Nvidia Sparks New AI Debt Binge, Cleverly Shifting Risk To Wall Street

You have to hand it to Nvidia. When things began to slow down for AI companies, as the numbers needed got too big and the opposition to their build-out plans too determined, the company stepped up to lend its customers a significant amount of the money they needed to keep buying more of Nvidia's products. Then, when analysts and investors began to question whether these circular lending relationships - think circulate firing squad - were creating false demand, Nvidia pivoted. 

The result is that Wall Street has been sold, by Nvidia, on the financial benefits of lending half a trillion dollars to the AI industry. This cleverly shifts the economic and political risk from Nvidia to Wall Street, which is probably assuming that, as in the past, if things go south, they will shift the burden to US tax payers by convincing the federal government that if they don't step up, the economy will crash. The only problem is that the economic case for the AI build-out is still not clear so that while the bankers and chip sellers will make huge profits in the short term, in the worst, but not unlikely, case, will only help them ride out the collapse their strategy created. Nvidia's stock price dropped after this deal was announced yesterday. Investors are still not sold on the fantasmagorical AI story. JL

Andrew Sorkin and colleagues report in the New York Times:

Monday was the day we may look back on years from now as the inflection point in the A.I. boom, the moment it got so leveraged that a crisis began to form. Nvidia’s announcement that it was teaming up with a half-dozen Wall Street firms to lend $500 billion for the A.I. buildout adds a huge amount of debt to the A.I. economy. It’s a clever move for Nvidia, shifting systemic risk to Wall Street investors. Whether that’s a master class in balance sheet management or the start of a new credit bubble is the $500 billion question.

Mark Monday on your calendar. It’s a date we may look back on years from now as either the inflection point in the A.I. boom — or the moment it got so leveraged that a crisis began to form.

Nvidia’s announcement that it was teaming up with a half-dozen Wall Street firms to lend $500 billion for the A.I. buildout adds a huge amount of debt to the A.I. economy. It’s a clever move for Nvidia, which will go from being the de facto financial backstop for the industry (for which it has been criticized) to shifting systemic risk to Wall Street investors.

Whether that’s a master class in balance sheet management or the start of a new credit bubble is the $500 billion question. More below.

The A.I. debt binge

Wall Street titans can’t get enough of the picks and shovels of the artificial intelligence boom, like data centers and chips. That’s the clear takeaway from the announcement that an all-star group of investors was teaming up with Nvidia for $500 billion worth of funding to help finance the A.I. boom.

But the move comes amid growing signs that many Americans don’t share the financial community’s enthusiasm for the A.I. buildout.

“We need to raise this money as fast as possible,” Larry Fink, the C.E.O. of BlackRock, said on Monday in announcing the initiative. His firm and several other heavyweights — Apollo! Blackstone! Brookfield! Goldman Sachs! KKR! — said that it was imperative to help tech companies amass the resources needed for their A.I. expansion efforts.

The investment firms will dole out the funds via loans, credit and more. (They’ll be available “at attractive rates,” according to Nvidia.)

• Other details weren’t available, though the Wall Street firms alluded to “yield-based products” and securitization. Fink said he foresaw “a next future for financial engineering.”

The context: The A.I. boom is already hugely expensive. Morgan Stanley analysts predict that hyperscalers will invest $3.5 trillion into A.I. infrastructure between now and 2028. Model developers are also spending heavily, with Anthropic reportedly agreeing to lease computing capacity from Riot Platforms for $9 billion.

Such investments are increasingly being built on debt, some of which was already being arranged by Nvidia. (The chipmaker has already been accused of arranging circular financing for its customers. Investors appear wary. Nvidia’s stock price began falling on Monday after The Financial Times reported on the financing partnerships; it closed down 2.8 percent.

The bigger problem is that many Americans aren’t onboard either. Business leaders have defended data centers as a way to create, in Fink’s words, “a huge amount of jobs.” President Trump has said they’re “tremendous wins” for the communities that host the server farms, citing the taxes and jobs they generate.

But data centers have become politically toxic in many quarters amid concerns about their strain on communities’ energy and water supplies and the deals that companies have struck with local governments to build them.

• Those concerns have prompted some companies to step up financial commitments to municipalities where they want to build data centers. Consider Meta’s new fund for supporting local communities, which DealBook hears will start with an initial $1 billion — and is expected to grow over time.