing bonds at 9% being sold for some amount of money (possibly even less than the original principle?)
How does selling the $1k bond at $800 translate into 15%? The bond was originally worth $1k+$45*10=$1450, now $45*9 ($1405?), so if you buy it for $800 that's approximately 85% of its original value ($800+(9*$45)/$1405) and thus a 15% decrease? How does that relate to the original 9%?
Is this about what existing bonds are being sold for or new bonds?
Presumably a us treasury bond yield is basically the same as inflation?
> Are you saying there are existing bonds at 9% being sold for some amount of money (possibly even less than the original principle?) ... Is this about what existing bonds are being sold for or new bonds?
The bonds were issued earlier this year. Their sale is a loss for someone, and NOT a small one.
> How does selling the $1k bond at $800 translate into 15%?
1000 5 year at 9 percent 5x90(450) + 1000 back.
If you need to dump it for 800, the bond still pays out 1000 in the end, The issuer still pays out 5x90(450). The 200 bucks I pick up at the end gets spread out over the 5 years so it looks like 5x130 (650+800).
That would be 16 percent, but all the numbers for the sake of sanity got rounded from their real ones. 9.xx rate, 8xx resale price, and 14.9 (closing on 15) rate.
It gets calculated that way because if you need to sell more new debt it only makes sense to know how to price it.
> Presumably a us treasury bond yield is basically the same as inflation?
Sometimes, often not. But Treasury Bonds have quite a few advantages. No state tax on the interest payments. They are almost as good as cash, so you can borrow against them at a pretty good rate (Better than a HELOC and way better than a credit card). Lots of institutions will give you a line of credit for up to 90 percent of the value of the bond. You can also borrow against them for margin trading (60percent? better than stocks) -
1. Bank gives you $X to buy an asset and burdens you with debt of $Y, which is much more than $X as it includes interest.
2. Bank sells the debt at $Z because holding the debt is risky and the bank would rather have cash than debt. Its counterparty would rather have more cash over time and is fine with the risk but does not want to bother with the whole process of closing the loan. $X < $Z < $Y.
3. Profit! Bank spent $X to get $Z, which is greater than $X.
If it were trivial to find buyers, wouldn't that be a sign that they priced the debt too low? It should be just hard enough to find buyers that your lost sales are less than the extra price you are able to extract to the sales you make.
"Nothing out of hte[sic] ordinary here, but to be fair the original article isnt' a financial site so they would have no real idea about how this work behind the scenes."
It mentions a "report by the Financial Times". To be fair thats's a "financial site"
Whether news is "out of the ordinary" sometimes doesn't matter for some readers. It can still be news that's useful to them
Investors dump data centre bonds as AI borrowers face ‘Darwin moment’
Isn’t this a perfectly normal thing banks do with all large debt? Any bank underwriting any $40b loan was always going to syndicate it.
Not to do so would be reckless.
What is unusual about this is that syndications usually clear in a few weeks but this has been stuck in distribution for six months and still not closed.
What is unusual about this is not that it is a single debt of that size but that it is Oracle that is the poor quality indicator.
And it's just one of them: they know that there is about three trillion dollars of this risky shit out there either in the hyperscaler/FAANG balance sheets or off the books and others are reaching the limits of their appetites for it, so they are going to struggle to sell this particular debt, and meanwhile Oracle's position gets worse every day.
We are getting a lot closer to the Margin Call crisis meeting moment where one bank decides it cannot assess the risk of their share of it, are we not?
But this time it is happening in a world where retail investors, lawyers, government officials, elected representatives are much more likely to have seen Margin Call and The Big Short.
But if Oracle crashes and burns, is that going to tank the whole industry, or is it more likely that the bigger players just eat it up and take its customer?
Oracle is a really serious problem, because they actually are too big to fail. Nobody can take Oracle's core business that quickly. So multiple governments, internationally, are going to have to step in to preserve the various outposts of Oracle that keep them and major organisations running.
Those bits could be sold off to different global consulting firms, I suspect.
(But aren't those global consulting firms also going to be freaked out about their own AI risks? And what does the whole AI-assisted coding thing do to a sober assessment of what all of Oracle's global business is worth? Lots of unanswered questions)
Also that is not the AI data centre bits; those will have to be chopped off and dumped.
If that doesn't seriously spook the markets — a company as well-known and formerly blue-chip as Oracle, needing an international bailout — then it would be kind of surprising.
Yeah, like what happened in the 2008 financial crisis where governments had to step in to save the banks as people defaulted on housing payments due to high mortgages.
Oracle is already close to being classified as junk and reaching a tipping point. If/when that happens it is unclear what affect that will have on the markets on companies invested in AI datacenters with Oracle, and other companies that Larry Ellison and other Oracle investors own shares in.
Yes — I think the thrust of it is that Oracle is unusual because all of their risk is on their books, right? They aren't using SPVs. So it's much clearer.
So the worry is that it makes it clear that the unexamined risk in the SPVs has a lot less light shed on it.
Everyone is salivating at the prospect of One Rich A-hole Called Larry Ellison getting his come-uppance, but this is the correct take. Oracle without cloud is still a profitable (if much smaller) business that can continue on for quite a while. Larry (along with everyone else holding $ORCL) gets hosed, but corporations will still continue to get extortion requests couched as "opportunities to license Java 8"
Their software is embedded into so many governments and Fortune 500s. It also makes them unlikely to go completely bankrupt but just Chapter 11, reorganize and sell off those parts.
Oracle’s customers/counterparties aren’t really at risk of becoming unsecured creditors in a bankruptcy situation though, so there’s no contagion risk, so “too big to fail” does not mean what it means when you’re talking about a systemically important financial institution.
Everyone knows these loans are dogshit but if anyone moves first to say so then everyone else’s loans basically are screwed too. So everyone is incentivized to pretend like there’s no problem even though everyone knows there’s a problem.
Listening to Ed Zitron on various podcasts, there are several issues with Oracle stocks:
1. they are one place above junk;
2. they are being treated as effectively junk;
3. if they get classified as junk, any pension portfolios holding Oracle stock must sell as they can't hold junk stocks.
If that happens then there will be a cascade of effects. Not just in the AI/datacentre sector but elsewhere, as Larry Ellison holds a stake in Paramount/helped finance the Paramount/WB merger.
Oracle's force majeure notice on a data centre build-out is not helping, I am sure.
(Can't remember, is it this Texas one?)
ETA: This whole Oracle bit is really the area of Zitron's predictions that is the least contentious: he called things, they are happening.
The big question is to what extent this is a harbinger of bad things. In a less crazy market where the value of enterprise-software-backed consultancy is stable or growing, you can imagine people lining up to bite off chunks from the carcass of a failed Oracle. But is the value of enterprise software even stable? Aren't many of the possible buyers also overextending themselves?
ETA 2: No, the potential force majeure is about a project in New Mexico, apparently
>3. if they get classified as junk, any pension portfolios holding Oracle stock must sell as they can't hold junk stocks.
Wouldn't hedge funds or PE recognize this arbitrage opportunity and eat this up, making this a non-issue? Vastly simplifying this: suppose "junk bond" means the chance of default is greater or equal to 10%. Of course it's bad if the risk of oracle going bankrupt edges up from 9% to 10.1%, but we shouldn't expect pandemonium from the 10% cliff edge, because there's plenty to be made by selling all the bonds that pension funds are obligated to sell, because now they have higher yields (yields move inverse to bond prices).
Because assuming the premise is true, there will be a dip in bond prices (ie. higher yields) when oracle gets downgraded, because pension funds or whatever have to dump their holdings. You buy the dip, not at the top.
Because the general consensus at this point appears to be that the notes will fail. You wouldn’t buy a loan if you thought it wasn’t going to be repaid.
I guess, maybe, but perhaps the risk that GP is commenting on is that it could be it's own form of Juicing.
I do sincerely doubt, even with the big shifts that AI enables to have companies 'move away' from Oracle, that Oracle will default.
On the other hand, There's still an elevated chance of decline.
IOW, Those stocks might move from pension type plans to different baskets as a result, however there is a non-negligible risk of some (not total!) loss in the 5-10 year term.
Will add, I would -hope- that the same pension rules around selling questionable stocks, would also have rules limiting what level of exploitation is possible.
I think it's only a matter of time, like the build-up to the financial crash in 2008 or the dot-com bubble. There's currently a huge amount of money being bet on the big AI tech companies without any real sense of return. And the companies like Oracle that are funding data centre build-out are sitting on unused GPU stock.
Recently, the Australian AI firm failed to secure an IPO [1], [2].
OpenAI is looking to go for an IPO despite shaky revenue [3], [4], [5], resulting in a stock drop for companies like Oracle invested in OpenAI [6].
Anthropic is in a similar situation: looking to IPO despite shaky finances [7], [8], [9].
The companies involved are all investing in each other and trading money between them leading to circular investment [10].
Equity shares do not have ratings, bonds have ratings. Everything else is correct, if their bond ratings slip one more level they will be rated junk which may force some holders to liquidate if they’re not allowed to hold junk bonds.
The longer a clearly deteriorating credit like Oracle remains nominally investment grade, the worse the selloff eventually becomes. It’d be a false economy to try to drag it out, especially when investment grade institutions are already pricing Oracle at crossover and preparing to get the hell out of dodge.
The trigger in Margin Call was not that they could not assess the risk, it was that they were improperly assessing the risk, had taken too much risk onboard, and the downside of the risk was more than the value of the firm.
Yes, and no. The film is not really about that one day or that one discovery.
Much of what Margin Call is about has already happened in the few days and weeks before the day in the movie — the events that precipitated the widespread firings, including a rather deliberate firing of the head of risk management, but are not really discussed.
In the meeting, Sullivan is talking about the music slowing, saying "if the music were to stop…". He's suggesting that the situation is bad, in the context of the un-discussed preceding days, so some action is needed, which is why he escalated.
Tuld saying he fears he "can't hear anything" is about much more fundamental uncertainty — his own belief that no set of numbers could be useful (he didn't even want to discuss the numbers in the report) and that the actual situation required acting on his gut instinct that it was much, much worse.
He, basically, thinks the risk cannot be assessed ("I'm telling you, this is it!") and arbitrary action is needed.
In short, the point is he did not have any confidence they could ride out the consequences of the preceding, largely un-discussed few days, because they were beyond their parameters, and that there was no time to assess the real hidden risk.
The trigger for the chosen action is not the newly correct numbers in Sullivan's report, but it forcing Tuld to confront his belief that even those numbers were no guide for anything.
(Sam's dog dying after his sad failure of a divorce is a crucial metaphor — the dog days are literally and metaphorically over)
> Matthew Moniot, co-head of credit risk sharing at Man Group, told the Financial Times the deal sizes involved are "out of scale to anything we've thought about, ever."
Which of course is a valid point to raise, but you should just say "corporate bond issuance is at a all time high", rather than some clickbait headline about how "Banks are now trying to offload the AI data center debt" and it's "out of scale to anything we've thought about, ever."
>It's not a clickbait headline. It's a direct quote.
I'm chastising the author of the article, for the "Banks are now trying to offload..." framing, not the commenter. Hopefully the fact that I was commenting about the headline made this clear.
>And the key point of it is not "larger than ever" but "out of scale"?
Isn't that "larger than ever" but with more exclamation points?
Massively not an expert, but at that level, things are not a binary "good/bad investment". Financial institutions have policies regarding finely sliced debt types, ratios, risks, lengths, sectors, etc.
I personally think it's all hugely overcomplicating things but that's the way modern world works.
(</i>until it every now and then, on regular intervals, doesn't:)
The short answer is to free up money to make other investments.
The longer answer is that banks generally have policies about how concentrated they can be in individual borrowers, industry sectors, geographies, etc. That is why you rarely see a single bank take all of a very large corporate loan. They syndicate it out.
They take a cut / fee for financing the debt deal and hold the debt short term. They can't do another deal (simplifying the situation) until they offload the risk. Their business is in their percentage for arranging deals, not in getting paid back over 50 years.
In these times, what other deals are out there. AI has sucked all the air out of the room, difficult to imagine anything getting similar investment over the next decade.
its a different business model? IBs dont generally hold debt to maturity. they underwrite the debt then gradually sell down in the weeks/months following the deal. their business is making money on the spread/underwriting margin.
I saw an article a couple of days ago on one of the popular sites (ft or Bloomberg or something), about how now is a great opportunity to purchase private company credit.
Guess this is the submarine https://paulgraham.com/submarine.html
Had temporary acronym overload, unpacking for anyone else:
There was a cringe-named Republican bill from the beginning of Trump's term, it somehow(?) relaxed the Enhanced Supplementary Leverage Ratio, and the eSLR is one of several related rules on very big banks that deter them taking on "too much" risk.
Private credit is far different than the debt of a public ally traded company. It is far riskier as those companies can't easily tap the credit or equity markets for new money if they get into trouble the way a public company can.
