Data Center CDO Crisis: Subprime AI Debt Explained

Rickards makes perhaps his most provocative claim by comparing data center financing to the subprime CDO crisis of 2008. Private equity funds build data centers, charge AI companies rent, and then combine multiple leases into securities sorted into tranches based on default risk. This is the exact same CDO structure that caused the 2008 financial crisis.

Charlie Warzel of The Atlantic confirmed this practice, writing that private-equity firms put up or raise the money to build a data center, which a tech company will repay through rent, and multiple data-center leases can be combined into a security. Tech journalist Ed Zitron refers to it as subprime AI because it is equivalent to giving no income, no asset loans to subprime borrowers in 2008. David Dayen of The American Prospect said we have a 2000s housing bubble level of financial engineering on top of a 1920s level of private unregulated lending on top of something bigger than a 1990s internet level of technology and infrastructure build-out. Oliver Wyman, a top financial consulting firm, warned that an equity crash like the early 2000s would wipe out approximately $33 trillion of value, more than US GDP.

The systemic risk is that these data center bonds are being bought by pension funds and retirement accounts around the world. Analysts at JP Morgan are saying that fund and pension managers are buying so many that bond portfolios, which historically traded correlated with rates and banks’ performance, are now going to be correlated with technology companies’ performance.

It is not just individual investors who are worried. The chief of the Bank of England has warned that the private credit market is slicing and dicing and tranching loan structures, and that if you were involved before the 2008 financial crisis, alarm bells should be going off. Norway’s $2.1 trillion sovereign wealth fund, one of the biggest and most conservative wealth funds in the world, says it is shunning investments in data centers and AI. The former head of the IMF is saying this could turn into a $35 trillion market crash.

The comparison to 2008 is not perfect. Data center bonds are backed by physical infrastructure, unlike subprime mortgages that were backed by houses with inflated appraisals. The companies paying rent on data centers include some of the largest tech companies in the world. But the structural similarity, debt being packaged into tranches and sold to investors who may not understand the underlying risk, is genuine.

Rickards puts the scale of the data center buildout in perspective. He notes that it is estimated nearly $5 trillion will be spent on data centers in just the U.S. alone, and that AI is as much a real estate problem as a technological one. The debt financing these data centers follows the exact CDO blueprint from 2008. James Rokakis, the County Treasurer in charge of Cleveland during the subprime crisis, initially thought CDOs were “one of the most brilliant financial innovations of the 20th Century” because “nothing is more stable, and there’s nothing safer than the American mortgage market.” Only later did he realize that these CDOs were what took the country’s finances and “shoved them over the edge of the cliff.” Rickards argues that the same dynamic is playing out today, except instead of subprime mortgages, the underlying assets are leases from AI companies that collectively produce no profits. Ben Bernanke told Congress during the 2008 crisis: “If we don’t do this, we won’t have an economy on Monday. This could be the worst financial crisis in global history, including the Great Depression.”

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The package includes six months of Strategic Intelligence plus six special reports: AI Fallout (the biggest AI losers to remove from your portfolio immediately), The AI Black Paper Blueprint (his personal million-dollar roadmap), AI Meltdown Insurance (how to profit from the coming crash), Trump’s AI Arsenal (how investing in AI superweapons could turn $1,000 into $162,000), The Perfect Physical Gold Portfolio, and How to Make Your Home Your Personal Fortress.

Where to Learn More

For the complete analysis, read our AI Black Paper review covering Jim Rickards’ full thesis on the AI Minsky Moment.

See our analysis of subprime AI debt for how data center bonds echo 2008.

Read our deep dive on circular financing in AI for the full Lucent comparison.

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