Subprime AI Debt: How Data Center Bonds Echo 2008

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.

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 mechanism is straightforward. Private equity funds raise money to build data centers. AI companies sign long-term leases to rent the space. Those leases are then combined into securities, sorted into tranches based on default risk, and sold to investors. The problem is that the underlying leases are backed by an industry that, in many cases, produces no profits.

Rickards puts the scale of the data center buildout in stark terms. He notes that 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. With AI companies already burning cash, where will the money come from? The answer, Rickards says, is massive amounts of debt. Wall Street has structured these data center deals as glorified real estate loans, and as Charlie Warzel of The Atlantic confirmed, 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 sorted into tranches based on their risk of default. The CDO bonds paid enormous returns, sometimes as high as 15%, making them irresistible to pension and fund managers. Rickards warns that these new data center bonds are filling pension funds, retirement accounts, and 401(k)s, blowing the bubble up on a tectonic scale.

OpenAI, the biggest tenant in many of these data centers, is losing more than a billion dollars a month. Deutsche Bank estimates OpenAI will need $143 billion in negative cash flow before making a single dollar in profit. If OpenAI cannot pay its lease obligations, the data center bonds backed by those leases could default, cascading through the financial system just as subprime CDOs did in 2008.

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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 the data center CDO crisis for the full breakdown.

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

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