But the debt we are talking about is not Private credit debt, its completely different animal with far different risk characteristics
The problem with private credit is that most of the valuations are not publicly tested.
what do I mean by that? oracle is publicly traded, which means they (should) report profit loss and other key metrics in a standardised way. This means that one company's metrics should be comparable to others. Their value is assessed by the second on a public market. This means that anything that affects thier value (real or imagined) is reflected almost instantly. (same goes for debt)
Private credit, and the stuff its invested in, is much murkier. THey do not have the same public reporting rules. There is no testing of value. Its in the interest of the owner of that debt to talk up the value of the assets they hold.
This means that a fund might invest in 10 companies. Those companies might be doing well, or they might not. Because information is limited, and there are no public trades, the value of those companies are only ever tested at sale, or in a crisis. (ie they fold, or do something so public that they can't avoid the consequences.)
THe problem then is that because information is limited (was it a one off, did the owner hide the problem, did they use the wrong investment strategey, is the rest of the portfolio also over valued by 10x?) causes people to panic, and withdraw money.
Because private credit is not that liquid, it means that if people withdraw too much money, they either have to say "no we have no free cash" (lehman brothers insolvancy), they have to take out bridging loans (expensive and very short term) or sell assets (fire sales rarely get good value and shrink the credit supply)
All of which causes a panic, and people look at places like softbank, see the leverage and think "oh fuck thats not worth anything" and the bubble pops.
Modern finance is basically a collaborative fiction. Its fine so long as everyone buys into the same narrative. As soon as someone says "no, why?" the whole thing falls of the rails.
But luckily for the modern financial system, there are enough watchdogs lured with its narratives into willingness to enforce their coherency with weapons.
You might as well say that banks giving mortgages caused that. Sure it happened as part of the process but that wasn't the thing that caused the problem.
> In the early 2000s, the debt underpinning CDOs was generally diversified, but by 2006–2007—when the CDO market grew to hundreds of billions of dollars—this had changed. CDO collateral became dominated by high risk (BBB or A) tranches recycled from other asset-backed securities, whose assets were usually subprime mortgages. These CDOs have been called "the engine that powered the mortgage supply chain" for subprime mortgages, and are credited with giving lenders greater incentive to make subprime loans, leading to the 2007–2009 subprime mortgage crisis.
It’s also hard to ignore differences. Bubbles gonna bubble, but the consumer is quite healthy this time around. Burry being short doesn’t make it 2008.
> Wage growth has remained relatively muted over the past year. That, combined with higher inflation, means Americans are earning less for an hour of work. Average hourly earnings, adjusted for inflation, fell 0.5 percent in September, and were down 0.7 percent from a year earlier. It was the sixth straight month of year-over-year declines in real earnings.
> The share of seriously delinquent auto loan balances has hit a record high this year, while nearly 13% of credit card balances are seriously past due — close to their 2010 peak in the aftermath of the housing crisis — according to recent data from the Federal Reserve Bank of New York.
> The ability of U.S. families to stay current on their debts worsened over the past three years, hitting levels not seen since the aftermath of the global financial crisis, the Federal Reserve reported Friday.
> Wage growth has remained relatively muted over the past year. That, combined with higher inflation, means Americans are earning less for an hour of work. Average hourly earnings, adjusted for inflation, fell 0.5 percent in September, and were down 0.7 percent from a year earlier. It was the sixth straight month of year-over-year declines in real earnings.
Where are they getting this data? This directly contradicts their claim:
> Real average hourly earnings for all employees decreased 0.5 percent from August to September,
seasonally adjusted, the U.S. Bureau of Labor Statistics reported today… From September 2025 to September 2026, real average hourly earnings decreased 0.7 percent,
seasonally adjusted.
Your chart appears to be weekly earnings, not per-hour wages. Having to pick up more shifts or a second job to make ends meet supports the point, in my book.
> but the consumer is quite healthy this time around
This is one of the more out of touch things I’ve read today. I’m not sure from where you’re sourcing your economic data.
Maybe you’re saying this financial collapse won’t be as bad as 2008? I’d agree with you, that one was singularly dangerous and required large scale government intervention to guarantee that the global financial infrastructure didn’t bust. But this bubble will hurt very badly at a time where the consumer is not as strong as you think.
No, to be more specific, banks selling the collateralized mortgages that were subprime in risk as if they were prime and these risk ratings being accepted at their word and via collusion with the ratings agencies is what caused this.
There is no issue with collateralized debt as long as the risk is properly assessed, the whole point of securitization is that you can take on higher risk for higher reward of an asset that was previously just one single piece of risk.
> Cloud computing giant Oracle Corp is on the cusp of a junk-grade credit rating and its shares have tanked as the artificial intelligence hyperscaler becomes the fall guy of investors' concerns over the sector's debt-fuelled spending binge.
Honestly, that would be more like the railway mania in the 1840s or, really, insert any "Panic of X" here. Speculative mania has been a thing for centuries and will continue to be a thing for a centuries.
The specific problem of the 2008 financial crisis was that the banks were going out of their way to obfuscate the source of their CDOs so that, even when it was clear in 2007 that the subprime mortgage market was unraveling, you couldn't look at your instruments and figure out whether or not you were affected. The problem wasn't the CDO, it was the obfuscation. And as far as I'm aware, the current debt offerings aren't being obfuscated--if you want to avoid the data center debt because you think it's junk, just avoid the stuff being touted as data center debt.
> The problem wasn't the CDO, it was the obfuscation.
yes, i specificly remember when Lehman went under the banks stopped trusting each other's ability to assess their own exposure. The banks stopped lending to other banks and that's when Paulson got on his knees (literally, i think there's a picture of him on his knees in front of Nancy Pelosi) asking congress for cash to guarantee loans. The side effects started squirting out everywhere i think even Mcdonald's was hours away from bankruptcy because the corporate paper market suddenly ceased to exist. Also, money market returns turned negative briefly, that's like a negative interest rate on a traditional savings account bad. It was bizarro world for maybe 72hrs.
The movies don't really do justice to just how upside down and nonsensical the financial world became. It was a knife's edge for 2 or 3 days.
One complication this time is that the picture is reversed. Both the executive branch and Congress have massive incentives to keep the music playing. Nobody is going to have to beg Mike Johnson to step in, as he'll happily do whatever the White House says. Yes, there will presumably be a new Speaker after the election, but how much will that matter?
My fear is that this is all going to turn into one big front-running exercise where those connected with the Trump crime family are warned to get out first, banks that swear allegiance are bailed out next, and the rest of us get to hold the bag.
The nuance here, though, was that the CDOs and similar instruments were sold in a tranched fashion, and the super-senior tranche was made to look as if it was very low risk, as normal for tranches instruments.
But when your entire series of tranches all consists of trash, then which tranche you were in didn't really matter.
CDO and CDO2 instruments hid this distinction really well, and unfortunately the ratings agencies bought into it and sold crap as AAA securities.
This is an oversimplification. It is straightforwardly correct that, for any imperfectly correlated basket of assets, the senior slice will be safer than the junior slice. If you hold the most senior 10% of a basket of mortgages, 90% of those mortgages would need to default for you to start taking losses. That is rare in any context and in fact there is a good bit of evidence that AAA-rated mortgage-backed securities didn't actually do all that badly in the 2008 crisis: https://www.nber.org/papers/w24509
There were a lot of factors that contributed to the 2008 crisis: adverse selection leading to low quality portfolios, mispriced assets, high leverage which magnified losses, lower-quality securities being held by investors who couldn't really afford to bear the losses on them, etc. But the fundamental concept of tranching is not actually that bad, even though every time people read about it they think it's the exact same as 2008. Banks have been tranching debt since long before 2008 and they have been tranching debt ever since. Not just mortgages either, but all kinds of debt.
Another factor in that case was that the government regulated, in some cases, the ratings of bonds that entities were allowed to buy (they couldn't be as highly levered with lower rated bonds) and so there was an incentive for bond ratings to be falsely inflated, happily carried out by the rating agencies. Of course collateralized junk is still junk, and many people at the time knew that, but there was money to be made in looking the other way.
And for this one when insurance companies are forming syndicates because their underwriting becomes greater than any one company, it just sounds frightening, the sound this thing is going to make when it finally pops.
Adjusting for inflation, though, things also can happen faster now than, say, thirty years ago, and there's more centralization in quite a few industries.
> Adjusting for inflation, though, things also can happen faster now than, say, thirty years ago, and there's more centralization in quite a few industries.
Not sure its just related to centralization, probably more so that information can flow more freely now, but I fully agree.
Loans are sold off, which means that they can raise more money to make loans. Each time you do that, you create more money out of thin air, which is profit.
The problem is, it only works if everyone believes.
THe problem with 2008 is that people stopped believing and demanded banks settle immediately. which then meant that they needed to raise cash, which meant looking at their assets, which meant looking at the risks of those assets, and then it went to shit.
That’s true, but before you try to shift the blame onto the homeowners, remember that these mortgages were intentionally issued to extremely risky borrowers, and then that risk was intentionally obfuscated when the loans were collateralized. The fault cannot be laid entirely on the borrowers, which is what I sense you’re trying to do here.
Investors bought a lie packaged by the financial institutions. They shouldn’t have believed in the first place because the risk was junk-level but not sold as such.
No but thats the point, they were always in trouble. sub prime were sub prime.
Everyone thought they were ok because they didn't look at, or were not shown the, default rate of their instrument. The risk profile was deliberately obscured, or the people wilfully ignored it.
yeah, either they discount it enough to look worthwhile to someone, or they keep it and take the risk. Risk assessments are inherently subjective, so both parties can think they're making a deal.
>We lent £1,000 to John Sozzleby at 10%. We quantify the risk level as “iffy”, which is 42.6 qualm points above "dodgy". and are willing to sell you the debt for £700. its a great deal!
> They sell down debt when they are worried about concentration, which is exactly what "approaching internal limits" means in plain English: too much of this bank's balance sheet is now one bet on one sector holding up.
Which is correct, but kind of weird because being confident in a credit and being worried about concentration are not really mutually exclusive things. You can be pretty confident in an investment but not want it to constitute a majority of your portfolio. (Bankers know that even very strong credits are never 100% guaranteed to pay out.)
Let's say I offered you the chance to pay $100 to get $120 back if at least one coin toss in five came up heads. That's a pretty good bet, right? But would you bet your house on it?
This is common. Selling debt is normal. If there is money to be made by selling the debt and going back to issuing more loans, they’ll try to find a buyer.
Everyone is so primed to believe that all things related to data centers are bad that they’ll assume this is a special event. The person writing the headline knows that.
Not sure I agree. The credit default swaps have been extremely expensive lately, meaning that someone is already thinking about an AI bubble popping that will take private credit down which will make banks take a serious hit (11% of their outstanding loans are to linked to AI). On top of that we are in a time where the economy is propped up basically by AI spending and delinquencies on all sort of debt are at historically high rates.
Maybe it's because I've lived through 2007, but the time to panic is when ~100 year old institutions disappear overnight (Bear Stearns)
Do we even have one bankruptcy yet?
I'm keeping an eye on Coreweave and Oracle. But they haven't collapsed yet, not as of today anyway.
If it's anything like 2007, it's going to be the one we aren't watching that collapses first. Those in the open about their debts and situation are often more honest and solid than other unknown players. The ones who are lying the most are the ones with the worst accounting and worst books.
------
So yeah, chances are that Coreweave is just this week's topic. We really don't know how close we are to a collapse until someone out there actually starts to collapse.
The big two AI labs are still not listed on the stock market, and SPCX is still above it's listing price. Unless you can remain liquid more than the market remains irrational better find some other use for your investment funds. No?
Every single server with a dozen ethernet and/or IB ports that run something like four pairs in each connector for bandwidth, times 8 to 42 servers in a cabinet times a couple thousand cabinets in a building times a dozen buildings in one location. And then you need the fiber to connect all the switches together, and the buildings together, and then you need to tie the facilities into the wider world through various ways.
You absolutely should post about it when you short for good cause - there was a fund that earned it's money that way. Do research, find adverse fundamentals or malfeasance that are underreported, short the security, then publish your findings and let the market do its thing. IIRC, it was them that publicized that Nikola (Electric truck startup) faked their demo video by rolling a non-operative prototype truck down a stretch of slightly inclined highway.
I remember in Summer 2007 feeling that there was an impending implosion coming based on the shady practice of using 2nd mortgages as downpayments - it had become a common practice. Started doing a bit of shorting (not too much), made a little, lost a little and then sort of lost interest in doing it just about the time things fell apart in '08. All that to say that these things can take a lot longer than you'd expect. You can look at the situation (like the circular funding as well as this article) and decide that yes it's not sustainable. But it can sustain longer than you expect.
Oh, I am well aware it's hard to time it. But still getting a general sense of the impending crash can help preparing in different ways. You can park part of your assets, not completely withdraw. Or pay extra for piece of mind by hedging them. Sure, it will cost, maybe won't be needed at all, or still misfired, but I'll sleep better with less anxiety, so that's still a win in my book...
Yeah. The thing is, we were being told that was a problem in late 2004 (this is when Max Keiser was writing and talking about the risks to Fannie Mae and Freddie Mac; he and others saying this were written off as cranks, even though they laid out a pretty solid scenario that came substantially true.)
