AI Bubble Concerns Echo Subprime Crisis Fears – A Deep Dive
Recent developments are intensifying anxieties surrounding a potential AI bubble. openai’s CFO, Sarah Pryor, initially suggested the need for a novel financial structure involving private equity, banks, and a U.S. federal government backstop to fund massive AI infrastructure investments – effectively a debt guarantee from taxpayers. While Pryor and CEO Sam Altman later walked back the statement amidst criticism, the core concern remains: is the current investment in AI justified?
Wall Street is increasingly skeptical of OpenAI‘s spending, questioning whether the company is burning through cash without a clear path to profitability. Despite a soaring valuation estimated at $500 billion, OpenAI has never turned a profit. The industry as a whole needs to generate an estimated $1 trillion in added value to see meaningful returns, but consumer spending isn’t keeping pace. OpenAI projects $13 billion in sales this year, a mere fraction of Amazon’s estimated $700 billion, and only 5% of its 800 million chatgpt users are paying subscribers.
This situation is raising unsettling parallels to the 2008 financial crisis.Investment banks, private equity firms, and conventional banks are becoming deeply involved in the AI funding frenzy. While hyperscalers are diversifying their financing through bonds and loans, brokerage institutions are struggling to manage their exposure.
A strategy gaining traction is “synthetic risk transfer” (SRT), where banks offload the risk of loan defaults to external investors without transferring the loans themselves. Deutsche bank is reportedly utilizing SRT to hedge against potential defaults on billions of dollars in AI infrastructure loans. Though, this structure bears a striking resemblance to the collateralized debt obligations (CDOs) and credit default swaps (CDS) that exacerbated the 2007 housing market collapse. Like those instruments, SRT repackages and trades credit risk, potentially amplifying losses during a downturn. Notably, Deutsche Bank was a key player in the creation and sale of CDS prior to the 2008 crisis.
Adding to the alarm, renowned investor Michael Burry – famously portrayed in “The Big Short” for predicting the subprime mortgage crisis – has placed significant bets against AI companies. His hedge fund,Scion Asset Management,purchased put options on Nvidia and Palantir stock,signaling a belief that the AI bubble will burst. This suggests a growing perception that the current AI investment boom shares perilous similarities with the conditions that led to the 2008 financial meltdown.