So yes, Oracle is likely a canary in the coal mine.
It can only really be seen as an indicator of hidden risks to the banks from exposure to the SPVs.
But how long it will take before the miners start dropping dead from the fumes, who knows. Could be years, could be a few weeks after the Anthropic IPO when people are sitting smoking on the steps to the helipad saying "what the fuck? No I mean, really, really. What the fuck!"
Funny cause I also feel that a failed Anthropic IPO can trigger the domino effect. And I also t
Feel this is why them and Open ai postpone so much. And shows how smart Musk was with rushing his IPO.
I can’t short anything due to this. I know something smells but I can never predict when the system will fall apart. And especially recently, the markets seem way too “vibes based” as if even normal securities are all meme stocks now.
With these things it's not about spotting the signs but rather predicting the timing. Everyone and their dog can see the signs but that's not enough to be actionable
Who is building the infrastructure to resell the gpus from failed data centers if / when this collapses. It would be a waste for everything to get wasted
The GPUs used in data centers cant really be used outside the same context. They cant connect to standard PCs or servers. They are highly specialized. The resale would need to be at the server or rack level for the same use case.
There have been some examples of folks ripping off the SMX interface and rewiring the card for PCI-E but I'm not sure how efficient that would really be or what kind of market there could be
Yes, they're "just" pcie, though units like H100 and newer (or did it start with pascal? i really don't know) have variants that use a proprietary connector called SXM, but it's always just pcie lanes underneath. In some versions there are interposer and mezzanine boards, but again, pcie with associated bits and bobs like retimers and pcie switches. Not impossible to integrate, just annoying.
Indeed, also even the air cooled ones are designed for high static pressure fans (ie small fans that spin at really high RPMs). Those fans are really really loud.
You can just mod them to run on consumer fans that are designed to spin much slower but have higher diameter
You can order the SXM carrier boards on eBay/Alibaba today.
> You wouldn’t repurpose these for home gaming, it would still be for llms
When small businesses, home-labbers and prosumers have cheap access to potent GPUs, there will be a Cambrian explosion of grassroots creativity and innovation in areas that are "beneath" AI labs expansive ambitions; I want to see the OBS-equivalent of LLMs. Hell, I'd love to see what some broke artist can do with OBS, an H100, and an open video model.
Good luck powering a 400kw rack in your basement, if you are looking to do frontier model type stuff. Just a single machine can run in the 150kw range these days for the less exotic stuff.
It can certainly be parted out with proper motivation but it’s going to take a whole new ecosystem to support these in your typical home lab. Even then 20-30kw slices are electric car level energy consumers.
> Good luck powering a 400kw rack in your basement
Wut? Open-weight models already exist and don't need a cottage industry.
I'd gamble on 1 million curious people with 1 SoTA GPU each over one AIaaS lab or company with 1M GPUs when it comes to developing delightful things and experiences. We still don't know what small, specialized models can do because AI labs only ship products that could justify the trillions invested so far. With a single Nvidia A100, I have trained small models that beat the brakes off "SoTA" models in niche areas (estimated TAM is <10M people, world wide) - the "Bitter Truth" doesn't apply to the long tail.
I mean it's not that hard. It's just hard if your frame of reference is "can I download it within one click on my $6000 Macbook".
This whole subthread is just sad. "Oh no, it's not the same form factor. It is useless".
Where's the "Hacker" in "Hacker News" there.
It's a shame that we need to defer to "China" as a shorthand for "actual engineers" just because our own engineers lack imagination and drive that would validate being given that title in the first place.
> It's a shame that we need to defer to "China" as a shorthand for "actual engineers" just because our own engineers lack imagination and drive that would validate being given that title in the first place.
There are a lot of reasons other than skill why China is the way it is. Culture and locality are big ones. I don't know a whole lot but I disagree that any "actual engineer" could easily come up with a sustainable business for this stuff in the US -- for example, harvesting and processing used parts for their components is a hugely laborious process, and China has a huge culture of recycling and reworking that simply does not exist in the US (and would largely be socially unacceptable to introduce!). Take for example the pre-modded 4090s, or the BGA desktop motherboards I mentioned, or any number of other products that are based not merely on sheer engineering. It's not exactly engineering on its own that causes these things to happen, but more the fact that nearly anybody can just throw together an operation like that and have tons of workers available to make it sustainable.
I do believe that your assessment that it will come from China is right.
Though, at least the "coming up with the idea" is something that could be done in the West I would argue. We too could read datasheets and probe stuff. We just chose not to.
Please don't misunderstand me as attacking you. I was attacking that other guy further up the thread with the empty GitHub account and the equally empty ambitions, trying to drag all of us crabs back into this bucket we find ourselves in.
> I do believe that your assessment that it will come from China is right. Though, at least the "coming up with the idea" is something that could be done in the West I would argue. We too could read datasheets and probe stuff. We just chose not to.
Oh, plenty of people do not choose not to -- there are tons of blog posts and YouTube videos out there of people doing stuff exactly like this! It's just the making it sustainable part that's very difficult outside of somewhere like China, because -- unless you have special VC privilege -- you can't really offer reasonable prices to the masses, which makes your purchase volume go down, which further drives up your prices even more, until it converges on some insane number.
They do not have display outputs, but, at least with my 4090, if I plug the monitor into the iGPU instead, Windows still renders frames on it and just pushes them to the GPU that has a monitor attached.
So the lack of output ports of those DC GPUs might not prevent that?
Or maybe there are other limitations there I am not aware of, of course. Maybe the silicon cannot do the stuff needed for games or something like that.
Yeah, probably that. But something like the L40 - which is just a 4090 with more VRAM - might be usable like that?
Maybe?
You SV guys go use your stock options and try it out for science.
I think the data centres stay, continue to be used for LLMs but end up not getting the intended returns and possibly ending up in the hands of creditors who don't end up with the sort of money they expected.
I think at least we Europeans will really want these data centres once prices become reasonable though. We really need training infrastructure.
As someone who's in it's late 20s now, I always thought the idea of selling IOUs, debts, loans and invoices for cash is batshit crazy to me to be honest.
I never knew my loan and others loan could be packaged together as a financial product, the most famous one being the Mortgage backed securities (MBS), and then repackaged with other MBSes together to make a tranches of debts/loan known as Collateralized Debt Obligation (CDO).
Both MBS and CDO, plus Gaussian Copula that is being used to price CDO, not realizing the implied volatility is actually higher than expected that poisoned the whole scheme, contributed heavily into the unwinding of the 2008 Great Financial Crisis and is what killed Lehman Brothers, and set the powder keg to detonate the Eurodollar crisis 3 years later.
Yet it has been 20 years. 20 fucking years. The banks and the governments around the world hasn't fucking changed. Those CDO money ended up in private credit and Special Purpose Vehicles (SPV) which both of them is in its pending doom.
I can't fathom to imagine how fucked would this financial tsunami would be.
Debt doesn't make any sense in tech sector. Why would anyone take all the risks associated with innovation and accept an upside capped at like 5% per year which barely offsets the value lost to inflation. The only reason anyone takes the risk is because the risk is on the taxpayer who has to foot the bill through inflation.
This tracks with recent reporting that AI debt issuance fell 50% month over month in September[0]
> Tech companies raised $23 billion in AI-related debt globally in September, less than half the amount raised in August, according to Morgan Stanley data covering public bonds and private placement transactions.
> The decline marks a continued drop from June, when companies raised a record $113 billion for AI infrastructure including data centers and chips. In the US investment-grade market, where blue-chip tech groups borrowed around $306 billion between January and August, AI-related bond issuance stopped completely last month.
To make senes of the drop we need to know how much they expected to raise in September. Were the expecting to raise $50B but only raised $23B? Or were they expecting to raise $25B but only raised $23B? That's an important detail. Further, "bond issuance stopped"... was that intentional or not? It's like we're getting half the story and then have to use our imagination and biases to make the story as bad as possible.
ftfa "Morgan Stanley attributed the decline to the large amount of debt already raised earlier this year."
This sounds like fearmongering. Banks aren't in the business of collecting on debt. They are in the business of writing loans they can sell to people who collect the debt. This is pretty standard business in the 2020s. Not defending data centers or AI or whatever, not denying that there is an AI bubble. Just saying that this is how business is done now.
Why? It's hard to see what they're good for outside of AI data center workloads. Your average member of the general public arguably doesn't have much use for a "graphics processing unit" that isn't actually capable of processing graphics
They can have a pretty good LLM running in there, or cad design. For the average joe, having the free tier of AI without the breach of privacy is pretty good already.
As the other comment answered, if a crash materializes like the ones before (dotcom bubble, crypto crash, etc) you'd be able to get a lor of ram and a couple of high end GPUs (5090, 4090 and the like) for a grand or two. With that you can a pretty beefy model locally.
I don't see how. I'm not saying that consumer-grade hardware isn't useful because enterprise-grade hardware exists. I'm saying that enterprise-grade hardware isn't particularly practical for most consumers. Personal computers were many things, but what they generally weren't was people installing IBM S/390s in their living rooms. Because some of the same design features that make them great for centralized, high volume business workloads also makes them kind of a PITA if that isn't what you need.
For my part, I do work on machine learning projects at home. But I'm nowhere near operating at a scale where datacenter GPU features like being optimized for 4- and 8-bit calculations would be a net benefit. Nor do I have any particular desire to have one of those things making my home office sound like I live next to a steel mill.
It's not too far off from why I don't have a box truck parked in my garage even though it's technically more capable than my Kia. And on the occasions when that is what I need, the local hardware store will gladly rent one to me for $20 per day.
Mainframes did not make and still don't make very good personal computers. Same goes for these "gpus". They are the modern day mainframes. (I know we still have mainframes, but that is besides analog)
The next token prediction machine is writing 90%+ code at multi-trillion $$$ companies, its already solved millennial problems -- but yes its definitely not living up to hype.
But it's creating new problems, and when the damage those new problems outweighs the value created, then that's when the bubble starts (or started) to form and we live in a delusion until the damage massively outweigh the benefits, is when the bubble popping starts being considered, and then when there's irreversible damage is when the bubble popping is marked for formal revision and then when ...
Sorry if this appears obtuse, but what exactly is an “AI Data Center”?
Is it a data center with nothing but GPUs, that does nothing but inference all day and all night?
Is it a data center custom-built for only AI companies to use?
Do these “AI Data Centers” have data storage? VPS? …
Or, as I suspect, is “AI Data Center” simply a fake media buzzword that really means “Normal Data Centers” but with political baggage and stigma built-in.
It's a data centre being build specifically to run LLMs (and possibly other ML models). As such, it will be focused on NVIDIA servers with large numbers of inter-connected GPUs (so they can run the 2T-4T parameter models from OpenAI, Anthropic, etc.) [1].
It's a different build-out to a data centre that can host video/YouTube content (fast CPU, no GPU, large number/size of hard drives), or that can run web servers (fast CPUs, low to average hard drive capacity).
> Or, as I suspect, is “AI Data Center” simply a fake media buzzword that really means “Normal Data Centers” but with political baggage and stigma built-in.
No you're absolutely right. The only difference that I can tell is power requirements are legitimately higher because GPUs consume more electricity. More cooling is also needed because there's more heat generated. Aside from those two things, it's a plain old datacenter that companies have been building at break neck speeds since like 1996. Now that I think about it, how come there's no panic about additional Internet backbone capacity needed to support these "AI datacenters"?
Is it just me or is debt the wrong type of investment here? It feels like the tech companies hacked the markets by issuing bonds on something that merely resembles something else where bonds makes sense (real estate) while actually being completely different.
These are moonshot investments. As an investor, equity would make sense - possible downside, but unlimited upside. But with bonds you're still taking all that downside (you'll be further ahead in line than equity investors, but you will still be in line!), meanwhile if the bet does work out in your favor, the upside is limited to just receiving fixed coupon payments.
The more comments I read on HN attempting to rationalize this as "normal behaviour" by banks, the more I believe that this is a massive bubble getting ready to pop
The CDSs on some loans are getting to the point where it’s too expensive to even bet that the loans will fail as the CDS market seems to have concluded the loans will fail.
> The CDOs on some loans are getting to the point where it’s too expensive to even bet that the loans will fail as the CDO market seems to have concluded the loans will fail.
Did you mean CDS? As your sentence doens't make sense as its written.
To be fair to banks this is what they do with almost all debt their underwrite.
They hold it to help stabilize the market for it while its being sold and then offload it once the market has been established.
Nothing out of hte ordinary here, but to be fair the original article isnt' a financial site so they would have no real idea about how this work behind the scenes.
This doesn't seem like a story at all given how robust this debt is trading.
My mortgage has been sold almost a half dozen times already.
Is there a way that you can track this yourself? I've had three different mortgages [1] in my lifetime and as far as I know it was all completely opaque who/what was ultimately holding the underlying debt.
[1]: First was a decade ago with RMG (a Canadian monoline lender) and the other two with Scotia, the first of which was a fixed mortgage at purchase, and the second was a refinancing.
I don't mean this flippantly, but it's usually whoever you're writing the check to. My first home had the mortgage sold within a week, and someone else started taking the money out of my account.
The servicing company could be different than whoever actually owns the debt.
Yep.
Some originators will hold on to servicing of your debt wherever it goes (within certain boundaries, e.x. if you go into a delinquency or reconciled delinquency state).
Those originators use it as a selling point, because many people have gotten bit by servicer flips one way or another.
Oh okay, in that case mine were never sold. As in the sibling reply, my assumption is that the "retail" side of the mortgage (who you make your payments to) is fully detached from who ends up owning the mortgage backed securities that your debt is being financed by.
When your mortgage is sold, you should get a "goodbye letter" from whoever sold it, and a "hello letter" from whoever bought it. This is so you don't keep sending checks to the old place, and have the new people decide that you aren't paying your mortgage.
Composition vs inheritance maybe makes a difference here? :thinking_grimace:
What I mean is parent companies and contracts that might obfuscate who's owed the debt.
However, I don't know anything about debt markets let alone homeownership.
in principle you should be able to reject the mortgage sale, too. purely hypothetical but: suppose some bank was responsible for killing a family member, you shouldn't be forced to owe that bank money.
This means that any mortgage transfer would come with a 'sweetener deal'. If you don't object to the transfer you get a small reduction in your monthlies, e.g.
I assume the right to sell the mortgage to anyone they want is part of the original mortgage contract.
Yeah I don't know why I wrote "in principle". I meant "ideally"
Understood, but they've got all the leverage, unfortunately. In countries like Australia, it's essentially impossible to get a fixed rate mortgage (for the life of the mortgage), when it would probably has been a great deal a few years ago; banks have all the leverage to dictate the terms.
With variable-rate mortgages, banks can insulate themselves from inflation risks, which they themselves create.
Popular discontent and laws really would be the only way
the ability for capital markets to buy mortgages is one of the reasons the USA has 30 year fixed and australia does not (not the only reason).
How are you harmed by your loan being sold?
Bad customer service, autopay details changing, etc. Have you ever managed a loan sale? Have you ever managed a loan sale of an elderly person with dementia? It's a royal pain in the ass. If you get it wrong, you risk losing credit score.
Checks? ;)
Use a mortgage originator that keeps the servicing themselves. One of the reasons I usually use PenFed in the US, after a nightmare of fly by night servicers.
After being chopped up and bundled with safe loans being mixed with non safe loans so nobody has any idea what’s being bought.
Where have I heard this before.
Probably from Margot Robbie :-)
https://www.youtube.com/watch?v=GrZyx4bNvs8
> My mortgage has been sold almost a half dozen times already.
Sure that could be true, but that has nothing to do with the public debt we're talking about.
Completely different markets.
That's like me saying the condo Market in Miami is hot and you rebutting that single family homes in HOA's in Phoenix are not hot right now.
Both can be true at the same time as they are completely different market that are only very tangentially relate.
My favorite was the following:
- I still have a mortgage on a property but don't live there so the mortgage bill gets sent to a different address (b/c rental property)
- Company A originated the mortgage and sells it to Company B
- Company B completely ignores the mailing address and starts sending bills to the original property address
- only through blind luck did I realize that the mortgage bill was being unpaid
This seems like basic, basic bookkeeping but I guess it's also a reminder that "reality has more detail than people realize" and that there are plenty of opportunities for improving systems.
One of those myths too many programmers believe: All street addresses can accept US mail. Not necessarily the issue in this comment, but when somebody gives you both a shipping address and a mailing address and you send mail to the shipping address, the fault is yours if it doesn't arrive.
Another: A particular street address only maps to one person, entity, or family. Counterexample: Giant skyscraper with a zillion tenants, each in a different suite. Or a giant apartment building. Etc.
Still another: One particular suite address only maps to one person, entity, or family. Counterexample: Any of thousands of commercial mailbox-rental / package-shipping stores in US strip malls, which tend to have suite numbers (within the mall) and possibly hundreds of tenants, all at one suite.
One of those facts that mortgage owners refuse to internalize: the party responsible for the payments is not necessarily living on the property. There is absolutely no reason in this century to assume that the mailing address for real estate mortgage related correspondence is the address of the property. Related: the assumption that if there are two names on a mortgage with given names that are commonly understood to be gendered, the parties are legally married.
I own the duplex I live in. The actual property address is the rental unit. Every time the mortgage gets sold my tenant gets mail about it until I can change the mailing address back to my actual address (next door). It’s absolutely infuriating because the carelessness of my mortgage servicer who I don’t even choose makes me look bad.
You should be able to go to the USPS and do a change of address for yourself. That way every time mail for you is sent to your tenant, it will go to you.
https://moversguide.usps.com/mgo/move-combined-mobile will let you do it online.
It's a pain that you have to do this because of their incompetence. But it will save you the embarrassment.
This is actually a great idea.
go to the *private company the usps sold the captive market to.
It may be harder to do that now.
One of the changes USPS made in recent years is that they are securing mail forwarding. That type of arrangement may not be possible.
I just moved. Moving a business address was hard. For an individual, the only requirement ai saw was that I pay a small fee with a credit card registered to one of the addresses.
Doesn't that only last for a year? I remember it being just for temporarily catching mail you haven't changed the address for yet.
This is a great idea. I'll try it but I'm not sure it will work. I believe there is a time limit on the forwarding and it looks like not all mail is forwarded, including financial documents.
https://www.usps.com/manage/forward.htm
If the world were just, the consequences for that would be the morons owning the mortgage having to eat a missed payment.
(They'd stop fucking this sort of thing up pretty quick if they faced financial consequences for it.)
Ar some point I had all the bills on my calendar and a event to check if the company confirmed the payment. It saved me at least a handful of times. I confess that I am not that diligent anymore, but I also have scheduled things in a more reliable way that always notifies me on payment. But the other day the bank skipped one of the payments because some information on the destiny account have changed but nothing was shown. It is always annoying to stop what you are doing to do this
I remember getting a mortgage and the loan officer saying that there was a 100% possibility that the loan would be sold within 60 days of closing.
My mortgage got sold before the first payment. It was in retrospect quite funny because I still get periodic spam emails from the originator as if I'd already be back on the market for another mortgage.
This is standard. Origination and servicing are typically handled by different companies (or parts of the same company). Usually the Origination side only handles short term loans and doesn’t want stuff hanging around longer than is necessary.
At one point my mortgage was sold to a bank with a truly awful website. One of its many faults was the password had to be exactly 8 characters.
IoweIowe
8 characters? That smells of 'account created on a mainframe' - you can only have a max of 8 characters for mainframe passwords.
> This doesn't seem like a story at all given how robust this debt is trading.
That directly contradicts specific points made in the story, about specific Tier 1 banks and specific amounts of debt not finding buyers. And the amount cited isn't all that great, given the overall equity in play.
> Nothing out of hte[sic] ordinary here
Matthew Moniot, Man Group: "the deal sizes involved are 'out of scale to anything we've thought about, ever.'"
Hard to compare your model with his, since he doesn't have one. When quotes from named credit risk guys from named finance organizations sound like angsty Gen Z, it's not ordinary.
In any case, the story is covering something significant. There is an important test occurring, and we're all going to learn the results, sooner or later. It could all turn out fine, but I don't know. I don't believe you really know either.
Well I'd agree the size of these deals are far larger than any debt deals I can remember in the past 10 years.
But that has nothing to do with the scare tactic headline that says banks are trying tot offload debt. As I said this is exactly how banks work and how they treat all debt they underwrite.
I believe the implication is that if AI is really The Second Coming (or First Coming, if you prefer), then banks would want to keep the debt and the potential gains of said debt. Or rather, there should be an overwhelming demand for said debt.
Bond guys aren’t emotional. Inflation is heading up as are rates. They’re unloading stuff from their balance sheet that will depreciate in value.
It’s not necessarily a statement about AI, it’s just finance and accounting.
Where it's going to pinch is any incompletely funded AI datacenter build-outs.
If the market is already crammed with sector-concentrated debt (because of the amount already issued), finding buyers for more is going to get increasingly hard.
At some point everyone big already has enough exposure and isn't interested in the risk of more.
The only thing that keeps the party going is being able to drain that debt off bank sheets, but it's hard to see a ton of interest in fixed rate, capped upside exposure to a high risk industry in an environment of rising central bank rates.
If the of fate of the AI boom is so fragile that a digital newsletter site's headlines are a meaningful concern to you, perhaps you have some things to ponder. The story itself names names, quotes verifiable statements and makes reasonable inferences.
And this is supposedly high grade debt we're talking about: JPMC is spending months on end shopping around a few $10's of billions, and having to discount it. Never mind the far greater sums on the books of vastly less credible outfits, complete with meme names that always age poorly when things go pear shaped.
How a bunch of highly speculative moonshot big tech stuff has managed to be financed by Tier 1 financial institutions and high grade debt, as opposed commonplace equities, is a question for the ages, and we may all yet find ourselves suffering the answers.
You give a blatant misrepresentation of the very non-ordinary circumstances here.
The debt isn't trading robustly at all, exactly the opposite.
> JPMorgan and MUFG are part of the group that has spent more than six months trying to distribute $38 billion in construction debt tied to a Texas and Wisconsin data center project leased to Oracle.
> JPMorgan, Morgan Stanley, SMBC and MUFG are quietly shopping pieces of the AI debt pile they helped build, a sign the lenders closest to the money have started hedging their own bet.
> One case shows how stuck this has gotten. A group of banks including JPMorgan and MUFG has spent more than six months trying to distribute $38 billion in construction debt tied to a Texas and Wisconsin data center project leased to Oracle, Bloomberg has reported. Some lenders are now willing to sell pieces of it to non-bank buyers at a discount, just to move it. Six months is a long time to sit on debt nobody underwrote to hold forever.
> Matthew Moniot, co-head of credit risk sharing at Man Group, told the Financial Times the deal sizes involved are "out of scale to anything we've thought about, ever."
> This doesn't seem like a story at all given how robust this debt is trading.
FTA: That is exactly why CoreWeave-leased paper prices at 7.00% to 9.875%, against the 5.70% to 7.875% that hyperscaler-leased bonds command, per bond market data compiled by CCIR.
Just so were clear: Core weave paid Micron and NVIDA 80 percent margins to buy equipment at a 9 percent lending rate so it can sell it to providers who are subsidizing tokens at 20x their own API prices (that are likely also subsidized).
Could it all work out? It could. But it does not look like there is the financing to keep building - thats going to impact prices and the moment that happens this debt looks even more risky.
What you've written is the demand for debt. What's the supply like? You can't conclude demand exceeds supply without knowing both sides, and the US has printed more money than any other time in history.
The debt (bonds basically) is sitting on the books of investment banks. The article here is 5 days old - that "9 percent" figure is already out of date.
Here is today: Shares of AI cloud provider CoreWeave (CRWV) dropped over 15% Wednesday, a day after venture capitalist Chamath Palihapitiya posted on X a chart that showed the yield Nvidia-backed firm's 2032 bonds hit 15% yesterday as a sell-off brought prices into distressed territory. SOURCE: https://finance.yahoo.com/markets/stocks/articles/nvidia-bac...
I can conclude that supply is far exceeding demand because of the rates attached.
This seems like the sort of thing that would be really fascinating to understand but so far your comments are very opaque.
Consider this an invitation to expound at great length on the subject, if you are in to that sort of thing.
Bonds are a weird product. As long as the issuer honors them (remains in business) they are a guaranteed return.
In this case CoreWeave has sold ~4billion in 5 year bonds at a 9% rate. If you buy one for 1000 bucks you will get 2x45$ payments a year for 5 years. Then at the end a 1000 cash payment.
For the sake of argument let's say you bought this earlier this year. You now have an asset worth 1000 dollars. If it is a good bond (A US treasury or Municipal Bond) you can borrow against it from lots of place - you have something worth 1000 dollars on your "books" (accounting). For the earliest sales (you) core weave has already made a 45 dollar payment.
You now have a 1000 dollar asset and 45 bucks in cash. IF you hold to maturity and keep all the money you get 1000 bucks back and 450 bucks in interest.
What happens if you want to sell it? Maybe rates went down a lot, so that 9 percent is huge, and the AI boom is going gang busters so that 9percent looks like a good deal. I offer you 1100 for the bond. You now have 1145 dollars in cash.
What happens if you need money, and rates are the same and CoreWeave looks the same? I will offer you 980 for it... You now have 1025 bucks in cash... and I get the rest of the payments (45$x9) and 1000 bucks back at the end. (This has tax implications).
What happens if you want to sell cause you need money AND, you think CoreWeave is gonna burn, or this "ai thing" is a bust. Well it's likely that I think that too. the bond is only ever going to pay 45X9 more payments but I want a higher rate. I say to you "I'll give you 800 for it" (a 15% rate), cause CoreWeave is fucked. You need the cash so you sell it for that much and have 845 bucks. Thats a loss of $155.
Let's say you bought a billion of those bonds, and expected to walk away 1.45 billion in 5 years - but you sold them all off today and LOST 155 million.
Someone owned a LOT of 9% Core Weave bonds and either found a BETTER investment -OR- they wanted out of CoreWeave and no one had the money or desire to own them. The bond buying market is announcing that "We don't want any more CoreWeave Debt".
There are a lot of problems with CoreWeave: those 5 year bonds it sold, well the contracts to support them (15 billion a year in revenue on 60 billion of debt) only run for 3 years. At current rental rates for long term commitment NVIDA hardware had a 3 year pay off term... But thats not power, the building, staff, the business was (is) marginal.
Who was selling the debt? Well my guess would be a chunk of it was JP Morgan (who set up the bonds to start with). Dumping it right after you announce your numbers (they were a minor miss) and lower your target for CoreWeave's stock would be an ideal time. But that is PURE speculation.
So 9% is the yield and people demanding 15% for new bonds instead of the previous 9% means they lack confidence you'll be around to pay back the original principle?
Are you saying there are existing bonds at 9% being sold for some amount of money (possibly even less than the original principle?)
How does selling the $1k bond at $800 translate into 15%? The bond was originally worth $1k+$45*10=$1450, now $45*9 ($1405?), so if you buy it for $800 that's approximately 85% of its original value ($800+(9*$45)/$1405) and thus a 15% decrease? How does that relate to the original 9%?
Is this about what existing bonds are being sold for or new bonds?
Presumably a us treasury bond yield is basically the same as inflation?
> Are you saying there are existing bonds at 9% being sold for some amount of money (possibly even less than the original principle?) ... Is this about what existing bonds are being sold for or new bonds?
The bonds were issued earlier this year. Their sale is a loss for someone, and NOT a small one.
> How does selling the $1k bond at $800 translate into 15%? 1000 5 year at 9 percent 5x90(450) + 1000 back.
If you need to dump it for 800, the bond still pays out 1000 in the end, The issuer still pays out 5x90(450). The 200 bucks I pick up at the end gets spread out over the 5 years so it looks like 5x130 (650+800).
That would be 16 percent, but all the numbers for the sake of sanity got rounded from their real ones. 9.xx rate, 8xx resale price, and 14.9 (closing on 15) rate.
It gets calculated that way because if you need to sell more new debt it only makes sense to know how to price it.
> Presumably a us treasury bond yield is basically the same as inflation?
Sometimes, often not. But Treasury Bonds have quite a few advantages. No state tax on the interest payments. They are almost as good as cash, so you can borrow against them at a pretty good rate (Better than a HELOC and way better than a credit card). Lots of institutions will give you a line of credit for up to 90 percent of the value of the bond. You can also borrow against them for margin trading (60percent? better than stocks) -
Banks don't want to own anything. They want to get their share and pass on the risk.
How would the banks make money then? I imagine the profit margin of debts is pretty small
Volume!
1. Bank gives you $X to buy an asset and burdens you with debt of $Y, which is much more than $X as it includes interest.
2. Bank sells the debt at $Z because holding the debt is risky and the bank would rather have cash than debt. Its counterparty would rather have more cash over time and is fine with the risk but does not want to bother with the whole process of closing the loan. $X < $Z < $Y.
3. Profit! Bank spent $X to get $Z, which is greater than $X.
yeah, but they dont underwrite such garbage!
stop trying to normalize that oracle got away with shady deals with those banks.
could you get 20mi on your 1mi house? yeah, oracle could, and much more. how on earth is this "normal" and "what banks do"?
This just in: banks sell assets (data center loans) to raise capital so they can do bank things again (i.e. make more loans).
Also just in: water is wet!
I think the real story isn't that the banks are selling it, but that they are apparently struggling to find buyers.
Could it be tied to the current debt crisis USA is having?
This might play out just fine, or crash like the housing market.
If it were trivial to find buyers, wouldn't that be a sign that they priced the debt too low? It should be just hard enough to find buyers that your lost sales are less than the extra price you are able to extract to the sales you make.
Only if you can hold the debt until someone is willing to pay the price you're asking to make it profitable.
Is there any way other than a bloomberg to watch the trading action on it?
"Nothing out of hte[sic] ordinary here, but to be fair the original article isnt' a financial site so they would have no real idea about how this work behind the scenes."
It mentions a "report by the Financial Times". To be fair thats's a "financial site"
Whether news is "out of the ordinary" sometimes doesn't matter for some readers. It can still be news that's useful to them
Investors dump data centre bonds as AI borrowers face ‘Darwin moment’
https://www.ft.com/content/678bcd31-6c2a-447b-a68c-ce6dec220...
Isn’t this a perfectly normal thing banks do with all large debt? Any bank underwriting any $40b loan was always going to syndicate it.
Not to do so would be reckless.
What is unusual about this is that syndications usually clear in a few weeks but this has been stuck in distribution for six months and still not closed.
What is unusual about this is not that it is a single debt of that size but that it is Oracle that is the poor quality indicator.
And it's just one of them: they know that there is about three trillion dollars of this risky shit out there either in the hyperscaler/FAANG balance sheets or off the books and others are reaching the limits of their appetites for it, so they are going to struggle to sell this particular debt, and meanwhile Oracle's position gets worse every day.
We are getting a lot closer to the Margin Call crisis meeting moment where one bank decides it cannot assess the risk of their share of it, are we not?
But this time it is happening in a world where retail investors, lawyers, government officials, elected representatives are much more likely to have seen Margin Call and The Big Short.
But if Oracle crashes and burns, is that going to tank the whole industry, or is it more likely that the bigger players just eat it up and take its customer?
Oracle is a really serious problem, because they actually are too big to fail. Nobody can take Oracle's core business that quickly. So multiple governments, internationally, are going to have to step in to preserve the various outposts of Oracle that keep them and major organisations running.
Those bits could be sold off to different global consulting firms, I suspect.
(But aren't those global consulting firms also going to be freaked out about their own AI risks? And what does the whole AI-assisted coding thing do to a sober assessment of what all of Oracle's global business is worth? Lots of unanswered questions)
Also that is not the AI data centre bits; those will have to be chopped off and dumped.
If that doesn't seriously spook the markets — a company as well-known and formerly blue-chip as Oracle, needing an international bailout — then it would be kind of surprising.
Yeah, like what happened in the 2008 financial crisis where governments had to step in to save the banks as people defaulted on housing payments due to high mortgages.
Oracle is already close to being classified as junk and reaching a tipping point. If/when that happens it is unclear what affect that will have on the markets on companies invested in AI datacenters with Oracle, and other companies that Larry Ellison and other Oracle investors own shares in.
Yes — I think the thrust of it is that Oracle is unusual because all of their risk is on their books, right? They aren't using SPVs. So it's much clearer.
So the worry is that it makes it clear that the unexamined risk in the SPVs has a lot less light shed on it.
(ETA: that article suggests Oracle is using SPVs)
I think liquidation would be unlikely. Restructuring would be more likely. Like as happens with airlines from time to time.
Everyone is salivating at the prospect of One Rich A-hole Called Larry Ellison getting his come-uppance, but this is the correct take. Oracle without cloud is still a profitable (if much smaller) business that can continue on for quite a while. Larry (along with everyone else holding $ORCL) gets hosed, but corporations will still continue to get extortion requests couched as "opportunities to license Java 8"
I don't see a world where Larry gets financially hosed. The whole system is setup to protect him, there will be a parachute.
He will believe he has been hosed because the parachute will be for less than he believes is his proper share.
He's 82.
Even for a megalomaniac, at some point it doesn't really matter.
These people never seem to realize that time with the grandkids really is priceless.
Is oracle too big to fail?
I mean yes, there are key contractors for certian things, but depending on the structure they can be chapter 11'd to yeet that debt.
Of course junking all those bonds would cause a crisis.
Their software is embedded into so many governments and Fortune 500s. It also makes them unlikely to go completely bankrupt but just Chapter 11, reorganize and sell off those parts.
Oracle’s customers/counterparties aren’t really at risk of becoming unsecured creditors in a bankruptcy situation though, so there’s no contagion risk, so “too big to fail” does not mean what it means when you’re talking about a systemically important financial institution.
Yes this is basically the Margin Call situation.
Everyone knows these loans are dogshit but if anyone moves first to say so then everyone else’s loans basically are screwed too. So everyone is incentivized to pretend like there’s no problem even though everyone knows there’s a problem.
Listening to Ed Zitron on various podcasts, there are several issues with Oracle stocks:
1. they are one place above junk;
2. they are being treated as effectively junk;
3. if they get classified as junk, any pension portfolios holding Oracle stock must sell as they can't hold junk stocks.
If that happens then there will be a cascade of effects. Not just in the AI/datacentre sector but elsewhere, as Larry Ellison holds a stake in Paramount/helped finance the Paramount/WB merger.
[1] https://www.youtube.com/watch?v=rHaPfdnRoZ4 -- Mostly Economics Podcast #55: Who pays when the AI bubble bursts with Ed Zitron (12:36 - 23:53)
Oracle's force majeure notice on a data centre build-out is not helping, I am sure.
(Can't remember, is it this Texas one?)
ETA: This whole Oracle bit is really the area of Zitron's predictions that is the least contentious: he called things, they are happening.
The big question is to what extent this is a harbinger of bad things. In a less crazy market where the value of enterprise-software-backed consultancy is stable or growing, you can imagine people lining up to bite off chunks from the carcass of a failed Oracle. But is the value of enterprise software even stable? Aren't many of the possible buyers also overextending themselves?
ETA 2: No, the potential force majeure is about a project in New Mexico, apparently
>3. if they get classified as junk, any pension portfolios holding Oracle stock must sell as they can't hold junk stocks.
Wouldn't hedge funds or PE recognize this arbitrage opportunity and eat this up, making this a non-issue? Vastly simplifying this: suppose "junk bond" means the chance of default is greater or equal to 10%. Of course it's bad if the risk of oracle going bankrupt edges up from 9% to 10.1%, but we shouldn't expect pandemonium from the 10% cliff edge, because there's plenty to be made by selling all the bonds that pension funds are obligated to sell, because now they have higher yields (yields move inverse to bond prices).
Why aren't the PE firms buying this debt right now though, before Oracle is downgraded? Isn't that a better purchase?
(Sincere, not rhetorical questions)
Because assuming the premise is true, there will be a dip in bond prices (ie. higher yields) when oracle gets downgraded, because pension funds or whatever have to dump their holdings. You buy the dip, not at the top.
Because the general consensus at this point appears to be that the notes will fail. You wouldn’t buy a loan if you thought it wasn’t going to be repaid.
> You wouldn’t buy a loan if you thought it wasn’t going to be repaid.
Eh, people do weird things all the time.
Also, there is often extreme information asymmetry.
Ehhhh?
I guess, maybe, but perhaps the risk that GP is commenting on is that it could be it's own form of Juicing.
I do sincerely doubt, even with the big shifts that AI enables to have companies 'move away' from Oracle, that Oracle will default.
On the other hand, There's still an elevated chance of decline.
IOW, Those stocks might move from pension type plans to different baskets as a result, however there is a non-negligible risk of some (not total!) loss in the 5-10 year term.
Will add, I would -hope- that the same pension rules around selling questionable stocks, would also have rules limiting what level of exploitation is possible.
You could have made a lot of money betting against Ed Zitron over the past few years. He has predicted 12 of the last 0 AI market crashes.
Of course past performance is no guarantee of future results, as they say.
tbf he only needs to be right once, and at the moment the question of profitability of these frontier companies is still open
I think it's only a matter of time, like the build-up to the financial crash in 2008 or the dot-com bubble. There's currently a huge amount of money being bet on the big AI tech companies without any real sense of return. And the companies like Oracle that are funding data centre build-out are sitting on unused GPU stock.
Recently, the Australian AI firm failed to secure an IPO [1], [2].
OpenAI is looking to go for an IPO despite shaky revenue [3], [4], [5], resulting in a stock drop for companies like Oracle invested in OpenAI [6].
Anthropic is in a similar situation: looking to IPO despite shaky finances [7], [8], [9].
The companies involved are all investing in each other and trading money between them leading to circular investment [10].
[1] https://www.wsj.com/finance/firmus-ipo-ai-trade-f490c240
[2] https://www.abc.net.au/news/2026-10-10/how-firmus-the-bigges...
[3] https://techcrunch.com/2026/10/08/openais-revenue-is-reporte...
[4] https://www.inc.com/chris-morris/what-openais-leaked-financi...
[5] https://futurism.com/future-society/ai-financial-bubble-open...
[6] https://www.cnbc.com/2026/10/08/open-ai-revenue-nvidia-oracl...
[7] https://www.investors.com/news/technology/anthropic-ipo-fili...
[8] https://www.newconstructs.com/wp-content/uploads/2026/10/Ant...
[9] https://www.tradingkey.com/analysis/stocks/us-stocks/2622154...
[10] https://graceblakeley.substack.com/p/the-ai-circular-economy
s/stock/bonds
Equity shares do not have ratings, bonds have ratings. Everything else is correct, if their bond ratings slip one more level they will be rated junk which may force some holders to liquidate if they’re not allowed to hold junk bonds.
The longer a clearly deteriorating credit like Oracle remains nominally investment grade, the worse the selloff eventually becomes. It’d be a false economy to try to drag it out, especially when investment grade institutions are already pricing Oracle at crossover and preparing to get the hell out of dodge.
The trigger in Margin Call was not that they could not assess the risk, it was that they were improperly assessing the risk, had taken too much risk onboard, and the downside of the risk was more than the value of the firm.
Yes, and no. The film is not really about that one day or that one discovery.
Much of what Margin Call is about has already happened in the few days and weeks before the day in the movie — the events that precipitated the widespread firings, including a rather deliberate firing of the head of risk management, but are not really discussed.
In the meeting, Sullivan is talking about the music slowing, saying "if the music were to stop…". He's suggesting that the situation is bad, in the context of the un-discussed preceding days, so some action is needed, which is why he escalated.
Tuld saying he fears he "can't hear anything" is about much more fundamental uncertainty — his own belief that no set of numbers could be useful (he didn't even want to discuss the numbers in the report) and that the actual situation required acting on his gut instinct that it was much, much worse.
He, basically, thinks the risk cannot be assessed ("I'm telling you, this is it!") and arbitrary action is needed.
In short, the point is he did not have any confidence they could ride out the consequences of the preceding, largely un-discussed few days, because they were beyond their parameters, and that there was no time to assess the real hidden risk.
The trigger for the chosen action is not the newly correct numbers in Sullivan's report, but it forcing Tuld to confront his belief that even those numbers were no guide for anything.
(Sam's dog dying after his sad failure of a divorce is a crucial metaphor — the dog days are literally and metaphorically over)
> Matthew Moniot, co-head of credit risk sharing at Man Group, told the Financial Times the deal sizes involved are "out of scale to anything we've thought about, ever."
Isn't that just because corporate bond issuance is at a all time high?
https://www.economist.com/content-assets/images/20260711_EPC...
Which of course is a valid point to raise, but you should just say "corporate bond issuance is at a all time high", rather than some clickbait headline about how "Banks are now trying to offload the AI data center debt" and it's "out of scale to anything we've thought about, ever."
It's not a clickbait headline. It's a direct quote.
And the key point of it is not "larger than ever" but "out of scale"?
>It's not a clickbait headline. It's a direct quote.
I'm chastising the author of the article, for the "Banks are now trying to offload..." framing, not the commenter. Hopefully the fact that I was commenting about the headline made this clear.
>And the key point of it is not "larger than ever" but "out of scale"?
Isn't that "larger than ever" but with more exclamation points?
"Out of scale" when it is a risk management firm chap saying it, sounds like a polite way to say "abnormal" without scaring the straights.
(At least is the way I read it: not just large but abnormal in context)
I'm confused. Why would you offload it if you thought it was a good investment?
They make money as middlemen, not the ultimate holders of debt.
Massively not an expert, but at that level, things are not a binary "good/bad investment". Financial institutions have policies regarding finely sliced debt types, ratios, risks, lengths, sectors, etc.
I personally think it's all hugely overcomplicating things but that's the way modern world works.
(</i>until it every now and then, on regular intervals, doesn't:)
The short answer is to free up money to make other investments.
The longer answer is that banks generally have policies about how concentrated they can be in individual borrowers, industry sectors, geographies, etc. That is why you rarely see a single bank take all of a very large corporate loan. They syndicate it out.
Banks like good investments, but they like being paid fees more
They take a cut / fee for financing the debt deal and hold the debt short term. They can't do another deal (simplifying the situation) until they offload the risk. Their business is in their percentage for arranging deals, not in getting paid back over 50 years.
In these times, what other deals are out there. AI has sucked all the air out of the room, difficult to imagine anything getting similar investment over the next decade.
its a different business model? IBs dont generally hold debt to maturity. they underwrite the debt then gradually sell down in the weeks/months following the deal. their business is making money on the spread/underwriting margin.
I saw an article a couple of days ago on one of the popular sites (ft or Bloomberg or something), about how now is a great opportunity to purchase private company credit. Guess this is the submarine https://paulgraham.com/submarine.html
thank you for this link, all these years on the internet and I had not come across it
Hah, this is remarkably short turnaround. The OBBB only lifted the ESLR on April 1!
Had temporary acronym overload, unpacking for anyone else:
There was a cringe-named Republican bill from the beginning of Trump's term, it somehow(?) relaxed the Enhanced Supplementary Leverage Ratio, and the eSLR is one of several related rules on very big banks that deter them taking on "too much" risk.
Private credit is far different than the debt of a public ally traded company. It is far riskier as those companies can't easily tap the credit or equity markets for new money if they get into trouble the way a public company can.
But the debt we are talking about is not Private credit debt, its completely different animal with far different risk characteristics
Found it: head of JP Morgan asset management calling "once in a lifetime opportunity to invest in high quality company debt" https://www.cnbc.com/2026/10/10/jpmorgan-sees-once-in-a-gene...
Different markets, that is public debt the op was talking about private credit.
I agree with JPM that now is a good time to invest in public debt.
yeah, 10y US T-bills are nearing to 6%,this is actually excellent public debt :-D
The problem with private credit is that most of the valuations are not publicly tested.
what do I mean by that? oracle is publicly traded, which means they (should) report profit loss and other key metrics in a standardised way. This means that one company's metrics should be comparable to others. Their value is assessed by the second on a public market. This means that anything that affects thier value (real or imagined) is reflected almost instantly. (same goes for debt)
Private credit, and the stuff its invested in, is much murkier. THey do not have the same public reporting rules. There is no testing of value. Its in the interest of the owner of that debt to talk up the value of the assets they hold.
This means that a fund might invest in 10 companies. Those companies might be doing well, or they might not. Because information is limited, and there are no public trades, the value of those companies are only ever tested at sale, or in a crisis. (ie they fold, or do something so public that they can't avoid the consequences.)
THe problem then is that because information is limited (was it a one off, did the owner hide the problem, did they use the wrong investment strategey, is the rest of the portfolio also over valued by 10x?) causes people to panic, and withdraw money.
Because private credit is not that liquid, it means that if people withdraw too much money, they either have to say "no we have no free cash" (lehman brothers insolvancy), they have to take out bridging loans (expensive and very short term) or sell assets (fire sales rarely get good value and shrink the credit supply)
All of which causes a panic, and people look at places like softbank, see the leverage and think "oh fuck thats not worth anything" and the bubble pops.
TLDR;
Modern finance is basically a collaborative fiction. Its fine so long as everyone buys into the same narrative. As soon as someone says "no, why?" the whole thing falls of the rails.
But luckily for the modern financial system, there are enough watchdogs lured with its narratives into willingness to enforce their coherency with weapons.
Yep i'd say your comment fully agrees with me.
Wow, 2 lines in and I realize I already read this article waaay back, before I even knew what a startup was, much less who paul graham was.
The world is a napkin
This is just what banks do O_o underwrite loans, then collateralize (i.e. bundle) to people who want the risk.
yes just like mortgage backed securities in 2007
I reacted the same. What could be a bad sign though is if they try to sell it and they dont get what they want.
> This is just what banks do…
Sure. Sometimes they cause global financial crises as part of that process.
https://en.wikipedia.org/wiki/2008_financial_crisis
You might as well say that banks giving mortgages caused that. Sure it happened as part of the process but that wasn't the thing that caused the problem.
No, banks collateralizing mortgages caused it.
https://en.wikipedia.org/wiki/Collateralized_debt_obligation
> In the early 2000s, the debt underpinning CDOs was generally diversified, but by 2006–2007—when the CDO market grew to hundreds of billions of dollars—this had changed. CDO collateral became dominated by high risk (BBB or A) tranches recycled from other asset-backed securities, whose assets were usually subprime mortgages. These CDOs have been called "the engine that powered the mortgage supply chain" for subprime mortgages, and are credited with giving lenders greater incentive to make subprime loans, leading to the 2007–2009 subprime mortgage crisis.
It's hard to ignore the similarities.
It’s also hard to ignore differences. Bubbles gonna bubble, but the consumer is quite healthy this time around. Burry being short doesn’t make it 2008.
> the consumer is quite healthy this time around
Inflation's way up. Real wages are down.
https://www.nytimes.com/2026/10/14/business/economy/inflatio...
> Wage growth has remained relatively muted over the past year. That, combined with higher inflation, means Americans are earning less for an hour of work. Average hourly earnings, adjusted for inflation, fell 0.5 percent in September, and were down 0.7 percent from a year earlier. It was the sixth straight month of year-over-year declines in real earnings.
https://www.cbsnews.com/news/household-debt-delinquencies-ri...
> The share of seriously delinquent auto loan balances has hit a record high this year, while nearly 13% of credit card balances are seriously past due — close to their 2010 peak in the aftermath of the housing crisis — according to recent data from the Federal Reserve Bank of New York.
https://www.cnbc.com/2026/10/09/american-debt-delinquency.ht...
> The ability of U.S. families to stay current on their debts worsened over the past three years, hitting levels not seen since the aftermath of the global financial crisis, the Federal Reserve reported Friday.
> Wage growth has remained relatively muted over the past year. That, combined with higher inflation, means Americans are earning less for an hour of work. Average hourly earnings, adjusted for inflation, fell 0.5 percent in September, and were down 0.7 percent from a year earlier. It was the sixth straight month of year-over-year declines in real earnings.
Where are they getting this data? This directly contradicts their claim:
https://fred.stlouisfed.org/series/LES1252881600Q
https://www.bls.gov/news.release/realer.nr0.htm
> Real average hourly earnings for all employees decreased 0.5 percent from August to September, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today… From September 2025 to September 2026, real average hourly earnings decreased 0.7 percent, seasonally adjusted.
Your chart appears to be weekly earnings, not per-hour wages. Having to pick up more shifts or a second job to make ends meet supports the point, in my book.
> but the consumer is quite healthy this time around
This is one of the more out of touch things I’ve read today. I’m not sure from where you’re sourcing your economic data.
Maybe you’re saying this financial collapse won’t be as bad as 2008? I’d agree with you, that one was singularly dangerous and required large scale government intervention to guarantee that the global financial infrastructure didn’t bust. But this bubble will hurt very badly at a time where the consumer is not as strong as you think.
No, to be more specific, banks selling the collateralized mortgages that were subprime in risk as if they were prime and these risk ratings being accepted at their word and via collusion with the ratings agencies is what caused this.
There is no issue with collateralized debt as long as the risk is properly assessed, the whole point of securitization is that you can take on higher risk for higher reward of an asset that was previously just one single piece of risk.
> subprime in risk as if they were prime
What if this winds up being the case for the trillions dumped into AI in hopes of future revenues?
https://www.reuters.com/business/oracle-corp-goes-high-stake...
> Cloud computing giant Oracle Corp is on the cusp of a junk-grade credit rating and its shares have tanked as the artificial intelligence hyperscaler becomes the fall guy of investors' concerns over the sector's debt-fuelled spending binge.
Honestly, that would be more like the railway mania in the 1840s or, really, insert any "Panic of X" here. Speculative mania has been a thing for centuries and will continue to be a thing for a centuries.
The specific problem of the 2008 financial crisis was that the banks were going out of their way to obfuscate the source of their CDOs so that, even when it was clear in 2007 that the subprime mortgage market was unraveling, you couldn't look at your instruments and figure out whether or not you were affected. The problem wasn't the CDO, it was the obfuscation. And as far as I'm aware, the current debt offerings aren't being obfuscated--if you want to avoid the data center debt because you think it's junk, just avoid the stuff being touted as data center debt.
> The problem wasn't the CDO, it was the obfuscation.
yes, i specificly remember when Lehman went under the banks stopped trusting each other's ability to assess their own exposure. The banks stopped lending to other banks and that's when Paulson got on his knees (literally, i think there's a picture of him on his knees in front of Nancy Pelosi) asking congress for cash to guarantee loans. The side effects started squirting out everywhere i think even Mcdonald's was hours away from bankruptcy because the corporate paper market suddenly ceased to exist. Also, money market returns turned negative briefly, that's like a negative interest rate on a traditional savings account bad. It was bizarro world for maybe 72hrs.
The movies don't really do justice to just how upside down and nonsensical the financial world became. It was a knife's edge for 2 or 3 days.
One complication this time is that the picture is reversed. Both the executive branch and Congress have massive incentives to keep the music playing. Nobody is going to have to beg Mike Johnson to step in, as he'll happily do whatever the White House says. Yes, there will presumably be a new Speaker after the election, but how much will that matter?
My fear is that this is all going to turn into one big front-running exercise where those connected with the Trump crime family are warned to get out first, banks that swear allegiance are bailed out next, and the rest of us get to hold the bag.
This is correct.
The nuance here, though, was that the CDOs and similar instruments were sold in a tranched fashion, and the super-senior tranche was made to look as if it was very low risk, as normal for tranches instruments.
But when your entire series of tranches all consists of trash, then which tranche you were in didn't really matter.
CDO and CDO2 instruments hid this distinction really well, and unfortunately the ratings agencies bought into it and sold crap as AAA securities.
> unfortunately the ratings agencies bought into it and sold crap as AAA securities.
It's very hard to understand something when your salary depends on you not understanding something.
They just kept the music going, more ratings issued was more money for them. Paid by the bank creating the security, what could go wrong
This is an oversimplification. It is straightforwardly correct that, for any imperfectly correlated basket of assets, the senior slice will be safer than the junior slice. If you hold the most senior 10% of a basket of mortgages, 90% of those mortgages would need to default for you to start taking losses. That is rare in any context and in fact there is a good bit of evidence that AAA-rated mortgage-backed securities didn't actually do all that badly in the 2008 crisis: https://www.nber.org/papers/w24509
There were a lot of factors that contributed to the 2008 crisis: adverse selection leading to low quality portfolios, mispriced assets, high leverage which magnified losses, lower-quality securities being held by investors who couldn't really afford to bear the losses on them, etc. But the fundamental concept of tranching is not actually that bad, even though every time people read about it they think it's the exact same as 2008. Banks have been tranching debt since long before 2008 and they have been tranching debt ever since. Not just mortgages either, but all kinds of debt.
Is the risk on AI debt properly assessed?
Are these companies worth their incredibly high valuations?
> There is no issue with collateralized debt as long as the risk is properly assessed
Yeah... maybe think on that a bit in this context.
Another factor in that case was that the government regulated, in some cases, the ratings of bonds that entities were allowed to buy (they couldn't be as highly levered with lower rated bonds) and so there was an incentive for bond ratings to be falsely inflated, happily carried out by the rating agencies. Of course collateralized junk is still junk, and many people at the time knew that, but there was money to be made in looking the other way.
The cause is always a failure of underwriting. That was true of the Savings and Loan Crisis, the Great Financial Crisis.
It feels like each bubble gets bigger.
And for this one when insurance companies are forming syndicates because their underwriting becomes greater than any one company, it just sounds frightening, the sound this thing is going to make when it finally pops.
> It feels like each bubble gets bigger.
Well you would expect that given that the market keeps getting bigger and the money in circulation keeps getting bigger.
Inflation alone means each bubble should be bigger than the last all other things being equal.
Adjusting for inflation, though, things also can happen faster now than, say, thirty years ago, and there's more centralization in quite a few industries.
> Adjusting for inflation, though, things also can happen faster now than, say, thirty years ago, and there's more centralization in quite a few industries.
Not sure its just related to centralization, probably more so that information can flow more freely now, but I fully agree.
Yes, and sometimes they turn Tulips[0] into value stores. Or GPUs for that matter[1].
[0] https://en.wikipedia.org/wiki/Tulip_mania [1] https://nvidianews.nvidia.com/news/nvidia-partners-with-apol...
No but like this is how money supply works.
Loans are sold off, which means that they can raise more money to make loans. Each time you do that, you create more money out of thin air, which is profit.
The problem is, it only works if everyone believes.
THe problem with 2008 is that people stopped believing and demanded banks settle immediately. which then meant that they needed to raise cash, which meant looking at their assets, which meant looking at the risks of those assets, and then it went to shit.
People stopped believing because people stopped paying their mortgages.
That’s true, but before you try to shift the blame onto the homeowners, remember that these mortgages were intentionally issued to extremely risky borrowers, and then that risk was intentionally obfuscated when the loans were collateralized. The fault cannot be laid entirely on the borrowers, which is what I sense you’re trying to do here.
Investors bought a lie packaged by the financial institutions. They shouldn’t have believed in the first place because the risk was junk-level but not sold as such.
No but thats the point, they were always in trouble. sub prime were sub prime.
Everyone thought they were ok because they didn't look at, or were not shown the, default rate of their instrument. The risk profile was deliberately obscured, or the people wilfully ignored it.
they were valuable until it wasnt.
This is what a lot of, if not all, IPOs are for too.
Lots of names to obfuscate the same financial yada yada.
Next thing you know, they're going to take the money in your savings account lend it out to anyone who asks for a loan!
/s
yeah, either they discount it enough to look worthwhile to someone, or they keep it and take the risk. Risk assessments are inherently subjective, so both parties can think they're making a deal.
>We lent £1,000 to John Sozzleby at 10%. We quantify the risk level as “iffy”, which is 42.6 qualm points above "dodgy". and are willing to sell you the debt for £700. its a great deal!
|This is just what banks do O_o underwrite loans, then collateralize (i.e. bundle) to people who want the risk.
... and from the linked piece ...
| Banks do not sell down debt they are confident in
... I have no claim to expertise but both of these can't be true.
I wouldn't worry about it anyway, you can be sure when the day comes "they'll be to big to fail".
The next sentence in that article is:
> They sell down debt when they are worried about concentration, which is exactly what "approaching internal limits" means in plain English: too much of this bank's balance sheet is now one bet on one sector holding up.
Which is correct, but kind of weird because being confident in a credit and being worried about concentration are not really mutually exclusive things. You can be pretty confident in an investment but not want it to constitute a majority of your portfolio. (Bankers know that even very strong credits are never 100% guaranteed to pay out.)
Let's say I offered you the chance to pay $100 to get $120 back if at least one coin toss in five came up heads. That's a pretty good bet, right? But would you bet your house on it?
But it seems according to TFA they are trying and failing to do this.
Major base rate fallacy.
This is common. Selling debt is normal. If there is money to be made by selling the debt and going back to issuing more loans, they’ll try to find a buyer.
Everyone is so primed to believe that all things related to data centers are bad that they’ll assume this is a special event. The person writing the headline knows that.
It's normal to sell debt. It's not normal to underwrite bad debt.
And then fail to sell it.
Of course it is. The junk bond market is a thing for a reason.
So, is this the type of signs we should be on the lookout anticipating an impending implosion?
Depends on what price the banks offload at.
When the debt in 2007 sucked, it crashed the economy. But when the price was good in 2006, everyone celebrated.
Note: prices are getting worse for bonds today but nothing panic worthy yet.
Not sure I agree. The credit default swaps have been extremely expensive lately, meaning that someone is already thinking about an AI bubble popping that will take private credit down which will make banks take a serious hit (11% of their outstanding loans are to linked to AI). On top of that we are in a time where the economy is propped up basically by AI spending and delinquencies on all sort of debt are at historically high rates.
I am panicking a bit TBH
Maybe it's because I've lived through 2007, but the time to panic is when ~100 year old institutions disappear overnight (Bear Stearns)
Do we even have one bankruptcy yet?
I'm keeping an eye on Coreweave and Oracle. But they haven't collapsed yet, not as of today anyway.
If it's anything like 2007, it's going to be the one we aren't watching that collapses first. Those in the open about their debts and situation are often more honest and solid than other unknown players. The ones who are lying the most are the ones with the worst accounting and worst books.
------
So yeah, chances are that Coreweave is just this week's topic. We really don't know how close we are to a collapse until someone out there actually starts to collapse.
If I knew the answer to that I’d go short some stock…and maybe not post about it.
The big two AI labs are still not listed on the stock market, and SPCX is still above it's listing price. Unless you can remain liquid more than the market remains irrational better find some other use for your investment funds. No?
Just short Oracle and Coreweave.
My chop block list has those, plus micron, amd, nvidia, sandisk, western digital, skhynix, corning and marvell.
Those should really eat a lot of shit if any of the two ai companies stops buying everything no matter the price.
Why Corning?
They make the fiber optic cables and such that connect everything.
Is fiber optic cable actually a high-volume-demand component in all of this? All your other semiconductor picks seem good though.
If I'd be guessing, it's the Ukraine Russia war and the tethered drones that could be affecting their valuation?
Right now it's what's propelling corning's price, same as in the dot com bubble.
Every single server with a dozen ethernet and/or IB ports that run something like four pairs in each connector for bandwidth, times 8 to 42 servers in a cabinet times a couple thousand cabinets in a building times a dozen buildings in one location. And then you need the fiber to connect all the switches together, and the buildings together, and then you need to tie the facilities into the wider world through various ways.
It adds up quick.
You absolutely should post about it when you short for good cause - there was a fund that earned it's money that way. Do research, find adverse fundamentals or malfeasance that are underreported, short the security, then publish your findings and let the market do its thing. IIRC, it was them that publicized that Nikola (Electric truck startup) faked their demo video by rolling a non-operative prototype truck down a stretch of slightly inclined highway.
I remember in Summer 2007 feeling that there was an impending implosion coming based on the shady practice of using 2nd mortgages as downpayments - it had become a common practice. Started doing a bit of shorting (not too much), made a little, lost a little and then sort of lost interest in doing it just about the time things fell apart in '08. All that to say that these things can take a lot longer than you'd expect. You can look at the situation (like the circular funding as well as this article) and decide that yes it's not sustainable. But it can sustain longer than you expect.
Oh, I am well aware it's hard to time it. But still getting a general sense of the impending crash can help preparing in different ways. You can park part of your assets, not completely withdraw. Or pay extra for piece of mind by hedging them. Sure, it will cost, maybe won't be needed at all, or still misfired, but I'll sleep better with less anxiety, so that's still a win in my book...
Yep, market can remain irrational for longer than you can stay solvent.
This is the thing about being right too early has the same effect of being wrong.
Which is why I hate when people criticize some obviously overvalued shit, and the response is "why don't you short it".
Sometimes the best way to be safe of something about to explode is to just get away from it.
Yeah. The thing is, we were being told that was a problem in late 2004 (this is when Max Keiser was writing and talking about the risks to Fannie Mae and Freddie Mac; he and others saying this were written off as cranks, even though they laid out a pretty solid scenario that came substantially true.)
So yes, Oracle is likely a canary in the coal mine.
It can only really be seen as an indicator of hidden risks to the banks from exposure to the SPVs.
But how long it will take before the miners start dropping dead from the fumes, who knows. Could be years, could be a few weeks after the Anthropic IPO when people are sitting smoking on the steps to the helipad saying "what the fuck? No I mean, really, really. What the fuck!"
Funny cause I also feel that a failed Anthropic IPO can trigger the domino effect. And I also t Feel this is why them and Open ai postpone so much. And shows how smart Musk was with rushing his IPO.
"The market can stay irrational longer than you can stay liquid"
I can’t short anything due to this. I know something smells but I can never predict when the system will fall apart. And especially recently, the markets seem way too “vibes based” as if even normal securities are all meme stocks now.
Buy some put options instead?
oh ffs please
With these things it's not about spotting the signs but rather predicting the timing. Everyone and their dog can see the signs but that's not enough to be actionable
When are we getting CDOs with Nvidia GPUs as collateral as Nvidia envisions?
That's some very nice collateral you have there. But can it run crysis?
It can run a financial crysis
How much frames in CounterStrike,then? :-D
/s
As soon as Jensen gets his new leather jacket and invests in the new neocloud who then buys up nvidia chips.
Who is building the infrastructure to resell the gpus from failed data centers if / when this collapses. It would be a waste for everything to get wasted
The GPUs used in data centers cant really be used outside the same context. They cant connect to standard PCs or servers. They are highly specialized. The resale would need to be at the server or rack level for the same use case.
There have been some examples of folks ripping off the SMX interface and rewiring the card for PCI-E but I'm not sure how efficient that would really be or what kind of market there could be
Here is an example of an SXM2 adapter board to use a regular pcie slot
https://ebay.io/m/imDgiL
Aren't they PCIe like everything else or am I missing something? I know they have some fast interconnects. If not, is an adapter to PCIe possible?
Cooling is usually what kills you with server gear at home. I don't have a cold aisle, or a case that flows that much air. Can I water cool it enough?
No video outputs would probably be my biggest annoyance. It should be fine at headlessly rendering games for streaming though, as well as AI.
If there's a will, there's usually a way.
Yes, they're "just" pcie, though units like H100 and newer (or did it start with pascal? i really don't know) have variants that use a proprietary connector called SXM, but it's always just pcie lanes underneath. In some versions there are interposer and mezzanine boards, but again, pcie with associated bits and bobs like retimers and pcie switches. Not impossible to integrate, just annoying.
So, sort of specialized? but not really.
> If there's a will, there's usually a way.
That's the spirit!
Lots of the newer stuff is watercooled
Yes they use pcie electrically, but its not the same slot shape and there is usually carrier boards
You wouldn’t repurpose these for home gaming, it would still be for llms
Indeed, also even the air cooled ones are designed for high static pressure fans (ie small fans that spin at really high RPMs). Those fans are really really loud.
You can just mod them to run on consumer fans that are designed to spin much slower but have higher diameter
Seems easier to jerry-rig the watercooled ones honestly
would it be possible to sell this stuff to any of these "crypto" companies for mining or whatever tasks?
They wouldn’t mine with them, they would just offer cheap inference with open models.
This is already happening.
> there is usually carrier boards
You can order the SXM carrier boards on eBay/Alibaba today.
> You wouldn’t repurpose these for home gaming, it would still be for llms
When small businesses, home-labbers and prosumers have cheap access to potent GPUs, there will be a Cambrian explosion of grassroots creativity and innovation in areas that are "beneath" AI labs expansive ambitions; I want to see the OBS-equivalent of LLMs. Hell, I'd love to see what some broke artist can do with OBS, an H100, and an open video model.
Good luck powering a 400kw rack in your basement, if you are looking to do frontier model type stuff. Just a single machine can run in the 150kw range these days for the less exotic stuff.
It can certainly be parted out with proper motivation but it’s going to take a whole new ecosystem to support these in your typical home lab. Even then 20-30kw slices are electric car level energy consumers.
>> ... an H100, ...
> Good luck powering a 400kw rack in your basement
Wut? Open-weight models already exist and don't need a cottage industry.
I'd gamble on 1 million curious people with 1 SoTA GPU each over one AIaaS lab or company with 1M GPUs when it comes to developing delightful things and experiences. We still don't know what small, specialized models can do because AI labs only ship products that could justify the trillions invested so far. With a single Nvidia A100, I have trained small models that beat the brakes off "SoTA" models in niche areas (estimated TAM is <10M people, world wide) - the "Bitter Truth" doesn't apply to the long tail.
I bet China will find a way. They have stuff like desktop-size motherboards with BGA soldered mobile chips, just cause they can.
I mean it's not that hard. It's just hard if your frame of reference is "can I download it within one click on my $6000 Macbook".
This whole subthread is just sad. "Oh no, it's not the same form factor. It is useless".
Where's the "Hacker" in "Hacker News" there.
It's a shame that we need to defer to "China" as a shorthand for "actual engineers" just because our own engineers lack imagination and drive that would validate being given that title in the first place.
> It's a shame that we need to defer to "China" as a shorthand for "actual engineers" just because our own engineers lack imagination and drive that would validate being given that title in the first place.
There are a lot of reasons other than skill why China is the way it is. Culture and locality are big ones. I don't know a whole lot but I disagree that any "actual engineer" could easily come up with a sustainable business for this stuff in the US -- for example, harvesting and processing used parts for their components is a hugely laborious process, and China has a huge culture of recycling and reworking that simply does not exist in the US (and would largely be socially unacceptable to introduce!). Take for example the pre-modded 4090s, or the BGA desktop motherboards I mentioned, or any number of other products that are based not merely on sheer engineering. It's not exactly engineering on its own that causes these things to happen, but more the fact that nearly anybody can just throw together an operation like that and have tons of workers available to make it sustainable.
I do believe that your assessment that it will come from China is right. Though, at least the "coming up with the idea" is something that could be done in the West I would argue. We too could read datasheets and probe stuff. We just chose not to.
Please don't misunderstand me as attacking you. I was attacking that other guy further up the thread with the empty GitHub account and the equally empty ambitions, trying to drag all of us crabs back into this bucket we find ourselves in.
> I do believe that your assessment that it will come from China is right. Though, at least the "coming up with the idea" is something that could be done in the West I would argue. We too could read datasheets and probe stuff. We just chose not to.
Oh, plenty of people do not choose not to -- there are tons of blog posts and YouTube videos out there of people doing stuff exactly like this! It's just the making it sustainable part that's very difficult outside of somewhere like China, because -- unless you have special VC privilege -- you can't really offer reasonable prices to the masses, which makes your purchase volume go down, which further drives up your prices even more, until it converges on some insane number.
They already have PCI-e SXM risers and external multi-SXM boards for V100's.
Why not use them to host AI models? There is a ton of demand for AI that shadows consumer Pc usage. There is a compute shortage right now for AI.
I don't mind running private deepseek instances on server rack that I have bought for cents on the dollar.
I have seen guys on Reddit posting their H100 machines for a home lab
You're saying I can't get a rack of H100s in my garage and play Crysis 3 on medium
I actually think one might?
They do not have display outputs, but, at least with my 4090, if I plug the monitor into the iGPU instead, Windows still renders frames on it and just pushes them to the GPU that has a monitor attached.
So the lack of output ports of those DC GPUs might not prevent that?
Or maybe there are other limitations there I am not aware of, of course. Maybe the silicon cannot do the stuff needed for games or something like that.
Yeah, probably that. But something like the L40 - which is just a 4090 with more VRAM - might be usable like that? Maybe?
You SV guys go use your stock options and try it out for science.
I volunteer as tribute!
I'd much rather be in the recovery/asset remarketing market rather than the primary/reseller one when this thing pops, for sure.
Maybe as ship's ballast.
I think the data centres stay, continue to be used for LLMs but end up not getting the intended returns and possibly ending up in the hands of creditors who don't end up with the sort of money they expected.
I think at least we Europeans will really want these data centres once prices become reasonable though. We really need training infrastructure.
With bad dentists (1) and bad debt underwriters on the HN front page, I love that subjective diagnosis remains challenging and topical.
https://news.ycombinator.com/item?id=50050553
Same thing they did with bad mortgages just before the 2008 crash.
"bank does what banks normally do" is not news
It's time to bring back Bird and Fortune on the subprime crisis.
https://www.youtube.com/watch?v=mzJmTCYmo9g
If they're selling at a discount, and everyone is optimistic about the market, that's just free money for everyone else right.
As someone who's in it's late 20s now, I always thought the idea of selling IOUs, debts, loans and invoices for cash is batshit crazy to me to be honest.
I never knew my loan and others loan could be packaged together as a financial product, the most famous one being the Mortgage backed securities (MBS), and then repackaged with other MBSes together to make a tranches of debts/loan known as Collateralized Debt Obligation (CDO).
Both MBS and CDO, plus Gaussian Copula that is being used to price CDO, not realizing the implied volatility is actually higher than expected that poisoned the whole scheme, contributed heavily into the unwinding of the 2008 Great Financial Crisis and is what killed Lehman Brothers, and set the powder keg to detonate the Eurodollar crisis 3 years later.
Yet it has been 20 years. 20 fucking years. The banks and the governments around the world hasn't fucking changed. Those CDO money ended up in private credit and Special Purpose Vehicles (SPV) which both of them is in its pending doom.
I can't fathom to imagine how fucked would this financial tsunami would be.
JOHN TULD: And Mr. Sullivan that challenge is?
PETER SULLIVAN: We have to hold these assets on our books longer than we might ideally like to.
JOHN TULD: Yes.
JOHN: So. Now that we know the music has stopped. What do we do about it?
JARED: Sell it all. Today.
JOHN: Is that even possible, Sam?
SAM: Yes. But at what cost?
The media will do anything to capitalize on public fear, seriously...
Yeah that's sort of how banks work.
So... When does the music stop?
Unpaywalled companion article created with a different perspective:
https://medium.com/@vektormemory/the-si-wealth-transfer-is-b...
Debt doesn't make any sense in tech sector. Why would anyone take all the risks associated with innovation and accept an upside capped at like 5% per year which barely offsets the value lost to inflation. The only reason anyone takes the risk is because the risk is on the taxpayer who has to foot the bill through inflation.
This tracks with recent reporting that AI debt issuance fell 50% month over month in September[0]
> Tech companies raised $23 billion in AI-related debt globally in September, less than half the amount raised in August, according to Morgan Stanley data covering public bonds and private placement transactions.
> The decline marks a continued drop from June, when companies raised a record $113 billion for AI infrastructure including data centers and chips. In the US investment-grade market, where blue-chip tech groups borrowed around $306 billion between January and August, AI-related bond issuance stopped completely last month.
0: https://www.investing.com/news/stock-market-news/tech-compan...
To make senes of the drop we need to know how much they expected to raise in September. Were the expecting to raise $50B but only raised $23B? Or were they expecting to raise $25B but only raised $23B? That's an important detail. Further, "bond issuance stopped"... was that intentional or not? It's like we're getting half the story and then have to use our imagination and biases to make the story as bad as possible.
ftfa "Morgan Stanley attributed the decline to the large amount of debt already raised earlier this year."
ok, is that good or bad? They never say.
This sounds like fearmongering. Banks aren't in the business of collecting on debt. They are in the business of writing loans they can sell to people who collect the debt. This is pretty standard business in the 2020s. Not defending data centers or AI or whatever, not denying that there is an AI bubble. Just saying that this is how business is done now.
They should offload the overprovisioned, hyper concentrated GPUs back to the people
Why? It's hard to see what they're good for outside of AI data center workloads. Your average member of the general public arguably doesn't have much use for a "graphics processing unit" that isn't actually capable of processing graphics
You sound exactly like the people who didn't understand personal computers because mainframes existed.
What exactly is the average consumer supposed to do with an NVIDIA H100 or GB200?
They can have a pretty good LLM running in there, or cad design. For the average joe, having the free tier of AI without the breach of privacy is pretty good already.
For the average joe, spending $10k on the server-grade hardware needed to run the GPU, plus $100-$200 per month for power is not a great investment.
The hope is that a crash would lead to fire sale prices, and as for power, you may not need to run your system 24x7 depending on your use case.
As the other comment answered, if a crash materializes like the ones before (dotcom bubble, crypto crash, etc) you'd be able to get a lor of ram and a couple of high end GPUs (5090, 4090 and the like) for a grand or two. With that you can a pretty beefy model locally.
I don't see how. I'm not saying that consumer-grade hardware isn't useful because enterprise-grade hardware exists. I'm saying that enterprise-grade hardware isn't particularly practical for most consumers. Personal computers were many things, but what they generally weren't was people installing IBM S/390s in their living rooms. Because some of the same design features that make them great for centralized, high volume business workloads also makes them kind of a PITA if that isn't what you need.
For my part, I do work on machine learning projects at home. But I'm nowhere near operating at a scale where datacenter GPU features like being optimized for 4- and 8-bit calculations would be a net benefit. Nor do I have any particular desire to have one of those things making my home office sound like I live next to a steel mill.
It's not too far off from why I don't have a box truck parked in my garage even though it's technically more capable than my Kia. And on the occasions when that is what I need, the local hardware store will gladly rent one to me for $20 per day.
They're buying out RAM and consumer GPUs too.
Mainframes did not make and still don't make very good personal computers. Same goes for these "gpus". They are the modern day mainframes. (I know we still have mainframes, but that is besides analog)
I run free local models on my A4500. I wouldn't mind a little upgrade... if I could afford it.
If the next token prediction machine doesnt live up to the hype, this is going to be one massive bubble.
The next token prediction machine is writing 90%+ code at multi-trillion $$$ companies, its already solved millennial problems -- but yes its definitely not living up to hype.
But it's creating new problems, and when the damage those new problems outweighs the value created, then that's when the bubble starts (or started) to form and we live in a delusion until the damage massively outweigh the benefits, is when the bubble popping starts being considered, and then when there's irreversible damage is when the bubble popping is marked for formal revision and then when ...
Y/N
Is this our chance to 'get rich' by buying a negative valued asset? Like that time barrels were trading at 0$ or negatives?
Sorry if this appears obtuse, but what exactly is an “AI Data Center”?
Is it a data center with nothing but GPUs, that does nothing but inference all day and all night?
Is it a data center custom-built for only AI companies to use?
Do these “AI Data Centers” have data storage? VPS? …
Or, as I suspect, is “AI Data Center” simply a fake media buzzword that really means “Normal Data Centers” but with political baggage and stigma built-in.
It's a data centre being build specifically to run LLMs (and possibly other ML models). As such, it will be focused on NVIDIA servers with large numbers of inter-connected GPUs (so they can run the 2T-4T parameter models from OpenAI, Anthropic, etc.) [1].
It's a different build-out to a data centre that can host video/YouTube content (fast CPU, no GPU, large number/size of hard drives), or that can run web servers (fast CPUs, low to average hard drive capacity).
[1] https://www.nvidia.com/en-gb/data-center/
> Or, as I suspect, is “AI Data Center” simply a fake media buzzword that really means “Normal Data Centers” but with political baggage and stigma built-in.
No you're absolutely right. The only difference that I can tell is power requirements are legitimately higher because GPUs consume more electricity. More cooling is also needed because there's more heat generated. Aside from those two things, it's a plain old datacenter that companies have been building at break neck speeds since like 1996. Now that I think about it, how come there's no panic about additional Internet backbone capacity needed to support these "AI datacenters"?
Oracle data enter debt.
'nuff said.
Is it just me or is debt the wrong type of investment here? It feels like the tech companies hacked the markets by issuing bonds on something that merely resembles something else where bonds makes sense (real estate) while actually being completely different.
These are moonshot investments. As an investor, equity would make sense - possible downside, but unlimited upside. But with bonds you're still taking all that downside (you'll be further ahead in line than equity investors, but you will still be in line!), meanwhile if the bet does work out in your favor, the upside is limited to just receiving fixed coupon payments.
This is completely normal. Banks underwrite large loans and then package a bunch of them in different ways to sell to different investors.
The more comments I read on HN attempting to rationalize this as "normal behaviour" by banks, the more I believe that this is a massive bubble getting ready to pop
slop
I'll be damned if I don't get to throw people off roofs this time.
There's also a non-zero chance gubernatorial elections are won on the basis of pardoning such transgressions in the future.
The CDSs on some loans are getting to the point where it’s too expensive to even bet that the loans will fail as the CDS market seems to have concluded the loans will fail.
> The CDOs on some loans are getting to the point where it’s too expensive to even bet that the loans will fail as the CDO market seems to have concluded the loans will fail.
Did you mean CDS? As your sentence doens't make sense as its written.